5.26. Management of Concentration risk exposures
Calculating exposures
(1) Large exposure means a gross exposure to a counterparty or connected counterparties that is 10% or more of the Bank’s regulatory capital. In this rule: gross exposure to a counterparty or connected counterparties is the total of the following exposures:
- (a) on-balance-sheet and off-balance-sheet exposures;
- (b) debt securities held by the Bank;
- (c) equity exposures.
(2) In calculating the gross exposure, a Bank must include:
- (a) the outstanding balances of all loans and advances, including balances with other banks;
- (b) holdings of debt or equity securities;
- (c) unused off-balance-sheet commitments, whether revocable or irrevocable; and
- (d) the credit equivalent amounts of all market-related transactions (calculated in accordance with the rules in this Chapter).
(3) However, in calculating the gross exposure, a Bank must not include:
- (a) claims, equity investments and other exposures deducted from the Bank’s capital;
- (b) exposures arising in the course of settlement of market-related contracts; and
- (c) exposures that have been written off.
(4) For this Part II:
- (a) a Bank must treat an exposure as reduced (to the extent permitted by the provisions on Credit Risk Mitigation in part I of this chapter) by any applicable Credit Risk Mitigation technique; and
- (b) a Bank that is part of a financial group may offset intragroup amounts due to other deposit takers within the group.
Policies—large exposures
(5) A Bank’s large exposure policy must include:
- (a) exposure limits, commensurate with the Bank’s risk tolerance, risk profile and capital, for:
- (i) categories of counterparties (for example, sovereigns, other Banks and other financial entities, corporate and individual borrowers);
- (ii) connected counterparties;
- (iii) particular industries or sectors;
- (iv) particular countries; and
- (v) asset classes (for example, property holdings);
- (b) the circumstances in which the exposure limits may be exceeded;
- (c) the procedures for approving exceptions to, and deviations from, exposure limits or policies; and
- (d) the procedures for identifying, measuring, managing and reporting large exposures.
Limits on exposures
(6) A Bank must not become exposed without limit to a single counterparty. The Bank must not give a general guarantee of the obligations of a counterparty.
(7) The total of the Bank’s net exposures to any 1 counterparty or any 1 group of connected counterparties must not exceed 25% of the Bank’s regulatory capital.
(8) The total of all of the Bank’s net large exposures must not exceed 800% of that capital.
(9) A Bank may apply to the AFSA for approval for a proposed exposure in excess of the limits set out in this Chapter. An approval will be granted only in exceptional circumstances and only after the Bank satisfies the AFSA that the proposed exposure does not expose the Bank to excessive risk.
(10) The AFSA may impose a higher capital ratio on the Bank to compensate for the additional risk associated with the proposed exposure.
Obligation to measure
(11) A Bank must measure, classify and make provision for each large exposure individually.
(12) The Bank must immediately notify the AFSA if it is concerned that risk concentrations or large exposures might significantly affect its capital adequacy. The notice must describe the Bank’s proposed measures to address its concerns.