Central Bank of Bahrain Proposal To Tighten Limits on Large Credit Exposures

On the theory that regulators often craft regulations to deal with problems that have emerged, the 11 February Consultation Paper by the CBB on "Large Exposures"  indicates the Bahraini authorities' concerns with related party exposures.

The CBB's proposals are for the following.  As indicated these revisions have not yet been implemented but are being discussed with banks in Bahrain.

1. Loan and security underwriting where a strict 30% of capital rule is to be applied.  Amounts over this limit will not be allowed.  After an up to 90 day underwriting period, any remaining amounts will be subject to the normal large exposure limits, including the requirement to deduct from capital any amount over 15% of capital.   This underwriting limit is not available for transactions with connected counterparties.
   
2.  A new rule that limits placement of investments with clients or securitization of such assets to 25% of capital again for up to a 90 day period.  A Board approved written due diligence and procedures policy for such transactions must be in place to be eligible for this limit.
3. A reduction in the aggregate exposure limit for a Conventional Bank's exposure to both directors and associated companies and unconsolidated subsidiaries to 25% from 40%  (currently it's 20% each thus equalling 40%).  As well as a reduction in all exposure to connected counterparties (including management) from 40% to 25% of the bank's consolidated capital base.
4. A reduction in the aggregate exposure limit for an "Islamic Bank's" direct balance sheet exposure to directors to 10% from 15% and establishment of a new separate limit of 15% for  associated companies and unconsolidated subsidiaries.  Previously the limit for both categoties taken together was a total of 15%.   And the aggregate limit for all connected counterparties is proposed to be reduced to 25%  (This mirrors the limits on Conventional Banks).
5. A reduction in the aggregate exposure limits for an "Islamic Bank's" off balance sheet exposures to an individual connected counterparty funded by client Restricted Investment Accounts  to 15% of the RIAs and in aggregate to all connected counterparites to 25% instead of 35% of the bank's consolidated capital base.
6. A reduction in the aggregate exposure limit for an "Islamic Bank's" direct balance sheet and off balance sheet exposures (this second category funded by RIAs) to 20% of the bank's consolidated capital base down from 25% and in aggregate to all connected counterparties from 60% to 50%.

Comments.

1. Clearly, there are problems in Bahrain with connected counterparty exposures as well as banks taking on inordinate "placement" risks with investments.  Serious problems I'd guess.  The CBB is not engaged in this endeavor - which I suspect will raise fierce opposition from both Conventional and Islamic Banks - just for theoretical reasons.
2. I hadn't realized that an "Islamic Bank" was allowed by the regulations to have such concentrations of risk exposure including RIAs. At first look this seems high. Not sure what I'm missing.

And for those interested the CBB's definition of a  Restricted Investment Account.