(92/121/EECof21 December, 1992)
The following is the text of a notice issued by the Bank to credit institutions on 9 February 1994.
Introduction
The Bank's requirements concerning monitoring and control of large exposures were last set out in the Licensing and Supervision Requirements and Standards for Banksl.
Certain adjustments to the Bank's requirements are necessary to comply with the terms of the EU Directive2 on the monitoring and control of large exposures of credit institutions3. The basis on which the Bank is implementing this Directive is set out below.
1. Implementation and scope
1.1. In accordance with the Bank's statutory powers4 regarding
(i) collection of information and
(ii) the maintenance of specified ratios by institutions under Bank supervision, the Bank requires compliance, as set out in this notice, with the obligations of the Directive, which came into effect on 1 January 1994.
1.2 . The Directive provides for a minimum standard. Member States are, however, free to impose limits more stringent than those laid down in the Directive. While in general the Bank is adhering to the limits set out in the Directive, in certain instances, e.g., lending to directors and significant shareholders of credit institutions, it is applying more stringent criteria. Such criteria are set out in the Bank's Licensing and Supervision Requirements which are revised and updated from time to time. In any event, the Bank would expect each credit institution to have devised its own policy on large exposures, including exposures to economic sectors. This should entail setting internal large exposure limits, independent of, and where prudent, lower than those derived trom the Large Exposures Directive .
1. 3. The Directive shall apply to credit institutions which have obtained the authorisation reterred to in Article 3 of the First Banking Coordination Directive (77/780/EEC). In effect, this refers to licensed banks, building societies, trustee savings banks, ACC Bank plc and ICC Bank plc. It does not apply to branches of credit institutions incorporated in other Member States of the European Union; these will be subject to the corresponding large exposures provisions applied by their home supervisory authorities. For branches of credit institutions incorporated outside the European Union, the Bank's requirements in relation to large exposures as set out in the Licensing and Supervision Requirements and Standards for Banks will continue to apply.
2. Reporting of Large Exposures
2. 1. Exposures are calculated as a proportion of Own Funds6.
2. 2. An exposure shall be taken to mean the total potential loss which a credit institution could incur in the event of nonpayment by a counterparty. It would include, therefore, all claims on the counterparty, both actual and contingent. Contingent claims would include, for example, undrawn facilities which the credit institution has, in effect, committed itself to provide.
2. 3. A credit institution's exposure to a client or group of connected clients7 shall be considered a large exposure where its value is equal to or exceeds 10 per cent. of its own funds.
2. 4. A credit institution shall report all large exposures to the Bank on a quarterly basis.
2. 5. Certain types of exposure are exempt from the limits set out in Section 3 below. However, these exposures should be included in the quarterly reports referred to in 2.4 above.
2. 6. Every credit institution must have sound administrative and accounting procedures and adequate internal control mechanisms for the purpose of identifying and recording all large exposures and subsequent changes to them and for monitoring those exposures in the light of each credit institution's own exposure policies.
3. Limits on Large Exposures
3.1. A credit institution may not incur an exposure to a client or group of connected clients the value of which exceeds 25 per cent. of its own funds.
3. 2. The Bank's current requirements relating to lending to a client or group of connected clients, other than a credit or financial institution8, in which the credit institution has what is considered by the Bank to be a major interest, are set out in the Licensing and Supervision Requirements and Standards for Banks. Accordingly, a credit institution's exposure to such a client or group of connected clients may not exceed 10 per cent. of own funds. The aggregate of all such exposures may not exceed 30 per cent. of own funds.
3.3. Similarly, the Bank's current requirements relating to lending to directors and significant shareholders of credit institutions are also set out in the Licensing and Supervision Requirements and Standards for Banks. Accordingly, a credit institution's exposure to any one of its directors or any one of its shareholders holding 10 per cent. or more of the shares of any class, including funds employed with businesses in which the director or such shareholder has a major interest, may not exceed 2 per cent. of own funds, unless such shareholders or businesses are also credit institutions. The aggregate of all such exposures may not exceed 10 per cent. of own funds.
3.4 A credit institution may not incur large exposures which in total exceed 800 per cent. of its own funds.
3.5 A credit institution shall at all times comply with the limits laid down in 3.1 to 3.4. If, in an exceptional case, an exposure exceeds those limits, it must be reported to the Bank without delay. The Bank may allow the credit institution a limited period of time in which to comply with the limits where, in the opinion of the Bank, the circumstances warrant it.
