Limitations on extensions of credit to any one borrower or group of connected borrowers ("large exposure regulation")
III.1 Nature of Regulation III
At the very center of a credit institution lies the extension of credit to borrowers. This regulation deals with the restriction of the amounts owed by one debtor or a group of connected debtors to a credit institution in order to avoid overexposure to one single entity.
Monitoring and controlling the exposures of a credit institution is an integral part of prudential supervision because excessive concentration of exposures to a single client or group of connected clients might result in an unacceptable degree of concentration risk and such a situation may be deemed to be prejudicial to the solvency of a credit institution.
III.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 governs any transaction with a single borrower.
The aim of this regulation is to provide a sound basis for transactions with large borrowers.
For the purposes of Supervisory Regulation III, 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.
"Credit institution" is defined in accordance with article 1, paragraph 1, sub c and d of the National Ordinance on the Supervision of Banking and Credit Institutions of 1994;
"Exposure" is defined as any facility granted, whether drawn or undrawn, by a credit institution to a client or group of connected clients, on or off balance sheet, and includes those commitments and contingent items deemed to be relevant deemed to be relevant by the Bank when assessing the identifiable risks of the credit institutions. Exposure elements include but are not limited to:
loans and advances, including overdrafts;
bills and promissory notes received;
guarantees and similar contingent liabilities as acceptances, documentary credits issued and confirmed, irrevocable standby letters of credit and
commitments such as repurchase agreements, irrevocable revolving lines of credit, underwriting (including note issuance facilities and revolving underwriting facilities), irrevocable undrawn overdraft facilities, lending commitments.
"Group of connected clients" means two or more persons, whether natural or legal, holding exposures from the same credit institution and any of its subsidiaries, whether on a joint or separate basis, but who are mutually associated through the control of one of them by the other. Moreover, the interconnection between the persons also implies that their cumulated exposure actually represents a single risk to the credit institution, with the likelihood that if one of them experiences financial problems the other or all of them are likely to encounter repayment difficulties.
"Control" as defined in Supervisory Regulation I and II.
III.4 Applicability and exemptions
Supervisory Regulation III 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 III.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.
III.5 Reporting of large exposures to the Bank
In the Supporting Schedules of the Chart of Accounts a report of every large exposure shall be made by the credit institution to the Bank on a periodic basis as required by the Bank.
An exposure of a credit institution to a client or group of connected clients is considered to be a large exposure when its value has reached or exceeded 15% of equity.
Regardless of whether large exposures exist in a credit institution the Bank requires the credit institution to report on the appropriate Chart of Accounts schedules a minimum of 25 exposures with the highest percentage value of equity.
III.6 Transactions with and balances due from large (connected) borrowers
In the determination of the interconnection between borrowers a credit institution should take at least the following criteria into consideration:
common ownership of clients;
common directors of clients;
cross guarantees provided by one client for the other;
direct commercial interdependency which cannot be substituted in the short term.
If on the basis of these criteria interconnections between clients is observed by a credit institution, the aggregate credits of these clients should be classified as a single risk.
With regard to large exposures to one borrower or group of connected borrowers the following limits apply:
Exposures to any one borrower or group of connected borrowers should be limited to 25% of equity.
Exposures to all large borrowers may in the aggregate not exceed 600%;of equity.
III.7 Exceptions on and prior approval for large exposures
The aggregate exposure limit of 600% referred to in paragraph III.6.2. sub b may be exceeded only in exceptional cases with the distinct prior approval of the Bank.
In such cases the Bank shall require the credit institution either to increase the volume of equity or to take other remedial measures such as a substantial coverage with solid additional collateral, the value of which is not likely to deteriorate during the term of the commitment.
Under no circumstances will an individual exposure to one client or group of connected clients be allowed to exceed 35% of equity.
III.8 Exemptions to the large exposure rule.
1. The Bank may fully or partially exempt from the application of the exposure limits in paragraph III.6. the following clients or group of connected clients:
the government of the Netherlands Antilles and the Islands of the Netherlands Antilles and
public authorities of certain countries to be designated by the Bank ona case by case basis.
Furthermore, the Bank will in principle fully or partially exempt from the application of the exposure limits in paragraph III.6:
exposures secured by an explicit and irrevocable guarantee or pledge of the public authorities referred to under a) and b) above;
exposures fully secured by cash deposits or securities listed on a Stock Exchange acknowledged by the Government of the Netherlands Antilles, provided that the exposure is less than the average market value in the last 12 months;
interbank exposures having a maturity of six months or less.
The exposures of a credit institution which has one or more subsidiary credit institutions and foreign branches shall be monitored and controlled on a consolidated basis by subject credit institution.
III.10 Grandfathering provision
A large borrower relationship 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 made by the institutions and which loans are found to be sound by the Bank based on the underlying documentation.