Principal approach for setting limits to exposures to shadow banking entities
Setting an aggregate limit on exposures to shadow banking entities
Institutions should set an aggregate limit to their exposures to shadow banking entities relative to their eligible capital.
When setting an aggregate limit to exposures to shadow banking entities, each institution should take into account:
its business model, risk management framework as outlined in paragraph 14b), and risk appetite as outlined in paragraph 14d);
the size of its current exposures to shadow banking entities relative to its total exposures and relative to its total exposure to regulated financial sector entities;
interconnectedness as outlined in paragraph 14e).
Setting individual limits on exposures to shadow banking entities
Independently of the aggregate limit, and in addition to it, institutions should set tighter limits on their individual exposures to shadow banking entities. When setting those limits, as part of their internal assessment process, the institutions should take into account:
the regulatory status of the shadow banking entity, in particular whether it is subject to any type of prudential or supervisory requirements;
the financial situation of the shadow banking entity including, but not limited to, its capital position, leverage and liquidity position;
information available about the portfolio of the shadow banking entity, in particular non-performing loans;
available evidence about the adequacy of the credit analysis performed by the shadow banking entity on its portfolio, if applicable;
whether the shadow banking entity will be vulnerable to asset price or credit quality volatility;
concentration of credit intermediation activities relative to other business activities of the shadow banking entity;
interconnectedness as outlined in paragraph 14 e);
any other relevant factors identified by the institution under paragraph 14 a).