Guidance Note: Approval of Concession Limits for Governments and Connected Banks (revised 12 December 2014)

Summary

This JFSC guidance note explains how a Jersey bank can apply for a Concession Limit that permits it to exceed the standard 25% of Agreed Capital Resources (ACR) exposure limit for certain counterparties, namely connected banks within its own group, sovereign governments, and entities with a similar risk profile such as central banks, sub-sovereigns, multi-lateral development banks and supranational bodies. It sets out the credit assessment and risk factors the JFSC expects to see supporting any such application, distinguishing between a Group Bank Concession Limit (GBCL) for intra-group banks and a Non-Group Concession Limit (NGCL) for sovereign and quasi-sovereign counterparties.

• Application requirement: Any request for a Concession Limit must be accompanied by a completed Application Form for Concession Limit approval, published on the JFSC website, together with the bank's comprehensive credit assessment of the counterparty.
• Ongoing credit assessment: The applicant bank must carry out credit assessments of the counterparty at least annually, and promptly provide the annual assessment (and any intermediate review triggered by a material decline in creditworthiness) to the JFSC.
• GBCL specifics: Requests for a Group Bank Concession Limit should specify limits for the group overall and for each relevant bank within it; exposures to non-banking group companies remain subject to the normal 25% limit unless guaranteed by a group bank with an agreed GBCL. GBCLs are not normally approved for banks below investment grade.
• NGCL specifics: Non-Group Concession Limits cover exposures to sovereigns and quasi-sovereign bodies; approved limits are capped by percentage of ACR according to the counterparty's lowest applicable credit rating and whether it is a high-income OECD member, ranging up to 1,000% of ACR for AAA-rated HI-OECD sovereigns down to 50% for BBB-or-higher non-HI-OECD foreign-currency exposures. No NGCL will be granted for a counterparty rated below investment grade.
• Counterparty undertaking: The JFSC requires an undertaking from the counterparty to provide the Jersey bank with information on its capital adequacy, liquidity and resolution plans, and to allow that information to be shared with the JFSC.
• Prudential regulator confirmation: The JFSC will seek initial and annual reconfirmation from the counterparty bank's home prudential regulator that it will notify the JFSC of material or imminent breaches of capital/liquidity rules and that it is satisfied with the counterparty's risk management.
• No fixed timescale on limits: The JFSC does not apply a fixed timescale to Concession Limits; limits may be amended or revoked at any time in light of adverse information.

The guidance is intended to be read alongside section 5.4 and Appendix III of the Code of Practice for Deposit-taking Business (the Banking Code), which contain the full rules on the use of Concession Limits.

Key obligations

• A Jersey bank applying for a Concession Limit must submit a completed Application Form for Concession Limit approval together with a comprehensive credit assessment of the counterparty.
• The applicant bank must conduct credit assessments of the counterparty at least annually and promptly provide these (and any intermediate reviews triggered by material creditworthiness decline) to the JFSC.
• GBCL requests must specify a limit for the group as a whole and sub-limits for each relevant bank within the group.
• The bank must obtain an undertaking from the counterparty to supply capital adequacy, liquidity and resolution information and to permit its disclosure to the JFSC.
• No NGCL will be granted for a counterparty rated below investment grade; unrated sovereigns are treated at the JFSC's discretion.
• Approved NGCL amounts must not normally exceed the percentage-of-ACR caps set out according to credit rating and HI-OECD status.

Applies to

Jersey banks (registered persons incorporated in Jersey), connected banks within a banking group, sovereign governments and quasi-sovereign entities (central banks, sub-sovereigns, multi-lateral development banks, supranational entities)

Deadlines

• at least annually: Jersey banks must carry out credit assessments of the relevant counterparty at least once a year and provide these to the JFSC.
• annually: The JFSC seeks annual reconfirmation from the counterparty's home prudential regulator regarding capital adequacy and liquidity risk management.