Consultation Paper - Proposed Revisions to the Large Exposure Framework for Banks

Summary

This is a Bermuda Monetary Authority consultation paper proposing revisions to the large exposure (LE) framework applicable to banks, aligning Bermuda's rules with the Basel Committee's post-2019 large exposures standard while retaining selected elements of the Authority's 2007 Large Exposure Guidance. It sets out proposed changes to definitions, exemptions and reporting practices and invites industry comment before the Authority finalises the revised framework.

• Capital base definition: Proposes narrowing the Large Exposure Capital Base (LECB) from Tier 1 plus Tier 2 capital to Tier 1 capital only, consistent with the Basel framework.
• Thresholds unchanged: Retains the existing 10% LECB reporting threshold and 25% LECB pre-approval limit for large exposures.
• Sovereign exposures: Proposes redefining 'Zone A' sovereigns using minimum credit rating criteria (A- to AAA / A3 to Aaa) for exclusion from large exposure calculations, with lower-rated sovereign exposures above 25% requiring pre-approval.
• PSE exemption: Proposes exempting public sector entities treated as sovereigns that carry an explicit sovereign guarantee and are linked to a Zone A sovereign.
• Interbank exposures: Proposes adopting the Basel exemption for intraday interbank exposures from LE calculations.
• Covered bonds: Proposes not adopting the Basel preferential treatment for covered bonds (national discretion), requiring banks to look through to the issuing counterparty.
• Structures/CIUs/securitisations: Requires banks to look through fund, securitisation and other structures to underlying assets when assigning exposures to counterparties.
• Central counterparties: Exempts exposures to qualifying CCPs related to clearing activities, while non-QCCP exposures remain subject to the 25% limit and 10% reporting threshold.
• Governance: Expects large exposure management information to reach the board at least semi-annually, with breaches reported at the next board meeting or immediately depending on severity.
• Continued reporting: Maintains existing statutory reporting obligations under section 38 of the Banks and Deposit Companies Act 1999, including quarterly reporting of the top 20 exposures.

The Authority is seeking stakeholder feedback on these proposals and intends to implement the revised framework from the quarter ending 30 June 2022, replacing the relevant portions of the 2007 Guidance.

Key obligations

• Industry stakeholders wishing to comment must email feedback to banking@bma.bm by close of business on 31 March 2022.
• Banks must continue to calculate, monitor and report large exposures on a 'worst case' basis under section 38 of the Banks and Deposit Companies Act 1999.
• Banks must seek the Authority's prior approval before entering into any transaction(s) that would expose them to losses equal to or exceeding 25% of available capital resources (subject to limited exemptions).
• Banks must continue to report their top 20 exposures within the quarterly PIR large exposure template, even where specific counterparty exemptions apply.
• Banks must provide large exposure management information to their board of directors at least semi-annually, and report any breach of large exposure limits to the board at the next scheduled meeting or immediately, depending on severity.
• Where a bank disaggregates connected counterparties, it must document the rationale for doing so.
• Banks must notify the Authority immediately if confidentiality concerns arise that could impede large exposure data monitoring.

Applies to

banks

Deadlines

• 31 March 2022: Deadline for industry and stakeholders to submit comments on the consultation paper to banking@bma.bm.
• quarter-end 30 June 2022: Target date by which the Authority is seeking to implement the revised large exposure framework.