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Banks’ risk management policy in review

The Central Bank of The Bahamas is set to lay down the revised guidelines for the standards and requirements that licensees must adhere to. The Central Bank has also announced that the consultation period is now over. 

Wednesday, December 22, 2010
Wednesday, December 22, 2010

The Central Bank of The Bahamas has wrapped up its consultation period on proposed amendments to its risk management policy for licensees.

Financial institutions had until December 3, to submit comments or questions to the Policy Unit, Bank Supervision Department, on the proposed amendments to the Guidelines for the Management of Large Exposures.

Those guidelines set out Central Bank‘s minimum standards and requirements that licensees are expected to follow in relation to controls on large exposures and credit risk concentrations.

“Credit risk concentrations of one kind or another have consistently been the source of a number of major bank failures over the years, and the financial turmoil of recent years has placed this issue at the forefront of the international regulatory agenda,” says Central Bank in its Consultation Paper issued November 22.

The revisions were foreshadowed in the bank’s September 2009 quarterly communication to licensees.

Minor amendments being proposed are expected to strengthen and clarify existing guidelines, while ensuring that The Bahamas’ rules remain consistent with international best practices.

The revisions provide further guidance on the criteria for granting exemptions for related party exposures to parent and group entities for treasury management purposes. The revisions deal with applicability, board of directors’ responsibilities and exempt exposures.

Properly managing large exposures is a standard prudential policy. Banks seek to make money on deposits, especially interest-earning ones. They might channel the funds upstream to a parent company, which can invest it as part of a wider pool of funds to back bigger projects.

To ensure that firms do not pump funds into risky ventures, Central Bank limits how much credit risk licensees can expose themselves to the parent or the group in terms of upstreaming these funds.

In its revision, Central Bank proposes that the guidelines apply to all licensees, “with the exception of branches of foreign banks and restricted trust companies whose operations are limited to conducting business on behalf of one client or clients who are members of the same family.”

Additionally, the amendment proposes that the licensee’s board of directors include a statement in its Annual Corporate Governance Certification confirming that the board has reviewed the large exposures policy statement and that it is appropriate to the licensee’s operating circumstances.

Central Bank also proposes to include an exemption from the related party limits–of 15 per cent of an institution’s capital base–to allow licensees to facilitate group treasury functions.

“This proposed exemption would be appropriate for exposures which are short-term in nature and that are placements with the licensee‘s parent or another member of the licensee‘s banking group,” says the Central Bank paper. “It is proposed that the placements be surplus to the needs of the firm and that the amount of the placement fluctuates regularly.”

Whenever it makes changes to any of its guidelines, Central Bank circulates its proposed amendments for public consultation. Customarily, the consultation period is 90 days. In the case of minor amendments that period could be abbreviated.

With the New Year dawning, the Bahamas Financial Services Board is looking to put before government initiatives to maintain the jurisdiction's competitive edge.

A new entity, launched New Year’s Day, combines resources of two organizations to increase effectiveness, and strengthen advocacy for local businesses.

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