EBA publishes final guidance on connected clients

The European Banking Authority (EBA) has published  its final Guidelines on the treatment of connected clients as defined in the Capital Requirements Regulation (CRR), aiming at supporting institutions in identifying all possible connections among their clients, in particular when control relationships or economic dependency should lead to the grouping of clients because they constitute a single risk. The guidelines apply to all areas of the CRR where the concept of ‘group of connected client’ is used, including the EBA technical standards and the EBA guidelines that refer to that concept.
The guidelines cover the two types of interconnection that lead to two or more clients being regarded as a single risk, i.e. control relationships and economic dependencies.
In particular, the Guidelines clarify that institutions should make use of their clients’ consolidated financial statements when assessing the existence of control.  In addition, they also provide a non-exhaustive list of indicators of control that institutions should use when assessing those clients to which EU accounting rules do not apply (e.g. natural persons, central governments, and clients which prepare consolidated financial statements in accordance with the accounting rules of a third country).
Regarding the assessment of interconnections based on economic dependencies, the final Guidelines confirm the requirement to consider two or more clients a single risk when funding or repayment difficulties of one client are likely to affect (an)other client(s). To this end, the Guidelines present a non-exhaustive list of situations that should be considered by institutions when assessing economic dependencies. The Guidelines also make clear that if institutions are able to demonstrate that the financial difficulties or failure of a client would not lead to funding or repayment difficulties for another client, these clients do not need to be considered a single risk (e.g. where the client can easily find a replacement for the other client).
Guidance is also provided on the assessment of situations where control and economic dependency are interlinked and can, therefore, lead to the existence of one group of connected clients as opposed to two separate groups of connected clients.
Regardless of the type of connection the single risk is based on, the chain of contagion leading to a possible default of all entities concerned is the relevant factor for the grouping.
The Guidelines expect institutions to identify all control relationships and also to take reasonable steps to investigate and identify economic dependencies among their clients. However, given the inherent difficulty of identifying all economic dependencies, they require that institutions take a proportionate approach and strengthen the investigation of economic dependencies in all cases where the sum of all exposures to one individual client exceeds 5% of Tier 1 capital.

Legal basis and next steps

In light of the new provisions laid down in the CRR as well as in the- EBA technical standards and guidelines in the area of large exposures, the EBA decided to review and update the 2009 CEBS ‘Guidelines on the implementation of the revised large exposures regime’ and to focus exclusively on the issue of connected clients under Article 4(1)(39) of the CRR. These guidelines replace the CEBS Guidelines issued on 11 December 2009.
In addition, the Guidelines take into account the developments in the area of shadow banking and large exposures at both EU and international level.