4.Exempt Exposures
4.1 If a credit institution incurs exposures to its parent undertaking, to other subsidiaries of that parent undertakings or to its own subsidiaries10, and these undertakings are either credit or financial institutions and are subject to consolidated supervision, such exposures may be exempt from the limits laid down in Section 3, subject to the prior approval of the Bank.
4.2 The following exposures are exempt for the purposes of calculating the limits laid down in Section 3:
(a) Exposures to Zone A1l central governments or central banks;
(b) Exposures to the European Communities;
(c) Exposures carrying the explicit guarantees of Zone A central governments
or central banks or of the European Communities;
(d) Exposures to Zone Bl2 central governments or central banks which are
denominated in the national currency of the borrower;
e) Exposures secured, to the satisfaction of the Bank, by collateral in
the form of Zone A central government or central bank securities or securities
issued by the European Communities or by Member State regional or local
authorities for which Article 7 of the EU Solvency Ratio Directive (89/647/EEC)
lays down a zero weighting for solvency purposes;
f) Exposures secured, to the satisfaction of the Bank, by collateral in
the form of cash deposits placed with the lending institution or with a
credit institution which is the parent undertaking or a subsidiary of the
lending institution;
g) Exposures secured, to the satisfaction of the Bank, by collateral in
the form of certiticates of deposit issued by the lending institution or
by a credit institution which is the parent undertaking or a subsidiary
of the lending institution and lodged with either of them:
h) Exposures to credit institutions with a maturity of one year or less,
but not constituting such institutions' own funds as defined in the EU
Own Funds Directive (89/299/EEC);
i) Exposures to gilt-edged market-makers and Stock Exchange money brokers,
secured to the satisfaction of the Bank;
j) 50 per cent. of the medium/low-risk off-balance-sheet items referred
to in Annex I to Directive 89/647/EEC;
k) The low-risk off-balance-sheet items referred to in Annex I to Directive
89/64//EEC, to the extent that an agreement has been concluded with the
client or group of connected clients under which the exposure may be incurred,
only if it has been ascertained that it will not cause the limits applicable
under Section 3 to be exceeded.
5. Reduced Weightings
5 1 The following risk weightings apply to claims on, and other exposures to, credit institutions with a maturity of more than one year:
(a) 20 per cent. to claims and other exposures with a maturity of more
than one but not more than three years.
(b) 50 per cent. to claims with a maturity of more than three years, provided
that they are represented by marketable debt instruments issued by a credit
institution.
In no case may either items (a) or (b) of the above constitute own funds within the meaning of Directive 89/299/EEC.
5.2 An exposure to a client which is explicitly, unconditionally and irrevocably guaranteed by a third party, will be treated as having been incurred to the third party itself.
5.3 Where an exposure undertaken by a subsidiary credit institution is guaranteed by its parent credit institution or another banking subsidiary of the parent, that exposure will be treated as an exposure to the parent credit institution or relevant banking subsidiary. The Bank may therefore permit subsidiaries to incur exposures exceeding 25 per cent. of their own funds provided that there are guarantees in place from the parent or subsidiary of that parent, which are acceptable to the Bank.
6. Supervision on a Consolidated and Unconsolidated Basis
6.1 Compliance with the requirements set out in Sections 2 and 3 will be monitored on a consolidated basis for each credit institution. In this respect, however, measures must be taken to ensure the satisfactory allocation of risks within each group.
6.2 In the case of a credit institution which has a subsidiary which is also a credit institution authorised by the Bank, the Bank may consider, in certain circumstances and subject to its prior approval, the monitoring of large exposures on a consolidated basis only.
6.3 If a credit institution is neither a parent undertaking nor a subsidiarv, compliance with the requirements set out in Sections 2 and 3 will be monitored on an unconsolidated basis.
7. Transitional Provisions Relating to Exposures in Excess of the Limits
7.1 The Bank would expect credit institutions to take appropriate steps, to bring exposures in excess of the specified limits within these limits as soon as possible. In the case of any such exposures to which a credit institution is legally bound, these may be continued until their maturity.
1. The current version was published in the Central Bank of Ireland Quarterly Bulletin, Autumn 1987.
2. 92/121/EEC, 21 December 1992 (O.J. No. L29, 5 February 1993, pages 1 -8).
3.The First Banking Coordination Directive (77/780/EEC of 12 December 1977) defines a credit institution as an undertaking whose business is to receive deposits or other repayable funds from the public and to grant credits for its own account. In an Irish context, credit institutions comprise licensed banks, building societies, trustee savings banks, ACC Bank plc and ICC Bank plc.
