Extension of credit to Executive Officers, Supervisory Directors, Principal Shareholders and their related interests and to employees of a credit institution
I.1 Nature of Regulation I
With Supervisory Regulation I the Bank seeks to formally limit the amount of lending to executive officers, supervisory directors, principal shareholders being natural persons (including the related interests of those persons) and employees of the institution.
The intended limitation will be applied to mentioned persons individually in relation to the equity of the credit institution. However, for employees the limitation is on an aggregate basis for all employees.
I.2 Legal basis, purpose and scope
This regulation is issued pursuant to article 21, paragraph 2, letter c of the National Ordinance on the Supervision of Banking and Credit Institutions 1994 and draws therefore on the authority of subject ordinance.
This regulation governs any extension of credit by a credit institution to the persons (mentioned above) employed in the institution itself, the holding company (if any) of which the credit institution is a subsidiary and other subsidiaries of the holding company.
The regulation also applies to any extensions of credit by the credit institution to a company controlled by such persons or a committee or party that benefits from or is controlled by such persons.
For the purpose of Supervisory Regulation I, the following definitions apply:
"Equity" is defined as Tier I capital as defined in the Chart of Accounts. For purposes of this regulation equity is considered at the end of the quarter preceding the date of the transaction.
"Covered parties" are the parties being subject to the regulation. These are executive officers, supervisory directors, principal shareholders and their respective related interests.
"Interest party" is a covered party that has made a request for extension of credit by the credit institution.
"Control" of a company or credit institution means that a person directly or indirectly, or acting through or in concert with others:
owns or has the power to vote 20% or more of any class of voting securities of the company or credit institution;
controls in any manner the election of the majority of the directors of the company or credit institutions
has the power to exercise a controlling influence over the management or policies of the company or bank. Based hereon, an executive officer or director is presumed to have control.
A person may rebut a presumption of control established as per a, b, or c above by submitting to the Bank written material that, in the Bank's judgment, demonstrate effectively the absence of control.
"Director" of a credit institution includes any supervisory director whether or not receiving compensation, any supervisory director of a bank holding company of which the institution is a subsidiary, and any supervisory director of any other subsidiary of that holding company.
"Executive officer" of a company or credit institution includes all individuals who participate or have the authority to participate (other than in the capacity of a director) in major policy-making functions of the company or credit institution whether or not the officer has an official title (such as Managing Director), the title designates the officers as an assistant or the officer is serving without compensation.
An officer who is presumed to be an executive officer in the meaning of this regulation may be effectively excluded from participation in major policy-making functions of the company or institution by unanimous resolution of the Board of Directors or by the articles association of the company or credit institution and this person actually does not participate in policy making. Consequently, the excluded executive officer will not be regarded as an officer (exercising control) in the sense of this regulation.
"Immediate family" means the individual's spouse, minor children and any of the individual's children (including adults) residing in the individual's home, whether adopted or not.
"Principal shareholder" means an individual or a company that directly or indirectly, or acting through or in concert with one or more persons, owns, controls or has the power to vote 10% or more of any class of voting shares of a company or credit institution. Shares owned or controlled by a member of an individual's immediate family are considered to be held by the individual.
"Persons" means both natural persons and corporate persons.
"Related interests" means a company or any other organization that is controlled by a person. In case there is no control by a person, the criterium for a related interest is whether the person benefits from the organization acting as an interested party.
"Subsidiary" is a company or credit institution in which a person holds a majority of the shares.
"Extension of credit" is a making or renewal of any loan, a granting of a line of credit in any manner whatsoever. Extensions of credit also include:
a purchase under an irrevocable repurchase agreement of securities, other assets or obligations;
an advance by means of an overdraft, cash or otherwise;
issuance of a standby letter of credit or other similar arrangements regardless of names or description;
an acquisition of any note, draft, bill of exchange or other evidence of indebtness;
an increase in the existing indebtness;
an advance of unearned salary or other compensation for a period in excess of 30 days and
any other transaction as a result of which a person becomes obligated to pay money or its equivalent to a credit institution.
"Employees" are all other persons employed by a credit institution not being an executive officer or director.
If an employee is also a principal shareholder, the employee is not considered to be an employee but a principal shareholder.
"Credit institution" is defined in article 1, paragraph 1, sub c and d of the National Ordinance on Supervision of Banking and Credit Institutions of 1994.
I.4 Applicability and exemptions
Supervisory Regulation I will be applicable to all credit institutions falling under the supervision of the Bank, except for those classes of institutions having an exemption under the regulation as mentioned in paragraph I.4.2.
This regulation shall not apply to any branches of foreign banks which are consolidated in their home country and for which branch the Bank has received a guarantee for all liabilities.
