CM-5 CM-5 The monitoring and control of large exposures of banks licensed by the Agency
CM-5.1 CM-5.1 Overview
CM-5.1.1
The Regulation on large
exposures for banks in Bahrain is issued as part of the Agency's measures to encourage banks to mitigate risk concentrations.CM-5.1.2
The contents of this chapter apply in full to all locally incorporated banks in the Kingdom of Bahrain on a consolidated basis.
CM-5.1.3
Banks, through the PIRC forms (see Module CA), should notify the Agency of the group companies to be consolidated for reporting purposes.
CM-5.1.4
The Agency will, as appropriate, discuss the application of this Chapter to relevant banks on an unconsolidated basis.
CM-5.2 CM-5.2 Exposures undertaken by Bahrain branches of Foreign Banks ("the Foreign Branches")
CM-5.2.1
The Agency's policy towards large
exposures on the books of ForeignBranches is to ensure that suchexposures are within the policy statement of the parent bank, as agreed by the parent regulatory authority.CM-5.2.2
All Foreign
Branches should report their 25 largestexposures to the Agency.CM-5.2.3
The Agency may, if circumstances so require and on a case-by-case basis, apply the full requirements of this Chapter to Foreign
Branches .CM-5.3 CM-5.3 The measure of exposure
CM-5.3.1
For large
exposure (s) purposes, the measure ofexposure should reflect the maximum loss that will arise should acounterparty fail or the loss that may arise due to the realisation of any lending assets, shareholdings or otherexposures or off-balance sheet positions. In certain cases (particularlyderivatives ), the measure of a largeexposure may be larger than that used in published accounts. Consistent with this, theexposure should include the amount at risk arising from a bank's:(a) Claims on acounterparty including actual claims, and potential claims which would arise from the drawing down in full of undrawn advised facilities (whether revocable or irrevocable, conditional or unconditional) which the bank has committed itself to provide, and claims which the bank has committed itself to purchase or underwrite. In the case of undrawn (overdraft) facilities, the advised limit must be included in the measure ofexposure (after deduction of any provisions). In the case of loans, the net outstanding balance as shown in the books of the bank should be included in the measure ofexposure after deduction of any provisions;(b)Contingent liabilities arising in the normal course of business, and thosecontingent liabilities which would arise from the drawing down in full of undrawn advised facilities (whether revocable or irrevocable, conditional or unconditional) which the bank has committed itself to provide. In the case of undrawn L/C or similar facilities, the advised limit must be included in the measure ofexposure ;(c) Holdings of equity capital, bonds, bills or other financial instruments. In the case of equityexposures , the current fair value as shown in the books of the bank should be included in the measure ofexposure .(d) Other assets which constitute a claim for the bank and which are not included in (a), (b) or (c) above.CM-5.3.2
As a general rule,
exposures should be reported on a gross basis (i.e. no offset). However, debit balances on accounts may be offset against credit balances on other accounts with the bank if:(a) a legally enforceable right of set off exists in all cases (as confirmed by a legal opinion addressed to the bank) in respect of the recognised amounts;(b) the debit and credit balances relate to the same customer or to customers in the same group; and(c) the bank intends either to settle on a net basis, or to realise the debit balances and settle the credit balances simultaneously.For a group facility, a full cross guarantee structure must also exist before debit balances on accounts may be offset.
CM-5.3.3
Large
exposures are calculated using the sum of the nominal amounts before the application of risk weighting and credit conversion factors for:(a) on-balance sheet claims;(b) guarantees and other contingent claims; and(c) potential claims in the case of undrawn facilities.The amount at risk from
derivative contracts is taken to be the credit equivalent amount calculated based on the guidelines for the prudential returns (see Module CA).CM-5.3.4
A bank's
exposure arising fromsecurities' trading operations is calculated as its net long position in a particularsecurity (a short position in onesecurity issue may not be offset against a long position in another issue made by the same issuer). A bank's "net long position" in asecurity refers to its commitment to buy thatsecurity together with its current holdings of the samesecurity , less its commitment to sell suchsecurities .CM-5.4 CM-5.4 Identity of counterparty
CM-5.4.1
For the purposes of measuring
exposures , thecounterparty will generally be the borrower (customer), the person guaranteed, the issuer of asecurity in the case of asecurity held, or the party with whom a contract was made in the case of aderivative contract.CM-5.4.2
Where a third party has provided an explicit unconditional irrevocable guarantee, and subject to the guaranteed bank's policy statement not stating otherwise, the guaranteed bank may be permitted to report the
exposure as being to the third party guarantor.CM-5.5 CM-5.5 Limits for large exposures
Aggregate limit on large exposures — 800%
CM-5.5.1
The aggregate of large
exposures may not exceed 800% of the bank's (consolidated) capital base.CM-5.5.2
"Capital base" is the adjusted capital base for the purpose of the risk asset ratio calculated in accordance with the PIR/PIRC return (see Module CA).
