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  • CM-4 CM-4 The monitoring and control of large exposures of banks licensed by the Agency

    • CM-4.1 CM-4.1 Overview

      • CM-4.1.1

        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-4.1.2

        The contents of this chapter apply in full to all locally incorporated Islamic banks in the Kingdom of Bahrain.

    • CM-4.2 CM-4.2 The measure of exposure

      • CM-4.2.1

        The measure of exposure reflects the maximum loss should a counterparty fail, or loss that may be experienced due to non-repayment of facilities granted. Consistent with this, an exposure encompasses 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;
        (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; and
        (c) Other assets (whether on balance sheet or restricted investment accounts), which constitute a claim for the bank and its customers and which are not included in (a) or (b) above. In particular, exposures where the bank itself is not exposed, but is committing client funds such as restricted investment accounts are included here.

      • CM-4.2.2

        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 where they relate to the same customer or to corporate customers in the same business group if:

        (a) a legally enforceable right of set off exists in all cases (as confirmed by an independent legal opinion addressed to the bank) in respect of the recognised amounts, and
        (b) 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 (i.e. full multilateral guarantees must be in place between all the companies within the group).

      • CM-4.2.3

        Large exposures are calculated using the sum of the nominal amounts before the application of the 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.

      • CM-4.2.4

        In case of syndicated facilities, the nominal amount would include only the bank's share of the syndication (financed by unrestricted investment accounts and bank's own funds) and any amounts for which binding commitments from other financial institutions are not available. Where a binding commitment is available, that amount would be excluded in calculation of the large exposures. See section CM-4.5 for exemptions.

      • CM-4.2.5

        For the purpose of large exposures, balance sheet claims involving assets acquired to be leased under Ijarah Muntahia Bittamleek should be reflected as an exposure against the lessee. Further, Murabaha contracts where assets are held for resale, under a binding promise, such exposure should be reflected as an exposure to the counterparty which has signed the binding promise. Potential claims in the case of Istisna'a contracts should include the total amount expected to be paid to al-Sani (the seller) and shown as an exposure to al-Mustasni (ultimate buyer).

      • CM-4.2.6

        A bank's exposure arising from securities' trading operations is calculated as its net long position in a particular security. A bank's "net position" in a security refers to its commitments to buy that security together with its current holding of the same security, less its commitments to sell such a security.

    • CM-4.3 CM-4.3 Identity of counterparty

      • CM-4.3.1

        For the purposes of measuring exposures, the counterparty will generally be the customer receiving the funds, the person guaranteed, and the issuer of a security in the case of a security held.

      • CM-4.3.2

        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 guarantor, rather than the person guaranteed.

    • CM-4.4 CM-4.4 Limits for large exposures

      • Aggregate limit on large exposures

        • CM-4.4.1

          A "large exposure" is any exposure whether direct, indirect or funded by restricted investment accounts to a counterparty or a group of closely related counterparties which is greater than, or equal to, 10% of the reporting bank's (consolidated) capital base.

        • CM-4.4.2

          "Capital base" is the adjusted capital base for the purpose of the risk asset ratio calculated in accordance with the PIRI return (see Module BR) (or owner's equity) using the most recent annual consolidated balance sheet, subject to any specific requirements by the Agency.

        • CM-4.4.3

          The aggregate of large exposures (from both on balance sheet and restricted investment accounts) may not exceed 1200% of the bank's (consolidated) capital base whether funded or not funded, i.e. contingent commitments.

        • CM-4.4.4

          However, the aggregate of large exposures from on balance sheet exposures should not exceed 800% of the bank's (consolidated) capital base whether funded or not funded.

      • Single exposure limit

        • CM-4.4.5

          The following single exposure limits apply:

          (a) Direct exposures (i.e. funded by a bank's own funds or unrestricted investment accounts): 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 without the prior written approval of the Agency. For this purpose, companies/banks with variable capital should not include participation shares in calculating their capital base, since these are governed by Mudaraba contract (profit sharing).
          (b) Restricted investment accounts: A bank may not incur an exposure to an individual counterparty or group of closely related counterparties where the exposure is funded by restricted investment accounts, which exceeds 30% of the reporting bank's (consolidated) capital base.
          (c) The combined exposures: A combined exposure of (a) & (b) above (funded by unrestricted investment accounts, or a bank's own funds or restricted investment accounts) to an individual counterparty or group of closely related parties may not exceed 35% of the reporting bank's (consolidated) capital base.

      • Closely related counterparties

        • CM-4.4.6

          Closely related counterparties are two or more counterparties who constitute a single risk because one of them has, direct or indirect, "control" over the other(s) (see below) 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-4.4.7

          "Control" means either significant ownership (i.e. ownership of 20% or more of voting equity) 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

        • CM-4.4.8

          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 policy statement agreed with the Agency.

        • CM-4.4.9

          No Islamic facilities provided by a bank to its own external auditors shall be permitted. In addition, unless provided for in the contract, off balance sheet restricted investment accounts will not be permitted to participate in on balance sheet corporate funding and vice versa and movement within restricted investment accounts is not permitted without the Agency's prior written approval.

