The Approach to Consolidated Supervision (May 2007)

Summary

This policy paper sets out the Bermuda Monetary Authority's approach to consolidated supervision of licensed banks and deposit companies under the Banks and Deposit Companies Act 1999. It replaces the Authority's January 2000 policy of the same name and explains when and how the Authority looks beyond a solo licensed entity to assess risks arising from the wider group to which it belongs.

• Purpose: Consolidated supervision complements, not replaces, solo supervision, and aims to capture risks from unregulated or higher-risk group entities that could affect the licensed institution.
• Methods: Supervision may be quantitative (accounting consolidation of financial returns, consolidated capital and large exposure limits) or qualitative (review of group business, controls and management) depending on the nature of group assets and activities.
• Scope of consolidation: Consolidation applies to relevant financial companies in the group including parents, subsidiaries, sister companies and entities with 20 percent or more ownership; insurance, insurance broking and real estate businesses are generally excluded from the financial company test.
• Exceptions: The Authority may exceptionally permit exclusion of certain subsidiaries or participations from consolidated returns where consolidation would be inappropriate, the assets are immaterial (under 1 percent of group assets), or legal impediments prevent full information transfer, but any excluded investment must be deducted from consolidated capital.
• Consolidation technique: Full line-by-line consolidation is normally required, with pro rata consolidation permitted only exceptionally, such as where other significant shareholders provide equivalent parental support.
• Ongoing oversight: The Authority maintains off-site and on-site review of overseas operations within consolidated groups and establishes home-host information-sharing arrangements, including memoranda of understanding, with other prudential regulators.

The document is guidance describing the Authority's supervisory methodology rather than a set of new statutory rules, but it creates specific expectations that licensed institutions must meet regarding consolidated reporting, data provision and prior agreement of consolidation scope.

Key obligations

• Institutions must agree the scope of consolidated returns and any exceptions to standard accounting consolidation rules individually with the Authority beforehand
• Where accounting consolidation is not implemented, institutions must provide the Authority with such data and information as it considers necessary for qualitative supervision of the institution within its group
• Institutions may be required to comply with additional routine reporting requirements set by the Authority for overseas operations within the consolidated group
• Where the Authority has concerns about risks within a group entity, the licensed institution may be required to limit its exposure to that entity or hold additional capital at group level

Applies to

banks, deposit companies, financial companies within banking groups