Recent failures are a reminder that banks need to limit and control their large exposures, because failure to do so makes them vulnerable to significant losses. This principle underpins the large exposures (LEX) standard issued by the Basel Committee on Banking Supervision, which complements the risk-based capital standards.
While essential, the implementation of this standard comes with challenges. These include the need to conduct case by case assessments, determining whether exposures are connected, whether exposures fall within the scope of the standard or constitute special cases that warrant specific treatments or exemptions, whether and to what extent exposures are mitigated, and how to treat breaches.
Automated tools can make supervisory oversight more efficient. Possible tools include automated checks across banks, a supervisory database containing groups of connected counterparties and tools that promote a risk-oriented supervision of large exposures. International guidance could help harmonise practices related to the detection, analysis and resolution of limit breaches and harmonise reporting requirements.
JEL classification: G21, G28
Keywords: finance, bank lending, commercial banks, bank regulation, standard, supervision