5.24 General
(1) This Chapter sets out the requirements for a Bank’s policy to identify, measure, evaluate, manage and control or mitigate concentrations of Credit Risk exposures. This Chapter also sets limits on a Bank’s Credit Risk exposures to individual counterparties and to groups of connected counterparties.
(2) The detailed requirements for managing the concentration risk including but not limited to methodologies, guidance, eligibility criteria, terms, parameters, and formulae which are required to comply with the primary regulations addressing concentration risk management and related regulatory limits outlined in this Part II of Chapter 5 of BBR are provided in section K of Chapter 5 of the Banking Prudential Guideline (BPG) issued by the AFSA. The relevant sections of the BPG also provide the supervisory expectations of the AFSA in relation to management of concentration risk.
(3) Banks are expected to comply with the provisions outlined in Section K of Chapter 5 of the BPG, in order to ensure compliance with the rules in this Part II. Failure to do so, would be assessed by the AFSA as inadequate risk management and governance implying non compliance with basic regulatory requirements applicable to Banks. It is suggested that this Chapter of the BBR, be read in conjunction with Chapter 5 of the BPG issued by the AFSA to facilitate understanding of the regulatory requirements and compliance with them.
Concept of connected parties
(4) The concept of parties being connected to one another is used in these rules in relation to counterparties or issuers with which a Bank has exposures. Connected counterparties are the basis for the measurement of concentration risk and large exposures.
(5) In contrast, the concept of parties being related to the Bank (which is discussed with Credit Risk in part I of this Chapter) is primarily used in relation to the requirement that the Bank’s transactions be at arm’s length. It is of course possible for a Bank’s related parties to be connected counterparties (such as when the Bank has exposures to them). For purposes of concentration risk, the Bank’s exposure to connected counterparties (whether related or not) is taken to be a single risk.
Connected parties
(6) A party is connected to another party if they are linked by:
- (a) cross guarantees;
- (b) common ownership;
- (c) common management;
- (d) one having the ability to exercise control over the other, whether direct or indirect;
- (e) financial interdependency—that is, the financial soundness of one may affect the financial soundness of the other; or
- (f) any combination of the factors mentioned in paragraphs (a) to (e).
(7) A counterparty may be connected to another counterparty by other linkages that, in the Bank’s assessment, connect the counterparties as constituting a single risk. A connected party can be an individual or other entity.
Role of Governing Body - concentration risk
(8) A Bank’s Governing Body must ensure that the Bank’s concentration risk management policy gives a comprehensive bank-wide view of the significant sources of concentration risk (including onbalance-sheet exposures, off-balance-sheet exposures and exposures from contingent liabilities).
(9) The Governing Body must also ensure that the Bank’s senior management monitors the limits set in this Chapter and that those limits are not exceeded on a solo or consolidated basis.