Exemptions from the application of Article 395(1)

Could exposures of an institution fully guaranteed by its parent undertaking - considering the substitution approach under Article 403(1)(a) of Regulation (EU) No 575/2013 (CRR) – be exempted from the large exposures provisions and in this way from the application of Article 395(1)? Furthermore, may the guarantees provided by the parent institutions from another Member State be handled in Article 403 of the CRR as a third party guarantee?

According to the Article 400(2)(c) of Regulation (EU) No 575/2013, competent authorities may fully or partially exempt from the application of Article 395(1) exposures, including participations or other kinds of holdings, incurred by an institution to its parent undertaking, to other subsidiaries of that parent undertaking or to its own subsidiaries, in so far as those undertakings are covered by the supervision on a consolidated basis to which the institution itself is subject, in accordance with this Regulation, Directive 2002/87/EC or with equivalent standards in force in a third country; exposures that do not meet these criteria, whether or not exempted from Article 395(1) of this Regulation, shall be treated as exposures to a third party. According to the Hungarian Banking Law, exposures defined in Article 400 (2)(c) of the CRR are exempted from large exposure requirements. However, an institution plans to provide a loan to a company, where the loan is fully guaranteed by the parent bank of the institution. The institution would like to use the substitution approach defined by Article 403, and to handle the loan as an exposure to its parent bank. If it is possible, the loan could be exempted from the large exposure requirements. It is worth mentioning that the parent bank is situated in another Member State, which may be a relevant issue, because Article 113(6) of the CRR also makes a differentiation between parent undertakings in the same Member State and outside. The CRR does not give a definition of “third party”. Clarification should be given if parent undertakings from another Member State could be handled as third parties in the application of Article 403.