4. Legislative provisions in respect of the collection of information and application of specified ratios by the Bank:
Collection of Information:
Section 18 of the Central Bank Act, 1971, as amended by the substitution of Section 37 of the Central Bank Act,1989 Section 41 of the Building Societies Act,1989 Section 25 of the Trustee Savings Bank Act,1989 S.I. No. 373 of 1992 , ACC Bank Act, 1992 (Section4) Regulations,1992 S.I. No. 24 of 1993 , ICC Bank Act, 1992 (Section 3) Regulations,1993
Application of Specified Ratios:
Section 23 of the Central Bank Act, 1971, as amended by Section 40 of the Central Bank Act,1989 Section 23A of the Central Bank, 1971, as inserted by Section 41 of the Central Bank Act,1989 Section 39 of the Building Societies Act,1989 Section 31 of the Trustee Savings Bank Act,1989 S.I. No. 373 of 1992 , ACC Bank Act, 1992 (Section 4) Regulations 1992 S.I. No. 24 of 1993 , ICC Bank Act, 1992 (Section 3) Regulations 1993
5. Exposures shall mean the assets and off-balance-sheet items reterred to in Article 6 of the EU Solvency Ratio Directive (89/647/EEC) and in Annexes I and III thereto, without application of the weightings or degrees of risk there provided for: the risks referred to in the afore mentioned Annex III must be calculated in accordance with one of the methods set out in Annex II to that Directive, without application of the weightings for counterparty risk. All elements entirely covered by own funds may, with the agreement of the Bank, be excluded from the definition of exposures provided that such own funds are not included in the calculation of the solvency ratio or of other monitoring ratios provided for in Community Acts.
Exposures shall not include:
a) in the case of foreign exchange transactions, exposures incurred
in the ordinary course of settlement during the 48 hours following payment;
or
(b) in the case of transactions for the purchase or sale of securities,
exposures incurred in the ordinary course of settlement during the five
working days following payment or delivery of the securities, whichever
is the earlier.
6. Own funds shall mean the own funds of a credit institution as defined in the EU Own Funds Directive (89/299/EEC).
7. Group of connected clients shall mean:
(a) two or more natural or legal persons who, unless it is shown otherwise,
constitute a single risk because one of them, directly or indirectly, has
control over the other or others; or
(b) two or more natural or legal persons between whom there is no relationship
of control* as defined in the first indent but who are to be regarded as
constituting a single risk because they are so interconnected, that, if
one of them were to experience financial problems, the other or all of
the others would be likely to encounter repayment difficulties.
8. Financial institution as defined in the second indent of Article 1 of the Consolidated Supervision Directive (92/30/EEC).
9. Parent undertaking as defined in the seventh indent of Article 1 of Directive 92/30/EEC.
10 Subsidiarv as defined in the eighth indent of Article 1 of Directive 92/30/EEC.
11. Zone A shall mean the zone referred to in the second indent of Article 2(1) of Directive 89/647/EEC, i.e. countries which are full members of the Organisation for Economic Cooperation and Development (OECD) and those countries which have concluded special lending arrangements with the International Monetary Fund associated with the Fund's general arrangements to borrow. Zone A countries currently comprise: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Japan, Luxembourg, Netherlands, New Zealand, Norway, Portugal, Saudi Arabia. Spain, Sweden, Switzerland, Turkey, United Kingdom, USA.
12. Zone B shall mean the zone referred to in the third indent of Article 2(1) of Directive 89/647/EEC, i.e. countries other than those listed in reference note 10 above.
____________________
*Control shall mean the relationship between a parent undertaking and a subsidiarv as detined in Article 1 of the Seventh Company Law Directive (83/349/EEC), or a similar relationship between any natural or legal person and an undertaking.
