• BANK Part 5.1 BANK Part 5.1 General

    • BANK 5.1.1 Introduction

      This Chapter sets out the requirements for a banking business firm's policies to identify, measure, evaluate, manage and control or mitigate concentrations of risk. This Chapter also sets limits on the firm's exposures to individual counterparties and connected counterparties.

      Note Safeguarding against risk concentrations is an essential part of a banking business firm's credit risk management policy — see rules 4.2.2 and 4.3.2.

      Derived from QFCRA RM/2014-2 (as from 1st January 2015).

    • BANK 5.1.2 Concept of connected parties

      (1) The concept of parties being connected to one another is used in these rules in relation to counterparties or issuers with which a banking business firm has exposures. Connected counterparties are the basis for the measurement of concentration risk and large exposures.
      (2) In contrast, the concept of parties being related to the banking business firm (which is discussed with credit risk in Chapter 4) is primarily used in relation to the requirement that the firm's transactions be at arm's length.
      (3) It is of course possible for a firm's related parties to be connected counterparties (such as when the firm has exposures to them).

      Note For purposes of concentration risk, the firm's exposure to connected counterparties (whether related or not) is taken to be a single risk.
      Derived from QFCRA RM/2014-2 (as from 1st January 2015).

    • BANK 5.1.3 Connected parties

      (1) A party is connected to another party if they are linked by:
      (a) cross guarantees;
      (b) common ownership;
      (c) common management;
      (d) one having the ability to exercise control over the other, whether direct or indirect;
      (e) financial interdependency — that is, the financial soundness of one may affect the financial soundness of the other; or
      (f) any combination of the factors mentioned in paragraphs (a) to (e).

      1 Parties would be connected if the same persons significantly influence the governing body of each of them.
      2 Parties would be connected if one of them has an exposure to the other that was not incurred for the clear commercial advantage of both of them and is not on arm's length terms.
      3 Parties would be connected if they are so closely linked that:
      (a) the insolvency or default of 1 is likely to be associated with the insolvency or default of the other;
      (b) it would be prudent when assessing the financial condition or creditworthiness of 1 to consider that of the other; or
      (c) there is, or is likely to be, a close relationship between their financial performance.
      4 Parties would be connected if a banking business firm has exposures to them and any loss to the firm on any of the exposures to 1 of the parties is likely to be associated with a loss to the firm with respect to at least 1 exposure to each of the others.
      (2) A counterparty may be connected to another counterparty by other linkages that, in the banking business firm's assessment, connect the counterparties as constituting a single risk. A connected party can be an individual or other entity.


      1 Two or more individuals or legal persons would constitute a single risk if they are so connected that, if 1 of them were to experience financial problems, the other or others would be likely to encounter repayment difficulties.
      2 Connected counterparties should be identified and the procedures to manage the combined credit risk considered. A banking business firm may need to monitor and report the gross exposure to connected counterparties against combined limits in addition to monitoring the exposure to each counterparty.
      Derived from QFCRA RM/2014-2 (as from 1st January 2015).

    • BANK 5.1.4 Role of governing body — concentration risk

      (1) A banking business firm’s governing body must ensure that the firm’s concentration risk management policy gives a comprehensive firm-wide view of the significant sources of concentration risk (including on-balance-sheet exposures, off-balance-sheet exposures and exposures from contingent liabilities).
      (2) The governing body must also ensure that the firm’s senior management monitors the limits set in this Chapter and that those limits are not exceeded on a solo or consolidated basis.
      Derived from QFCRA RM/2014-2 (as from 1st January 2015).