CM-5.5.3
A "large
exposure " is anyexposure tocounterparty or a group of closely related counterparties which is greater than, or equal to, 10% of (consolidated) capital base.Single exposure limit — 15%
CM-5.5.4
A bank may not incur an
exposure to an individualcounterparty or group of closely related counterparties which exceeds 15% of the reporting bank's (consolidated) capital base.CM-5.5.5
"Closely related
counterparties " are two or morecounterparties who constitute a single risk because one of them has, directly or indirectly, a controlling interest in the other(s) (i.e. 20% or more equity voting rights), orcounterparties connected in such a way that the financial soundness of any one of them may affect the financial soundness of the other(s), or the same factors may affect the financial soundness of both or all of them.CM-5.5.6
"Controlling interest" means either significant ownership or any other interests (including, but not limited to, the ability to exercise or control the exercising of voting power of
issued share capital in the licensee) which enable the holder, or which would enable a proposed transferee, thereof to exercise significant influence over the management and business of the licensee.Limit on exposures to connected counterparties — 40% aggregate
CM-5.5.7
Exposures to connectedcounterparties may be justified only when undertaken for the clear commercial advantage of the bank, when negotiated and agreed on an arm's length basis, and when included in the largeexposures policy statement agreed with the Agency.CM-5.5.8
No lending by a bank to its own external auditors shall be permitted. In this context, "external auditors" refers to the firm/partnership, the partners, the Directors and managers. For those conventional banks which provide Islamic banking services, no lending to members of the Shari'a board shall be permitted.
CM-5.5.9
For the purpose of this module, "Connected
counterparties " includes companies or persons connected with the bank, including in particular subsidiaries and associated companies (whether such association is due to control or shareholding or otherwise), Directors and their associates (whether such association is due to control or family links or otherwise), management, and shareholders holding 10% or more of the voting power of the bank. In this context, family links means spouse, father, mother, sons, daughters, sisters and brothers.CM-5.5.10
Exposures to all connectedcounterparties listed below when taken together, may not exceed 40% of (consolidated) capital base.Connected Counterparties Individual Limit Aggregate Limit Shareholders with "significant ownership (i.e. 10% and above)" 0% 0% Directors 10% 20% Associated Companies / Unconsolidated subsidiaries 15% 20% Total (including management) 40% CM-5.5.11
Lending to senior management is covered under chapter CM-6. All credit facilities to senior management will be included under the total connected
counterparties limit of 40% of capital base.Limit on exposures to shareholders
CM-5.5.12
Shareholders with significant ownership of the bank's capital (10% and above) are not allowed to borrow from the bank (i.e. a 0% limit), however smaller shareholders will be subject to the normal 15% limit on an individual basis. Directors who are also shareholders with significant ownership are subject to the 0% limit mentioned above.
Deductions from capital base
CM-5.5.13
The Agency will examine particularly closely all
exposures to companies or persons connected to a bank and will deduct them from the bank's (consolidated) capital base if they are, in the Agency's opinion, of the nature of a capital investment, or provision of long-term working capital, or are made on particularly concessionary terms.CM-5.5.14
Any other form of connected lending outside the scope of the above will be dealt with by the Agency on a case-by-case basis.
