Jun 07, 2013
May 23rd 2013 - The European Banking Authority (EBA) launches today a consultation on draft Guidelines on capital measures for foreign currency lending (FX lending) aimed at providing guidance to national competent authorities on how to deal with the specific risk of FX lending to unhedged borrowers as part of the Supervisory Review and Evaluation Process (SREP). The consultation runs until 23 August 2013.
Although these Guidelines address FX lending to unhedged borrowers, their focus is on prudential requirements and not on consumer protection elements of FX lending. However, they indirectly contribute to consumer protection by potentially making FX lending more costly in terms of capital and, therefore, reducing the likelihood of unaffordable borrowing in the system.
The first part of the Guidelines defines the subject matter and the scope and sets out the process to be followed. In particular, a materiality threshold is introduced and in case it is exceeded, competent authorities should review the risk as part of the SREP. Competent authorities can still apply these guidelines where the risk is under the threshold but is deemed to be material.
The second part of the document provides guidance on the supervisory review of FX lending governance arrangements and of capital adequacy as well as on how to calculate capital add-on as a result of the SREP.
The EBA has developed these draft guidelines on the basis of the European Systemic Risk Board (ESRB) Report on FX lending, published in 2011, and taking into account the final compromise on the Capital Requirements Regulation and Capital Requirements Directive (CRR/CRD).
These Guidelines complement existing guidelines related to the supervisory review process, internal governance, concentration risk, stress testing and home –host supervisory cooperation.
Re-disseminated by The Asian Banker