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  • CM-2.5 CM-2.5 Limits for Large Exposures

    • Definitions and Aggregate Limit on Large Exposures

      • CM-2.5.1

        A ‘large exposure’ is any exposure to a counterparty or a group of closely related counterparties which is greater than, or equal to, 10 percent of the reporting Bahraini conventional bank licensee’s Total Consolidated capital but excluding intragroup exposures.

        Added: June 2022

      • CM-2.5.2

        CBB requires that any large exposure, as defined in Paragraph CM-2.5.1, must have a prior approval by the Bahraini conventional bank licensee's Board of Directors unless the exposure was incurred within the specific borrower limits for which the licensee has prior Board approval.

        Added: June 2022

    • Single Exposure Limit to a counterparty – 15 Percent

      • CM-2.5.3

        A Bahraini conventional bank licensee may not incur an exposure to an individual counterparty or a group of closely related counterparties (not connected to the reporting licensee) which is 15 percent or more of the reporting licensee’s Total consolidated capital without the prior written approval of the CBB. Where this limit has been exceeded, the excess amount must be risk-weighted at 800 percent.

        Added: June 2022

    • Closely related counterparties – Criteria

      • CM-2.5.4

        In order for the licensee to establish the existence of a group of closely related counterparties, it must assess the relationship amongst counterparties by referring to one or more of the following criteria:

        (a) Control relationship: One of the counterparties, directly or indirectly, has control over the other(s) based on the following:
        (i) Where one entity owns 50% or more of the voting rights of another entity.
        (ii) Where one entity is deemed to have control by virtue of voting agreements (e.g. control of a majority of voting rights pursuant to an agreement with other shareholders).
        (iii) Where one entity exercises significant influence on the appointment or dismissal of an entity’s board and/or senior management, such as the right to appoint or remove a majority of such persons, or the fact that a majority of such persons have been appointed solely as a result of the exercise of an individual entity’s voting rights.
        (iv) Where one entity has significant influence on the board or senior management, e.g. an entity has the power, pursuant to a contract or otherwise, to exercise a controlling influence over the management or policies of another entity (e.g. through consent rights over key decisions).
        ; or
        (b) Economic interdependence: If one of the counterparties were to experience financial problems, in particular funding or repayment difficulties, the other(s), as a result, would also be likely to encounter funding or repayment difficulties.
        Added: June 2022

      • CM-2.5.5

        Bahraini conventional bank licensees are also expected to refer to criteria specified in IFRS for further qualitative guidance when determining control.

        Added: June 2022

      • CM-2.5.6

        Bahraini conventional bank licensees must assess the control relationship using the following criteria:

        (a) Voting agreements (e.g. control of a majority of voting rights pursuant to an agreement with other shareholders);
        (b) Significant influence on the appointment or dismissal of an entity’s administrative, management or supervisory body, such as the right to appoint or remove a majority of members in those bodies, or the fact that a majority of members have been appointed solely as a result of the exercise of an individual entity’s voting rights;
        (c) Significant influence on senior management, e.g. an entity has the power, pursuant to a contract or otherwise, to exercise a controlling influence over the management or policies of another entity (e.g. through consent rights over key decisions).
        Added: June 2022

      • CM-2.5.7

        The CBB will exercise its discretion in applying the definition of closely related counterparties on a case-by-case basis if it finds, during its onsite or offsite supervisory review, any linkage of such counterparties.

        Added: June 2022

      • CM-2.5.8

        In establishing closely related counterparty relationships based on economic interdependence (CM-2.5.4 (b)), licensees must consider, at a minimum, the following qualitative criteria:

        (a) Where 50 percent or more of one counterparty’s gross receipts or gross expenditures (on an annual basis) are derived from transactions with the other counterparty (e.g. the owner of a residential/commercial property and the tenant who pays a significant part of the rent);
        (b) Where one counterparty has fully or partly guaranteed the exposure of the other counterparty, or is liable by other means, and the exposure is so significant that the guarantor is likely to default if a claim occurs;
        (c) Where a significant part of one counterparty’s production/output is sold to another counterparty, which cannot easily be replaced by other customers;
        (d) When the expected source of funds to repay each loan one counterparty makes to another is the same and the counterparty does not have another source of income from which the loan may be fully repaid;
        (e) Where it is likely that the financial problems of one counterparty would cause difficulties for the other counterparties in terms of full and timely repayment of liabilities;
        (f) Where the insolvency or default of one counterparty is likely to be associated with the insolvency or default of the other(s); and
        (g) When two or more counterparties rely on the same source for the majority of their funding and, in the event of the common provider’s default, an alternative provider cannot be found. In this case, the funding problems of one counterparty are likely to spread to another due to a one-way or two-way dependence on the same main funding source.
        Added: June 2022

