The Management and Control of Credit Risks and the Implementation of the Statutory Provisions for Large Exposures (May 2007)

Summary

This is BMA guidance for banks and deposit companies licensed under the Banks and Deposit Companies Act 1999, setting out supervisory expectations for credit risk management and implementing the statutory large exposures controls in section 38 of the Act. It replaces the Authority's 1999 policy on reporting and control of large exposures and reflects a December 2006 industry consultation.

• Credit risk governance: The Board must set, and periodically review, the institution's credit risk strategy and key policies for taking on, measuring, controlling and reporting credit and counterparty risk, with senior management approval required for the largest or highest risk credits.
• Problem assets and provisioning: Institutions must maintain policies for periodic review, classification and provisioning of impaired assets; credits must be classified as impaired where full recovery is doubtful or arrears exceed 90 days.
• Related party exposures: Institutions must identify related parties, apply arm's length terms, keep limits at least as strict as for unrelated counterparties, and require Board approval (with conflicted members excluded) for material related exposures and write-offs.
• Concentration and country risk: Institutions must have a Board approved policy statement on large exposures, set prudent limits for sector, geographic and currency concentrations, and monitor country and transfer risk in international lending.
• Statutory large exposures limits: An exposure exceeding 10 percent of the LE capital base is a reportable large exposure; no exposure exceeding 25 percent of LE capital base may be undertaken without the Authority's prior written consent.
• Reporting mechanics: Large exposures must be reported quarterly via the Large Exposures Return within the Prudential Information Return, calculated on a worst case basis using the LE capital base figure most recently notified by the Authority.
• Breach notification: Institutions must pre-notify the Authority (normally at least 48 hours in advance) of any proposed exposure exceeding 25 percent of LE capital base, and must notify immediately upon becoming aware of any inadvertent breach of the 25 percent or other agreed limits.
• Group-wide monitoring: Although the statutory 25 percent limit applies at the licensed institution level, the Authority requires monitoring and reporting of connected counterparty exposures on a group-wide basis.

The guidance also addresses intra-group exposures, underwriting exposure concessions, aggregate clustering of large exposures, and notification obligations where legal or confidentiality obstacles impede information flows needed to monitor exposures.

Key obligations

• Board of Directors must determine and periodically review the institution's credit risk management strategy, policies and processes, including approval levels for the largest or highest risk credits.
• Institutions must put in place and apply policies and procedures for periodic review, classification and provisioning of problem/impaired assets.
• Credits must be classified as impaired when full recovery is doubtful or when contractual payments fall into arrears exceeding 90 days.
• Institutions must establish policies ensuring related party exposures are conducted on an arm's length basis, with limits at least as strict as for non-related counterparties, and require Board approval for material related exposures and write-offs.
• Institutions must draw up a Board-approved general policy statement on acceptance, control and management of large exposures, subject to regular review.
• Institutions must report to the Authority any transaction(s) exposing them to loss in excess of 10 percent of their LE capital base (large exposure).
• Institutions must obtain the Authority's prior written consent before entering into any transaction(s) that would expose them to loss in excess of 25 percent of their LE capital base.
• Institutions must complete and submit a quarterly Large Exposures Return as part of the Prudential Information Return.
• Institutions must pre-notify the Authority, normally at least 48 hours in advance, of any proposed exposure exceeding the 25 percent limit.
• Institutions must notify the Authority immediately upon becoming aware of any inadvertent breach of the 25 percent limit or other agreed counterparty limits.
• Institutions must monitor and report exposures to connected counterparties, and intra-group exposures, on a group-wide basis.
• Institutions must notify the Authority immediately if legal or confidentiality obstacles prevent them obtaining information needed to monitor and control large exposures.

Applies to

banks, deposit companies, institutions licensed under the Banks and Deposit Companies Act 1999

Deadlines

• quarterly: Large Exposures Return must be submitted quarterly as part of the Prudential Information Return.
• at least 48 hours before entering into commitment: Institutions should normally give the Authority at least 48 hours' notice before entering into a proposed exposure exceeding 25 percent of LE capital base (longer for complex cases).
• immediately: Institutions must notify the Authority immediately upon becoming aware of an inadvertent breach of the 25 percent limit or other agreed large exposure limits, or of legal obstacles to obtaining necessary exposure information.
• at least annually: The Authority confirms each institution's LE capital base figure in writing at least annually, which must be used for LE reporting until superseded.