Guidance Notes - Large Exposures Framework for Bermuda Banks and Deposit Companies (December 2024)

Summary

This BMA Guidance Note sets out the Large Exposures (LE) framework that Bermuda-licensed banks and deposit companies must apply to measure, monitor, control and report exposures to single counterparties or groups of connected counterparties. It replaces the 2007 large exposures guidance and implements the Basel III large exposures standard alongside Section 38 of the Banks and Deposit Companies Act 1999. The framework becomes effective on 1 January 2025.

• Large exposure definition: An exposure to a counterparty or group of connected counterparties equal to or greater than 10% of the institution's Large Exposure Capital Base (LECB) is a large exposure and must be calculated on a worst-case basis.
• 25% limit and pre-approval: Banks must obtain the BMA's prior written approval before entering any commitment that would create an exposure equal to or exceeding 25% of LECB, generally giving at least 48 hours' notice.
• Breach notification: Institutions must notify the BMA immediately upon becoming aware of any inadvertent breach of the 25% limit or other agreed counterparty limits.
• Quarterly reporting: Banks must report, on a quarterly basis, all exposures at or above 10% of LECB and their largest 20 counterparty exposures, both before and after credit risk mitigation.
• Board oversight: Management information on large exposures must go to the board at least semi-annually, and limit breaches must be reported to the board at the next meeting or immediately depending on severity.
• Connected counterparties: Exposures to connected counterparties (common control, ownership, management or cross-guarantees, or economic interdependence) must be aggregated and treated as a single counterparty exposure.
• Related parties: Institutions must have policies ensuring related-party exposures are conducted at arm's length, monitored, and subject to limits at least as strict as for unrelated counterparties.
• Sovereign, PSE and CCP treatment: Certain sovereign, public sector entity and qualifying central counterparty exposures are exempt from the pre-approval requirement, subject to specified risk-weight and guarantee conditions, but remain subject to reporting thresholds.
• Trading book treatment: Trading book exposures to a counterparty must be aggregated with banking book exposures to the same counterparty, with specific rules for calculating exposure values and offsetting long and short positions.

The guidance also sets out the definition of exposure value, credit conversion factors for off-balance sheet items (in the Appendix), and expectations that the BMA confirms each institution's LECB at least annually.

Key obligations

• Banks and deposit companies must calculate large exposures on a worst-case basis using the criteria in the guidance and apply the LE framework on both unconsolidated and consolidated bases.
• Banks must obtain the BMA's prior written approval before entering a commitment or exposure equal to or exceeding 25% of LECB, giving at least 48 hours' notice (or earlier for complex cases).
• Institutions must notify the BMA immediately of any inadvertent breach of the 25% limit or other agreed counterparty limits.
• Banks must report quarterly all exposures at or above 10% of LECB and their 20 largest counterparty exposures, before and after credit risk mitigation.
• Banks must provide management information on large exposures to the board at least semi-annually and report limit breaches to the board promptly.
• Banks must identify, document and aggregate exposures to connected counterparties, including performing due diligence to support disaggregation decisions.
• Institutions must implement policies and procedures ensuring related-party exposures are conducted on an arm's length basis and subject to limits at least as strict as for other counterparties.
• Banks must report all sovereign exposures equivalent to at least 10% of LECB and obtain prior approval for non-exempt sovereign exposures at or above 25% of LECB.
• Banks must aggregate trading book exposures with banking book exposures to the same counterparty and apply prescribed offsetting rules for long and short positions.
• Banks must notify the BMA immediately if client confidentiality concerns impede obtaining data needed to monitor and control large exposures.

Applies to

banks, deposit companies

Deadlines

• 1 January 2025: Effective date of the revised Large Exposures Framework.
• quarterly: Banks must report exposure values (before and after credit risk mitigation) for all exposures at or above 10% of LECB and the largest 20 counterparty exposures.
• at least 48 hours before entering the exposure: Notice period the BMA normally expects before approving a commitment reaching 25% or more of LECB.
• immediately: Institutions must notify the BMA upon becoming aware of any inadvertent breach of the 25% exposure limit or other agreed counterparty limits.
• at least semi-annually: Management information on large exposures must be provided to the board of directors.
• at least annually: The BMA confirms each institution's Large Exposure Capital Base (LECB) in writing.