• 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 Foreign Branches is to ensure that such exposures 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 largest exposures 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 of exposure should reflect the maximum loss that will arise should a counterparty fail or the loss that may arise due to the realisation of any lending assets, shareholdings or other exposures or off-balance sheet positions. In certain cases (particularly derivatives), the measure of a large exposure may be larger than that used in published accounts. Consistent with this, the exposure should include the amount at risk arising from a bank's:

        (a) Claims on a counterparty 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 of exposure (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 of exposure after deduction of any provisions;
        (b) Contingent liabilities arising in the normal course of business, and those contingent 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 of exposure;
        (c) Holdings of equity capital, bonds, bills or other financial instruments. In the case of equity exposures, the current fair value as shown in the books of the bank should be included in the measure of exposure.
        (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 from securities' trading operations is calculated as its net long position in a particular security (a short position in one security issue may not be offset against a long position in another issue made by the same issuer). A bank's "net long position" in a security refers to its commitment to buy that security together with its current holdings of the same security, less its commitment to sell such securities.

    • CM-5.4 CM-5.4 Identity of counterparty

      • CM-5.4.1

        For the purposes of measuring exposures, the counterparty will generally be the borrower (customer), the person guaranteed, the issuer of a security in the case of a security held, or the party with whom a contract was made in the case of a derivative 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 any exposure to counterparty 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 individual counterparty 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 more counterparties 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), or counterparties 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 connected counterparties 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 large exposures 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 connected counterparties 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 such exposures 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) interbank exposures;
        (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 or exposures secured by OECD central government securities / guarantees;
        (d) exposures secured by cash or GCC government securities / guarantees;
        (e) certain connected exposures, 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, such exposures continuing for no more than 90 calendar days. Underwriting exposures should normally be part of the trading book of a bank. Any residual holdings of securities held for more than 90 days from the commitment date of underwriting are no longer exempt and are subject to normal large exposure 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 the capital adequacy requirements on a solo basis.

        • CM-5.6.4

          Exposures to unconsolidated subsidiaries are not exempt and will be included under the limits for exposures to associated companies.

        • CM-5.6.5

          In respect of exposures to other connected counterparties, 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 includes exposures 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 an exposure 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 large exposures if the Agency is satisfied that:

          (a) such exposures 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 the exposure 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 the capacity to the third party, without itself exceeding the limit of 15% of capital base. Also, the total exposure 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 individual counterparty (other than an exempt exposure) 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 the exposure 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 of exposures 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 these counterparties.

      • 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 individual counterparties, including the maximum size of an exposure contemplated.

      • CM-5.8.5

        Exposures to counterparties 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 such exposures 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.