CM-5.6 CM-5.6 Exempt exposures
CM-5.6.1
Certain types of
exposure are exempt from the limits set out above, but notification of suchexposures should be made to the Agency on a quarterly basis in the format provided in Appendix BR-3.CM-5.6.2
These exemptions fall into the following categories and are subject, in each case, to the policy statement as agreed with the Agency:
(a) short term (i.e. up to six months original maturity) interbankexposures ;(b)exposures to GCC governments, their semi-governmental institutions and agencies that do not operate on a commercial basis, as set out in the guidelines to the PIR/PIRC (see Module CA);(c)exposures to OECD central governments orexposures secured by OECD central governmentsecurities / guarantees;(d)exposures secured by cash or GCC governmentsecurities / guarantees;(e) certain connectedexposures , in particular those arising from a group Treasury function (see paragraphs CM-5.6.3 to CM-5.6.6);(f)exposures which are covered by a guarantee from the bank's parent (see paragraphs CM-5.6.7 to CM-5.6.10); and(g)exposures arising from underwriting activities, suchexposures continuing for no more than 90 calendar days. Underwritingexposures should normally be part of the trading book of a bank. Any residual holdings ofsecurities held for more than 90 days from the commitment date of underwriting are no longer exempt and are subject to normal largeexposure limits.Exempt exposures to connected counterparties
CM-5.6.3
Exposures to subsidiaries which are always fully consolidated on a line-by-line basis for all supervisory purposes are exempt, however banks should bear in mind thecapital adequacy requirements on a solo basis.CM-5.6.4
Exposures to unconsolidated subsidiaries are not exempt and will be included under the limits forexposures to associated companies.CM-5.6.5
In respect of
exposures to other connectedcounterparties , the Agency will allow a bank to take on a Treasury role on behalf of the group as a whole (provided that the group is subject to consolidated supervision by its home supervisor). The Agency's policy regarding the taking on of a Treasury role includesexposures arising from a central risk management function.CM-5.6.6
In the above scenario (paragraph CM-5.6.5), for example,
exposures of more than 15% of the capital base to a parent bank from a subsidiary bank may be permitted where they constitute short term lending of excess liquid funds.Exposures undertaken by a subsidiary bank
CM-5.6.7
Where
exposures undertaken by a Bahrain subsidiary of an overseas bank are guaranteed by its parent, the Bahrain subsidiary bank may be deemed to have anexposure to its parent.CM-5.6.8
Under the terms of this module (see paragraph CM-5.6.2), such indirect
exposures to a parent bank may be exempt from the limits on largeexposures if the Agency is satisfied that:(a) suchexposures are entered into within the terms of a policy agreed by the parent bank, and(b) there are guarantees in place from the parent bank to protect the subsidiary should theexposure become impaired or require to be written off.CM-5.6.9
In the case of a Bahrain incorporated bank's subsidiary inside Bahrain, in order for an
exposure exceeding 15% of capital base to be acceptable in the subsidiary, the Bahrain parent must at all times have capacity to take on thecapacity to the third party, without itself exceeding the limit of 15% of capital base. Also, the totalexposure of the banking group to the customer must be within 15% of the parent bank's consolidated capital base.CM-5.6.10
The Agency will need to be satisfied that adequate control systems are in place to ensure that risks taken in the group as a whole are properly monitored and controlled.
CM-5.7 CM-5.7 Reporting of exposures
CM-5.7.1
Bahrain incorporated banks are required to report (for the attention of the Director of Banking Supervision Directorate) all large
exposures , (whether exempt or not) on a quarterly basis using the return provided in Appendix BR 3.CM-5.7.2
Banks are required to adopt policies and set internal limits, which will not lead to the
exposure limit(s) referred to above being exceeded as a matter of course.CM-5.7.3
For some banks, the Agency may determine it prudent to set a lower percentage(s) than the ones given herein.
CM-5.7.4
Should any bank find that, for reasons outside its control or otherwise, it has an
exposure to an individualcounterparty (other than an exemptexposure ) which results in it exceeding any of the limits set out above, this should be reported immediately to the Agency for its consideration, and action should be taken to immediately bring theexposure back within applicable limits as soon as possible.CM-5.8 CM-5.8 Policy statements
CM-5.8.1
The Agency requires each Bahrain incorporated bank to set out its policy on large
exposures , including limits for differing types ofexposures to individual customers, banks, corporates, countries and economic and market sectors, in a policy statement which should be formally approved by the Board of Directors. Furthermore, banks should not implement significant changes to these policies without prior discussion with the Agency.CM-5.8.2
The policy statement should identify 'connected
counterparties ' and the bank's policies towards lending to and investing in thesecounterparties .CM-5.8.3
The bank should explain and justify any requests for exemptions for lending to/investments in connected
counterparties .CM-5.8.4
Each bank will be expected to justify to the Agency in the policy document its policy on
exposures to individualcounterparties , including the maximum size of anexposure contemplated.CM-5.8.5
Exposures tocounterparties connected with the bank will continue to be particularly closely examined.CM-5.8.6
The necessary control systems to give effect to a bank's policy on large
exposures should be clearly specified and monitored by its Board.CM-5.8.7
Banks are required to implement appropriate internal systems and controls to monitor the size of their capital base on a daily basis to ensure that the limits detailed in this module are not exceeded.
CM-5.9 CM-5.9 Concentrations in economic and market sectors
CM-5.9.1
The extent to which a bank may be prudently exposed to a particular economic sector will vary considerably depending upon the characteristics and strategy of the bank, and the sector concerned.
CM-5.9.2
Concentrations should also be recognised in not just economic sectors, but also in markets (e.g. individual stock exchanges). The Agency will not apply common maximum percentages to banks' sectoral or market
exposures but, instead, will continue to monitor suchexposures on an individual and general basis.CM-5.9.3
Banks must specify in their policy statements how they define economic and market sectors, and what limits apply to differing sectors.
CM-5.9.4
Exposures and limits for sectors should be reviewed at least quarterly by the Board of Directors.CM-5.9.5
Banks which have over 10% of their risk-adjusted assets in market risk (i.e. the trading book) must also set market risk concentration limits.