ESRB recommends EU-wide reciprocation of France’s 5% large exposure limit for highly indebted large non-financial corporations

11 February 2019

On 5 December 2018, the European Systemic Risk Board (ESRB) adopted a Recommendation for the EU-wide reciprocation of France’s 5% large exposure limit for exposures of systemically important institutions (SIIs) to highly indebted large non-financial corporations (NFCs) having their registered office in France. This Recommendation was published in the Official Journal of the European Union on 1 February 2019.

The measure applies from 1 July 2018 to SIIs authorised in France at the highest level of consolidation of their banking prudential perimeter.

Recommendation ESRB/2018/8 seeks to ensure that France’s 5% large exposure limit applies not only to exposures of SIIs authorised in France, but also to exposures of SIIs authorised in other EU Member States. It thereby enhances the effectiveness and consistency of macroprudential policy in the EU and contributes to a level playing field in the Single Market.

Additional information

On 25 May 2018, the Haut Conseil de stabilité financière (High Council for Financial Stability) requested the ESRB to recommend to other Member States the reciprocation of its measure. The measure aims to increase resilience of the French banking system to corporate defaults by limiting concentration risk of SIIs, which are the most likely institutions to spill over risks to the rest of the financial system. The measure also raises awareness of other financial institutions and investors regarding the increased leverage of large French NFCs. After considering the cross-border implications, the General Board of the ESRB decided on 5 December 2018 to include the French measure in the list of macroprudential policy measures to be reciprocated under Recommendation ESRB/2015/2.

Relevant authorities are recommended to adopt reciprocating measures no later than six months following the publication of Recommendation ESRB/2018/8 in the Official Journal of the European Union. If the same macroprudential policy measure is not available in their jurisdiction, relevant authorities are recommended to apply a macroprudential policy measure available in their jurisdiction that has the most equivalent effect and to adopt the equivalent measure after consulting the ESRB.

Upon the reciprocation of this measure, SIIs will have to apply a 5% large exposure limit to their exposures to any highly indebted NFC or group of connected NFCs residing in France to which their original exposure is equal to or exceeds €300 million. An NFC is considered highly indebted if it has, at its highest level of consolidation, a leverage ratio greater than 100% and a financial charges coverage ratio below 3. NFCs which do not have their registered office in France and which are not a subsidiary or an economically dependent entity of, or directly or indirectly controlled by, an NFC having its registered office in France fall outside the scope of the measure.

Recommendation ESRB/2015/2 provides details of the rationale behind the reciprocation of macroprudential policy measures. In particular, in a highly integrated financial market such as the EU, where financial intermediaries operate across borders, non-reciprocation could lead to macroprudential policy measures being circumvented and undermine a level playing field among financial intermediaries. For that reason, the ESRB recommends an approach that is based on two main pillars, namely:

• a systematic assessment of the cross-border effects of macroprudential policy;
• a coordinated policy response in the form of voluntary reciprocity for macroprudential policy measures when needed.

It is important that these pillars are implemented consistently throughout the EU.

More information on the macroprudential measures that have been recommended for reciprocation by the ESRB under its reciprocity framework and their follow-up by Member States can be found on the ESRB’s webpages dedicated to reciprocation.

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