Statement of Guidance - Large Exposures and Credit Risk Concentration for Banks

Summary

This is a CIMA Statement of Guidance, dated November 2006, that explains how banks in the Cayman Islands should interpret and apply the Rules on Large Exposures and Credit Risk Concentration for Banks. It is guidance rather than a binding rule in itself, but it elaborates on what counts as an 'exposure', who counts as a 'counterparty' or a 'group of connected counterparties', and how related-party exposures, guarantees, securities collateral, and fund investments should be treated for large exposure purposes.

• Definitions of exposure: Covers on-balance sheet claims, contingent liabilities, derivatives, trading securities, and fund investments.
• Related counterparties: Exposures to related counterparties are capped at 25% of capital base under Rule 5.10, with possible exemptions for treasury roles.
• Capital base composition: Sets out the composition of the capital base (Tier 1 and Tier 2) used to measure exposure limits.
• Board-approved policy: Establishes expectations for a board-approved large exposure and credit risk concentration policy.
• Risk mitigants: Recognises guarantees and securities collateral as risk mitigants.
• Fund exposures: Gives special treatment to exposures to collective investment schemes, mutual funds and hedge funds, measured at the fund level, with a 25% of capital threshold that CIMA may permit to be exceeded with prior approval.

Finally, it describes CIMA's enforcement approach where a bank breaches the underlying Rules, including use of its Decision Making procedure, imposing timetables to bring exposures back within limits, requiring progress reporting, restricting business expansion, increasing capital adequacy requirements, or applying additional capital charges, which may be reduced or waived under specified conditions involving pre-approved guarantees.

Key obligations

• Banks must comply with the underlying Rules on Large Exposures and Credit Risk Concentration for Banks, which this Statement of Guidance interprets.
• A bank's exposure to related counterparties must be limited to 25% of its capital base (Rule 5.10), unless an exemption for a treasury role has been granted.
• Banks must ensure a proper, objective, arm's-length credit assessment is undertaken for exposures to related counterparties (directors, shareholders, senior managers).
• The board of each bank should develop a large exposure and credit risk concentration policy setting acceptable guidelines for exposures to individual counterparties, groups of connected counterparties, related counterparties, countries and economic sectors (Rule 5.1).
• Banks must monitor concentration to particular countries, geographic regions, and economic sectors, with monitoring systems proportionate to the size, nature and complexity of the bank's operations.
• Banks must provide a copy of their large exposure policy to the Authority upon request during off-site surveillance or on-site review.
• Exposures secured by guarantees under Rule 5.15 must be documented by a legally enforceable undertaking containing specified default/assumption-of-exposure language to be recognised for risk transfer.
• Exposures to collective investments, mutual funds, hedge funds and similar investments must be measured at the individual fund level rather than at the level of underlying holdings, and any exposure exceeding 25% of capital to a particular fund requires the Authority's prior approval (Rule 7).
• If a bank breaches the Rules, it must follow an agreed timetable to bring the exposure below the statutory or agreed limit and report progress to the Authority on a regular basis.

Applies to

banks