01 · Large exposures

The one limit that is not capital

Capital requirements price expected distributions of loss; they are nearly silent on the scenario where one counterparty takes a quarter of your Tier 1 with it. The large-exposures regime is that missing constraint: a hard limit — 25% of Tier 1 to any single client or group of connected clients, 15% between G-SIIs — that no risk weight, rating or profitability can relax. It is deliberately crude because concentration risk is deliberately simple: the failure of Herstatt, of Continental Illinois's oil-patch book, of every bank that discovered its ten largest names were secretly one name, is the same failure. The intellectual content of the regime sits almost entirely in one question: what is "one" counterparty? Control makes two entities one; so does economic dependence — the supplier who dies if the anchor client dies. The EBA's connected-clients guidelines are the case law of that question, and supervisors read group structures more sceptically than banks do.

• Sources: Art 387–403 CRR; EBA GL on connected clients; LE reporting ITS.
• CRR2 did the last tightening (T1 base, G-SII 15%); CRR3 leaves the regime stable. Watch shadow-bank exposure limits — the EBA's standing concern about NBFI concentrations arriving through the same door.