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Comparision of Directive With This Notice - SUMMARY POSITION
ARTICLE 1 DEFINITIONS
1 (a) CREDIT INSTITUTION .................3 (reference notes)
1 (b) COMPETENT AUTHORITIES ......N/A
1 (c) PARENT UNDERTAKING .............9
1 (d) SUBSIDIARY UNDERTAKING ......10
1 (e) FINANCIAL HOLDING COMPANY .....N/A
1 (f) FINANCIAL INSTITUTION .............8
1 (g) ANCILLARY BANKING SERVICES UNDERTAKING...N/A
1 (h) EXPOSURES ..............5
1 (i) ZONE A ...........11
1 (j) ZONE B ..............12
1 (k) OWN FUNDS ....6
1 (1) CONTROL ..........7 (Foot Note)
1 (m) GROUP OF CONNECTED CLIENTS......7
ARTICLE 2 SCOPE
APPLICATION.................1.3 (notice)
ARTICLE 3 REPORTING OF LARGE EXPOSURES
1 EXPOSURES...........2.3
2 FREQUENCY OF REPORTING..........2.4
3 EXEMPTION FROM REPORTING.........2.5
4 ADEQUACY OF ADMINISTRATION,ETC....2.6
ARTICLE 4 LIMITS
1 25 PER CENT. SINGLE LIMIT ......3.1
2 20 PER CENT. FOR CONNECTED COUNTERPARTIES....3.2/3.3 (Percentages Reduced)
3 800 PER CENT. AGGREGATE LIMIT......3.4
4 OPTION TO IMPOSE MORE STRINGENT LIMITS..1.2
5 REPORT BREACHES WITHOUT DELAY .......3.5
6 EXEMPTION OF EXPOSURES WITHIN CONSOLIDATED SUPERVISION ...4.1
7 OTHER EXEMPTIONS.....4.2
7(a) ZONE A CENTRAL GOVERNMENTS/ CENTRAL BANKS...4.2(a)
7 (b) EUROPEAN COMMUNITIES .....4.2(b)
7(c) GUARANTEES BY ZONE A CENTRAL GOVERNMENTS/CENTRAL BANKS/EU .....4.2(c)
7(d) OTHER CLAIMS ON ZONE A CENTRAL GOVERNMENTS/CENTRAL BANKS/EU ...4.2(a)/(c)/(d)
7(e) ZON E B CENTRAL GOVERNMENTS / CENTRAL BANKS
7(f) SECURED ON ZONE A CENTRAL GOVERNMENTS/CENTRAL BANKS/EU SECURITIES
....4.2(e)
7(g) CASH COLLATERAL ......4.2(f)
7(h) CD COLLATERAL .........4.2(g)
7(i) CREDIT INSTITUTIONS ......4.2(h)
7(j) SECURED EXPOSURES TO GEMMs & SEMBs.......4.2(i)
7(k) BILLS ENDORSED, ACCEPTED BY BANKS......not separately adopted
7(1) DEBT SECURITIES.....not adopted
7(m) INSURANCE COMPANIES ....not adopted
7(n) REGIONAL GOVT/CREDIT INSTITUTIONS......not adopted
7(o) OTHER FORMS OF SECURITY ..........not adopted
7(p) MORTGAGE SECURITY ..........not adopted
7(q) 50 PER CENT. OF MEDIUM-RISK OFF-BALANCE-SHEET...4.2(k)
7(r) MUTUAL GUARANTEES ............not adopted
7(s) LOW-RISK OFF-BALANCE-SHEET.......4.2(k)
8. 20 PER CENT. OF EXPOSURES TO LOCAL AUTHORITIES....not adopted
9. PARTIAL EXEMPTION OF CLAIMS ON BANKS .......5.1
10. FURTHER PARTIAL EXEMPTION OF CLAIMS ON BANKS....not adopted
11. RISK TRANSFER TO GUARANTOR....5.2(Risk transfer to issuer of collateral
not adopted)
12. EU TO RE-EXAMINE INTERBANK CONCESSION......N/A
ARTICLE 5 CONSOLIDATION
1. WHERE NEITHER PARENT NOR SUBSIDIARY......6.3
2. APPLICATION ON CONSOLIDATED BASIS .........6.1
3. WAIVER OF APPLICATION IN CASE OF SUBSIDIARY CREDIT INSTITUTIONS...6.2
ARTICLE 6 TRANSITIONAL ARRANGEMENTS
1. REDUCTION OF EXPOSURES........N/A
2. THE PROCESS OF REDUCING EXPOSURES.......7.1
3. EXPOSURES NOT TO INCREASE ABOVE LEVEL AT PUBLICATION DATE ...........N/A
4. PROVISIONS RELATING TO LEGALLY BINDING EXPOSURES...7.1
5. CONCESSIONARY LIMITS........ not adopted
6. EXTENSION OF CONCESSIONARY LIMITS ......not adopted
7. NEW DEFINITION OF LARGE EXPOSURES .....not adopted
8. REDUCED FREQUENCY OF REPORTING .......not adopted
9. SPECIAL TREATMENT OF MORTGAGE LOANS ....not adopted
10. SPECIAL TREATMENT OF PORTUGAL.......not adopted
ARTICLE 7 SUBSEQUENT AMENDMENTS
N/A
ARTICAL 8 FINAL PROVISIONS
1. PROVISIONS TO BE INTRODUCED BY 1.1.94 .........1.1
2. PROVISIONS COMMUNICATED TO EU ..........N/A
3. TREATMENT OF EXPOSURES PRINCIPALLY EXPOSED TO MARKET RISK.........N/A