Supervision For Measuring And Controlling Large Exposures

Commercial banks are confronted with plenty of risks in their business, amongwhich large exposures are drawing more and more attention. A key lesson from the2008financial crisis is that banks are in constant lack of effective measures and riskwarning mechanism against potential risks from their connected counterparties.Operational practices of the global banking industry suggest that large exposures ofindividual banks will cause huge shock to the global financial stability. For this, BaselCommittee released Supervisory Framework for Measuring and Controlling LargeExposures (Consultative Document)(hereinafter “New Framework”) on March25,2013based on its previous regulatory framework, in which a new regulatory framework forlarge exposures of a single counterparty or group of counterparties was put forward.The paper focuses on concentration risk of bank portfolio from the perspective oflarge exposures. Firstly, based on summaries drawn from existing regulatory reports anddocuments, the paper makes comparison between the core provisions under the NewFramework and those prevailing in the United States and Europe concerning largeexposure supervision and regulation. The2012data of16listed domestic commercialbanks are also measured here. Secondly, through integrating research results achieved athome and abroad, the paper conducts empirical analysis on the2007-2012panel data ofthese16commercial banks to explore impacts of large exposures upon banks’profitability and risks confronted. Herfindahl-Hirschman Index (HHI) is applied forsuch analysis, in which average ROE (ROAE), return on assets (ROA), non-performingloan is used to identify banks’ profitability and risk profile. Finally, the paper studieshow the look-through approach is used for effective measurement of special exposure inlarge exposures under the New Framework, and also introduces how to apply thismethod to measure potential risks in collective investment and asset securitization, sothat it offers references for large exposure supervision and information disclosureimprovement.More details are as follows:①The New Framework designed by the Committee serves as a fair complementfor capital adequacy supervision, mitigates counterparty convergence and regional andindustrial risk concentration, and improves banks capability to absorb unexpectedlosses. ②Exposure limits are set up in China for its concentration risk supervision, whichbrings multiple challenges in implementation of the New Framework and intransformation from exposure concentration of credit risk supervision to the overallsupervision of large exposures.③Banks’ risk exposure concentration has a significantly positive impact onprofitability of domestic banks and their risks, yet there no non-existing relationship isidentified, presenting the high-risk high-yield pattern.④Compared with small banks, large banks enjoy stronger profitability. Change ofshareholders’ equity ratio will cause changes in the bank’s capital structure, which mayhave opposite effects upon the bank’s assets yield and ROE.⑤The look-through approach is able to identify potential risks of complexfinancial products, thereby reduces information asymmetry between commercial banksand their counterparties. However, this approach asks for high requirements oninformation disclosure, and thus will cast a cost burden on the financial institutions.