    • Limit on Exposures to connected counterparties – 25 Percent Aggregate

      • CM-2.5.9

        Exposures to connected counterparties of Bahraini conventional bank licensees may be justified only when undertaken for the clear commercial advantage of the licensee, when negotiated and agreed on an arm’s-length basis, and when included in the Large Exposures Policy statement.

        Amended: October 2022
        Added: June 2022

      • CM-2.5.10

        A Bahraini conventional bank licensee may not exceed the individual or aggregate limits for exposures to connected counterparties shown in Paragraph CM-2.5.15, without the prior written approval of the CBB.

        Added: June 2022

      • CM-2.5.11

        The licensee may not undertake exposures to its own external auditor. In this context, ‘external auditor’ refers to the firm/partnership, the partners, the directors and the managers of the audit firm.

        Added: June 2022

      • CM-2.5.12

        For the purpose of this Module, ‘connected counterparties’ include legal and natural persons connected with the Bahraini conventional bank licensee, including, in particular; controllers of the licensee (and Board members, senior management and key staff of the controller, the controller’s appointed Board representatives, subsidiaries and associated companies of controllers including their Board members, senior management and key staff), approved persons of the licensee, as defined by Module LR-1A, and their close family members (as defined by IFRS – IAS 24); associated companies not mentioned hereinabove, unconsolidated subsidiaries and members of the Shari’a Supervisory Board (‘SSB’), if any.

        Added: June 2022

      • CM-2.5.13

        Equity participations in, and credit exposures to, consolidated banking and financial subsidiaries (see CA-2.3.1(c)) need not be included in exposures to connected counterparties for the sake of the table in CM-2.5.15. Equity participations in, and credit or financing exposures to, unconsolidated subsidiaries are included in the definition of exposure in order to understand the degree of support the parent is supplying to its unconsolidated subsidiaries on a day-to-day basis.

        Added: June 2022

      • CM-2.5.14

        The CBB will exercise its discretion in applying the definition of connected counterparties of the licensee on a case-by-case basis, if it finds during its onsite or offsite supervisory review any linkage of such counterparties.

        Added: June 2022

      • CM-2.5.15

        Exposures (both on and off-balance sheet) to all connected counterparties of Bahraini conventional bank licensees listed below, when taken together, may not exceed 25 percent of the Total consolidated capital. Where any of these limits have been exceeded, the excess amount must be risk-weighted at 800 percent.

        Connected Counterparties Individual Limit Aggregate Limit
        Controllers and their close family members as defined in IFRS, and Board members, senior management and key staff of the controller, the controller’s appointed Board representatives, subsidiaries and associated companies of controllers including their Board members, senior management and key staff 0% 0%
        Approved persons (and their close family members as defined in IFRS) and members of the SSB 10% 25%
        Associated companies not mentioned hereinabove, other connected counterparties not mentioned above, and unconsolidated subsidiaries 15%
        Total (including senior management and others) 25%
        Added: June 2022

    • Deductions from Total Capital

      • CM-2.5.16

        The CBB will closely examine all exposures to ‘connected counterparties’ and will deduct them from the licensee’s consolidated total capital if they are, in the CBB's opinion, of the nature of a capital investment, or provision of long-term working capital, or are made on particularly concessionary terms.

        Added: June 2022

      • CM-2.5.17

        Reciprocal cross-holdings of capital between the licensee and its controllers (see GR-5) which artificially inflate the capital of licensee concerned are not permitted. Any cross-holdings that occur, due to acquisitions or takeovers, must be deducted from the concerned licensee’s total capital (see also CA-2).

        Added: June 2022

      • CM-2.5.18

        Any other form of lending to connected counterparties outside the scope of the above will be dealt with by the CBB on a case-by-case basis.

        Added: June 2022

      • CM-2.5.19

        Bahraini conventional bank licensees must perform valuations of collaterals covering large exposures to ensure that collaterals are, and continue to be, enforceable and realisable at least on an annual basis when market conditions are adverse.

        Added: June 2022