Consolidated Basel Framework – large exposure (LEX)
A large exposures framework complements the Committee's risk-based capital standard because the latter is not designed specifically to protect banks from large losses resulting from the sudden default of a single counterparty or a group of connected counterparties. In particular, the minimum capital requirements (Pillar 1) of the Basel risk-based capital framework implicitly assume that a bank holds infinitely granular portfolios, i.e. no form of concentration risk is considered in calculating capital requirements. Contrary to this assumption, idiosyncratic risk due to large exposures to individual counterparties or groups of connected counterparties may be present in banks' portfolios. Although a supervisory review process (Pillar 2) concentration risk adjustment could be made to mitigate this risk, these adjustments are neither harmonised across jurisdictions, nor designed to protect a bank against very large losses from the default of a single counterparty or a group of connected counterparties. For this reason, the risk-based capital framework is not sufficient to fully mitigate the microprudential risk from exposures that are large compared to a bank's capital resources. That framework needs to be supplemented with a simple large exposures framework that protects banks from traumatic losses caused by the sudden default of an individual counterparty or group of connected counterparties. To serve as a backstop to risk-based capital requirements, the large exposures framework should be designed so that the maximum possible loss a bank could incur if a single counterparty or group of connected counterparties were to suddenly fail would not endanger the bank's survival as a going concern.
View the Assessment Methodology (section 10)
The RCAP assessments of the large exposures framework (RCAP-LEX) assess the completeness and consistency of domestic frameworks with the Basel standards. The following standards (including any applicable annexes) are in the scope of the assessment:
Supervisory framework for measuring and controlling large exposures (April 2014);
FAQs published by the Committee on the standards above, including those that would solve any interpretative issue arising during the assessment.