SCCL vs. LLL: Understanding the Key Differences in Credit Concentration Rules

SCCL vs. LLL: Understanding the Key Differences in Credit Concentration Rules

In the world of banking regulation, two acronyms often come up in discussions about credit risk: SCCL and LLL. While both the Single Counterparty Credit Limit (SCCL) and the Legal Lending Limit (LLL) share the common goal of preventing a financial institution from taking on excessive credit risk to a single borrower, they are fundamentally different in their purpose, scope, and, most importantly, their aggregation rules.

Understanding these differences is crucial for compliance officers, risk managers, and anyone interested in the regulatory framework that governs financial institutions.

The Core Similarity: Limiting Credit Concentration

At their heart, both SCCL and LLL are designed to protect against the same danger: the failure of a single large borrower causing a cascading failure within a financial institution. By imposing limits on the maximum credit exposure to any one entity, these rules enforce diversification and promote prudent lending practices. Both regulations also use similar concepts like “common control”, "control relationships", “financial interdependence”, and “economic interdependence” to identify related borrowers and combine their exposures.

However, this is where the similarities largely end.

Key Differences in Purpose and Scope

Legal Lending Limit (LLL)

This is a long-standing regulation primarily administered by the Office of the Comptroller of the Currency (OCC). Its purpose is to ensure the safety and soundness of an individual bank. The LLL’s focus is on protecting the bank’s depositors and capital by preventing it from becoming overly concentrated in credit risk to one borrower. It applies to individual banks and their domestic operating subsidiaries.

Single Counterparty Credit Limit (SCCL)

Established by the Federal Reserve following the 2008 financial crisis under the Dodd-Frank Act, SCCL is a systemic risk regulation. Its purpose is to prevent the failure of a large, interconnected financial institution from destabilizing the entire financial system. It applies to large, systemically important bank holding companies (BHCs) and foreign banking organizations (FBOs) on a consolidated, enterprise-wide basis.

Summary of Differences in Aggregation

The most practical and technical differences between LLL and SCCL are found in their aggregation rules, the specific tests used to determine when exposures to separate borrowers must be combined.

LLL Aggregation Rules

The LLL, as outlined in 12 CFR § 32.5, uses two primary tests that are more focused on the direct relationship between borrowers and the use of loan proceeds.

  • Direct Benefit Rule: This rule combines loans when the proceeds from a loan to one borrower are used for the “direct benefit” of another. This typically occurs when the proceeds, or assets purchased with them, are transferred to another person in a transaction that is not a bona fide, arm’s length sale of goods or services.
  • Common Enterprise Rule: This rule requires aggregation when a “common enterprise” exists. This can be established in a few ways:
    • Common Source of Repayment: The expected source of repayment for two loans is the same, and neither borrower has another source of income to repay their debt.
    • Common Control and Financial Interdependence: The borrowers are under common control, and one derives 50% or more of its gross receipts or expenditures from the other.
    • Joint Business Acquisition: Separate borrowers take out loans to jointly acquire a business in which they will own more than 50% of the voting interests.

SCCL Aggregation Rules

SCCL’s aggregation rules are designed to be more comprehensive and capture the economic substance of a relationship, regardless of its legal form.

  • Financial Consolidation: SCCL broadly aggregates exposures to all entities that are consolidated under accounting standards (e.g., U.S. GAAP and IFRS). This provides a holistic, firm-wide view of exposure to a single counterparty and its affiliates.
  • Economic Interdependence and Control Relationships: While similar to LLL’s “common enterprise” test, SCCL’s rules are more expansive and are focused on identifying situations where the failure of one counterparty would lead to the likely failure or material financial distress of another.
  • “Look-through” Approach: A unique feature of SCCL is its requirement to “look through” certain investment vehicles, such as special purpose vehicles (SPVs), to identify and aggregate exposures to the underlying assets. This prevents institutions from using complex structures to circumvent the spirit of the rule.
  • Types of Exposure: SCCL measures a broader range of “aggregate net credit exposure,” including not just loans but also derivatives, repurchase agreements, and securities financing transactions. It also allows for the netting of exposures and the recognition of eligible collateral to reduce the final exposure amount.
Feature of Aggregation Single Counterparty Credit Limit (SCCL) Legal Lending Limit (LLL)
Regulatory Focus Systemic risk and financial stability. Safety and soundness of individual institutions.
Covered Entities Large, systemically important BHCs and FBOs (on a consolidated basis). Individual banks and their domestic operating subsidiaries.
Primary Tests Financial consolidation, economic interdependence, and control relationships. Direct benefit and common enterprise (which includes common control and financial interdependence, and common source of repayment).
Scope of Aggregation Broad and comprehensive, designed to capture all exposures to a single counterparty and its affiliates across the entire consolidated firm. More focused on the relationship between borrowers and the use of credit proceeds at the individual bank level.
Look-through Rule Explicitly requires a “look-through” approach for exposures to special purpose vehicles (SPVs) and investment funds to identify underlying credit exposures. Does not have a formal “look-through” rule of the same breadth, although similar principles may be applied in specific cases.
Credit Exposures Captures a wide range of net credit exposures, including derivatives, repos, and securities. Allows for risk mitigation through eligible collateral and guarantees. Focuses on loans and extensions of credit, with specific rules for other exposures. The treatment of collateral and guarantees is different and may not be as comprehensive.

Conclusion: A Tale of Two Purposes

In summary, while both the Legal Lending Limit and the Single Counterparty Credit Limit aim to control credit concentration, they do so for different reasons and with different methods.

The LLL is a bank-specific, traditional rule focused on the micro-level goal of individual bank safety. Its aggregation tests are relatively straightforward, focusing on the direct use of loan proceeds and specific common enterprise scenarios.

The SCCL is a modern, enterprise-wide rule designed for the macro-level goal of financial stability. Its aggregation rules are broader and more complex, intended to capture all forms of economic risk across an entire financial conglomerate to prevent a systemic crisis.

To learn more about how GLOBAL ABAS can support your SCCL compliance program, visit our website or subscribe for future updates.

Disclaimer: This blog post is for informational purposes only and reflects our understanding of the SCCL rule and FR 2590 reporting as of the date of publication. It does not constitute legal, regulatory, or professional advice. Institutions should consult with internal and external advisors and refer directly to the SCCL rule (12 CFR Part 252, Subpart H) and FR 2590 instructions for specific guidance. GLOBAL ABAS disclaims any liability for actions taken or not taken based on this information.

Consult a GLOBAL ABAS Consulting, LLC professional regarding your specific issues and questions. Your feedback will help us improve the SCCL Compliance Lab. Please let us know what you think in the Comment below. Copyright © 2025 GLOBAL ABAS Consulting, LLC. All rights reserved.

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