        • CM-4.4.10

          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), members of the Shari'a Supervisory Board, management and other staff, 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-4.4.11

          The Agency will closely examine 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-4.4.12

          The limits for exposure to connected counterparties have been set as follows:

          (a) Direct exposures: A bank may not incur an exposure (whether funded or not funded) to an individual connected counterparty (as defined above) which exceeds 15% of the reporting bank's (consolidated) capital base. The aggregate exposures to all counterparties within this category should not exceed 25% of the bank's consolidated capital base.
          (b) Restricted investment accounts: A bank may not incur an exposure (whether funded or not funded) to an individual connected counterparty where the exposure is funded by restricted investment accounts which exceeds 25% of the reporting bank's (consolidated) capital base. The aggregate exposures to all counterparties within this category should not exceed 35% of the bank's consolidated capital base.
          (c) The combined exposures: A combined exposure of (a) & (b) above (funded by unrestricted investment accounts and bank's own funds, and restricted investment accounts) whether funded or not funded, to an individual connected counterparty may not exceed 25% of the reporting bank's (consolidated) capital base.
          (d) The aggregate exposures to connected counterparties: (whether funded from on balance sheet or restricted investment accounts) may not exceed 60% of the bank's (consolidated) capital base, whether funded or not funded.

    • CM-4.5 CM-4.5 Exempt exposures

      • CM-4.5.1

        Certain types of exposure are exempt from the limits set out above, but notification of such exposures should be made to the Agency.

      • CM-4.5.2

        These exemptions fall into the following categories and are subject, in each case, to the policy statement as agreed with the Agency:

        (a) Islamic bonds/ Sukook issued or guaranteed by the Government of Bahrain or its Agencies;
        (b) Islamic bonds/ Sukook issued or guaranteed by the IDB;
        (c) Short term (one year or less) interbank exposures;
        (d) Exposures to GCC governments, their semi-government institutions and agencies that do not operate on commercial basis;
        (e) Exposures to OECD central governments;
        (f) Exposures secured on cash or GCC government securities/guarantees;
        (g) Exposures secured on OECD central government securities/guarantees;
        (h) Certain connected exposures, in particular those arising from a group treasury function;
        (i) Exposures which are covered by a guarantee from the bank's parent (see paragraph CM-4.5.8);
        (j) Exposures arising from underwriting activities, such exposures continuing for no more than 90 calendar days. Any residual holdings of securities for more than 90 days from the commitment date of underwriting would be subject to normal large exposure limits;
        (k) Exposures where the bank is acting as agent for an investor in a single purpose, non-discretionary capacity, and the bank has the full right to set-off losses and costs against any funds provided by the investor (examples might include real estate investments); and
        (l) Syndicated facilities being financed by restricted investment accounts where the investor is fully aware of the type of investment and the associated risks.

      • Exempt exposures to connected counterparties

        • CM-4.5.3

          In respect of exposures to other group companies, the Agency's policy allows 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-4.5.4

          In certain exceptional cases, exposures of more than 15% of (consolidated) capital base to a bank which controls the financing bank may be permitted for utilisation of surplus liquid funds for a short period not exceeding 90 days even where the financing bank does not perform a treasury role. Any other form of connected financing outside the scope of the above will be dealt with by the Agency on a case-by-case basis.

      • Exposures undertaken by a subsidiary bank or by a branch outside Bahrain

        • CM-4.5.5

          In the case of banks, which are the Bahrain subsidiaries of overseas banks, the Agency will agree in writing with the supervisory authority of the parent bank, the size of exposures that can be undertaken by the subsidiary.

        • CM-4.5.6

          Exposures undertaken by a branch of a foreign bank on the books in Bahrain should be within the policy statement of the parent bank (company) as agreed by the parent's regulatory authority.

        • CM-4.5.7

          Overseas subsidiaries of Bahrain banks will be expected to comply with the regulatory requirements of the country in which they are located.

        • CM-4.5.8

          Where exposures undertaken by a subsidiary bank are guaranteed by its parent, the subsidiary bank may be deemed to have an exposure to the parent.

        • CM-4.5.9

          Under the terms of this Module, 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 non-performing or require to be written off.

        • CM-4.5.10

          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 for the subsidiary, the Bahrain parent must at all times have room to take over the exposure, without itself exceeding the limit of 15% of capital base. Also, the combined (on and off balance sheet) exposure of the banking group to the customer must be within 35% of the parent bank's consolidated capital base.

        • CM-4.5.11

          The Agency will need to be satisfied that adequate control systems are in place to ensure that credit risk taken in the group as a whole is properly monitored and controlled.

    • CM-4.6 CM-4.6 Reporting of exposures

      • CM-4.6.1

        Bahrain incorporated banks are required to report all large exposures on a quarterly basis using the PIRI return provided in Appendix BR 4.

      • CM-4.6.2

        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-4.6.3

        For some banks, the Agency may determine it prudent to set a lower percentage(s) than the ones given herein.

      • CM-4.6.4

        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-4.7 CM-4.7 Policy statements

      • CM-4.7.1

        The Agency requires each bank incorporated in Bahrain to set out its policy and internal limits on large exposures, including exposures to individual customers, banks, institutions, countries and economic sectors, in a policy statement which should be formally adopted by the Board of Directors. The policy statement should be part of the risk management policy of the bank. The Agency expects banks not to implement significant changes in these policies without prior discussion with the Agency.

      • CM-4.7.2

        Each bank should discuss their policy statement with the Agency. Each bank will be expected to justify to the Agency its policy on exposures to individual counterparties, including the maximum size of an exposure contemplated.

      • CM-4.7.3

        Exposures to counterparties connected with the bank will continue to be particularly closely examined.

      • CM-4.7.4

        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-4.8 CM-4.8 Concentrations in economic and market sectors

      • CM-4.8.1

        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-4.8.2

        Concentrations should also be recognized 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-4.8.3

        Banks must specify in their policy statements how they define economic and market sectors, and what limits apply to differing sectors.

      • CM-4.8.4

        Exposures and limits for sectors should be reviewed at least quarterly by the Board of Directors.

      • CM-4.8.5

        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.