I.5 Extension of credit to executive officers, directors, principal shareholders and their related interests.
The requirements under the regulation for above mentioned parties are as follows:
Extensions of credit by a credit institution to executive officers, directors, principal shareholders being a natural person and their related interests are subject to the following limits:
Executive officer: 50% the officer's net annual salary;
Directors: reasonable current account overdraft facility in line with established internal policy;
Principal shareholders: 2.5% of equity
An additional 2.5% of equity may be extended to the parties mentioned under 1.5.1. only if it is fully secured by adequate collateral.
Additionally, a credit institution is authorized to extend credit to any executive officer of the institution:
to a reasonable amount to finance the education of the officer's children where these children, due to the executive officer's position, would not ordinarily qualify for a government scholarship and
to a reasonable amount to finance the purchase, construction or improvement of residence, of the extension of credit is secured by a first lien on the residence and the residence has been adequately appraised and is owned by the executive officer.
Hence, for any other purpose not specified in a and b above, the aggregate amount of the credits to that officer must not exceed the lending limits specified above.
Extension of credit to executive officers are made by the credit institution subject to the following conditions:
the officer will report all requests for credit from other credit institutions;
prior approval is received from the Board of Directors;
unsecured loans become immediately due and payable upon the officer leaving the credit institution.
An extension of credit does not include an advance against accrued salary or other accrued compensation (earned but not disbursed) or an advance for the payment of authorized travel or other expenses on behalf of the institution.
I.6 Extension of credit to employees of a credit institution
Extension of credit to employees of a credit institution should be performed by the institution according to a proper lending policy for employees, considering the limits of paragraph I.6.2.
The requirement for loans to employees is as follows:
Total loans to employees of an institution may not exceed 10% of equity, of which up to 5% of equity may be left unsecured.
I.7 Terms and Creditworthiness
No credit institution may extend credit to any of its directors, principal shareholders or their related interests and the related interest of executive officers unless the extension of credit is made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions by the credit institution with other persons that are not covered parties and who are not employed with the institution. The extension of credit should furthermore not involve more than the normal risk of repayment or present other unfavorable features for the institution.
With regard to the lending terms, credit institutions may adopt in the context of the specified lending limits, preferential interest rates only for their employees and executive officers. These preferential rates for employees and executive officers must be approved by the Board of Directors.
I.8 Prior approval of extension of credit to covered parties (excluding employees)
No credit institution may extend credit to any of its executive officers, directors, principal shareholders or their related interests in an amount that, when aggregated with the amount of all other extensions of credit to that person and all its related interest, exceeds 50% of the limits specified under I.5.1 unless a line of credit in excess hereof has been approved in advance by a majority of the board of directors and the interested party has abstained from participating directly or indirectly in the voting.
However, in no event may a credit institution extend credit to any one of the covered parties, in an amount that, when aggregated with all other extensions of credit to the interested party and its related interests, exceeds NAf.100.000 except by complying with the requirements of I.8.1 above (prior Board of Directors' approval and no participation in voting by the interested party).
Participation in the discussion by an interested party or any attempt to influence the voting by the board of directors regarding an extension of credit constitutes indirect participation in the voting on an extension of credit. Consequently, the credit institution is in non-compliance and the credit extended will have to be repaid immediately.
I.9 Records of credit institutions with regard to extensions of credit to covered parties
Each credit institution shall maintain the necessary records for compliance with the requirements of this regulation. These records identify all executive officers, directors, principal shareholders and their related interests and specify the amount and terms of each extension of credit by the credit institution to these covered parties.
Each credit institution shall request at least annually that each executive officer, director or principal shareholder identify by means of a written statement their related interests with a loan from the credit institution. These records should be readily available for the Bank's inspection at any time.
I.10 Report by executive officers
Each executive officer who has a loan with a credit institution and who becomes a debtor of any other credit institution in an aggregate amount in excess of NAf.50.000 shall, within 10 days of the date the indebtness reaches such level, make a written report to the board of directors of the officer's credit institution. The report shall state the lender's name, the date and amount of each extension of credit, any security for it, and the purposes for which the proceeds have been or are to be used.
Subject reports should be filed as an integral part of the documentation requested under paragraph 1.9.
I.11 Grandfathering provision
A lending relationship of an executive officer, director, principal shareholder that becomes unpermitted as a result of the implementation of this regulation may continue for a period desired by the institution after consultation with the Bank, but may not continue for a period longer than 12 months after the implementation date of the regulation.
Existing loans maturing in a period longer than 12 months shall be respected, provided a written request is done by the institution and which loan is found to be reasonable and sound by the Bank, based on the underlying documentation.