11.1. Overview

(1) This Chapter sets out the requirements for an Islamic bank in relation to the management of their corporate group risk and the measurement of financial group Capital requirement and resources.

(2) Group membership can be a source of both strength and weakness to an Islamic Bank.

The purpose of group risk requirements is to ensure that an Islamic Bank takes into account the risks related to its membership of a corporate group and maintains adequate Capital resources so as to exceed its Financial Group Capital Requirement.

(3) The rules in this chapter apply only to an Islamic Bank. References to Islamic Financial Institution in this chapter would be limited to Islamic Banks, Islamic Financing Company and Islamic Broker Dealers.

11.2. Corporate Group and Financial Group

(1) An Islamic FI’s corporate group is made up of:

• (a) an Islamic Bank;
• (b) any parent entity of an Islamic Bank;
• (c) any subsidiary (direct or indirect) of an Islamic Bank; and
• (d) any subsidiary (direct or indirect) of a parent entity of an Islamic Bank.

(2) An Islamic Bank’s Financial Group is made up of:

• (a) an Islamic Bank;
• (b) any subsidiary (direct or indirect) of an Islamic Bank; and
• (c) any entity that the AFSA directs an Islamic Bank to include.

(3) An Islamic Bank may apply to the AFSA for approval to exclude an entity from its financial group. The AFSA will grant such an approval only after an Islamic Bank satisfies the AFSA that inclusion of the entity would be misleading or inappropriate for the purposes of supervision.

Guidance

The AFSA would consider a range of factors when requiring an Islamic FI to treat another entity as part of its financial group. These factors would include regulatory risk factors, including direct and indirect participation, influence or contractual obligations, interconnectedness, intra-group exposures, intra-group services, regulatory status and legal framework.

11.3. Requirements—group risk

(1) An Islamic Bank must effectively manage risks arising from its membership in a corporate group.

(2) An Islamic Bank that is a member of a corporate group must establish and maintain systems and controls to monitor:

• (a) the effect on an Islamic Bank of its membership in the group;
• (b) the effect on an Islamic Bank of the activities of other members of the group;
• (c) compliance with group supervision and reporting requirements; and
• (d) funding within the group.

(3) An Islamic Bank must also have systems to enable it to calculate its financial group

Capital requirement and resources. The systems must include a means of analysing realistic scenarios and the effects on the financial group’s Capital requirement and resources if those scenarios occurred.

Guidance

An Islamic Bank may take into account its position within its corporate group. It would be reasonable for a small firm within a larger group to place some reliance on its parent to ensure that there are appropriate systems and controls to manage group risk.

11.4. Role of governing body—group risk

An Islamic Bank’s governing body must ensure that an Islamic Bank’s group risk management policy addresses, on a group-wide basis, all risks arising from an Islamic Bank’s relationship with every other member of its group.

11.5. Group Capital requirement and resources

(1) This Part does not apply to an Islamic Bank if:

(a) an Islamic Bank is already subject to group prudential supervision by the AFSA because another member of its group is an authorised firm; or

(b) the AFSA has confirmed in writing, in response to an application from an Islamic Bank, that the AFSAy is satisfied that the group is the subject of consolidated prudential supervision by an appropriate regulator.

(2) An Islamic Bank that has received confirmation must immediately inform the AFSA in writing if any circumstance on which the confirmation was based changes.

11.6. Financial group Capital Requirement and Regulatory Capital resources

(1) An Islamic Bank must ensure, at all times, that its Financial Group Regulatory Capital exceeds its Financial Group Capital Requirement.

(2) In calculating its Financial Group Regulatory Capital, an Islamic Bank must not include Regulatory Capital or adjusted Regulatory Capital (as the case may be) of subsidiaries or participations of that group to the extent that those Regulatory Capital or adjusted Regulatory Capital exceed the Capital requirement for that subsidiary or participation and are not freely transferable within the group.

Guidance

(1) Capital resources or adjusted Capital resources would not be freely transferable if they are subject to an obligation to maintain minimum Capital requirements to comply with domestic solvency requirements, or to comply with debt covenants.

(2) If an Islamic Bank breaches rule 13.2.2(1), the AFSA would take into account the circumstances of the case, including any remedial steps taken by another regulator or an Islamic Bank, in deciding what enforcement action to take.

11.7. Solo limits to apply to group

Unless the AFSA directs otherwise, a prudential limit in these rules that applies to an Islamic Bank also applies to that Islamic Bank’s Financial Group.

Examples

(1) The restriction in rules relating to concentration risk (that an Islamic Bank’s individual large exposure must not exceed 25% or 40% of its regulatory Capital) applies to an Islamic Bank’s group so that an Islamic Bank’s group large exposure to a counterparty or connected counterparties must not exceed 25% or 40% of its group Capital resources.

(2) In a similar way, the restriction in rules relating to large exposures regime (that an Islamic Bank must ensure that the sum of its large exposures does not exceed 800% of its regulatory Capital) applies to an Islamic Bank’s group so that the sum of its group large exposures to counterparties or connected counterparties must not exceed 800% of its group Capital resources.