Banks told to monitor large exposures

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) has ordered big banks to closely monitor  large exposures to protect their solvency from possible losses in the event of a default.

BSP Governor Felipe Medalla said the Monetary Board has issued Resolution 1179, which approves the amendments to the prudential guidelines on large exposures of the Manual of Regulations for Banks (MORB) and the Manual of Regulations for Non-Bank Financial Institutions (MORNBFI).

“The BSP is cognizant that risks arising from large exposures of banks/quasi banks to a single counterparty or group of connected counterparties could pose concerns to the stability of each bank and the financial system,” Medalla said.

The BSP chief issued Circular 1150 pertaining to the approved prudential framework for large exposures monitoring threshold.

“In this light, covered banks or quasi banks shall identify, measure, monitor and control large exposures to protect covered banks’ or quasi-banks’ solvency from maximum possible losses in the event of sudden counterparty failure,” Medalla said.

Large exposures refer to exposures to a single counterparty or a group of connected counterparties equal to or greater than 10 percent of a covered bank’s Tier 1 capital.

On the other hand, connected counterparties refer to a group of counterparties that are connected through direct or indirect control of one of the counterparties over the others or economic interdependencies and must be treated as a single counterparty.

In establishing connectedness based on economic interdependence, the BSP said covered banks should follow the rule that 50 percent or more of a counterparty’s annual gross receipt or gross expenditures is derived from transactions with the other counterparty, as well as one  counterparty has fully or partly guaranteed the exposure of the other counterparty, or is liable by other means, and the exposure is significant enough that the guarantor is likely to default if a claim occurs.

The bank should also consider if 50 percent or more of a counterpart’s production or output is sold to another counterparty, which cannot be easily replaced by other customers and the expected source of funds to repay the loans of both counterparties is the same, and neither counterparty has another independent source of income from which the loans may be serviced and fully repaid.

The regulator said the banks should also monitor if it is likely that the financial difficulties of one counterparty would cause difficulties for the other counterparties in terms of full and timely repayment of liabilities, or if the insolvency or default of one counterparty is likely to be associated with the insolvency or default of the other counterparties.

“Covered banks should identify possible connected counterparties on the basis of economic interdependence in all cases where the sum of all exposures to a single counterparty exceeds five percent of Tier 1 capital,” Medalla said.

The BSP chief said that covered institutions should also maintain adequate documentation of the basis of their determination of a connected counterparty group and the due diligence conducted.

According to the central bank, covered banks should comply with the large exposures monitoring threshold of 25 percent of Tier 1 capital, on a solo and consolidated basis.

“The large exposures monitoring threshold shall be implemented to protect covered banks’ or quasi-banks’ solvency from maximum possible losses in case of sudden failure of a counterparty or group of connected counterparties, and to facilitate monitoring by the BSP of concentration risks in the financial system,” Medalla said.

Conglomerate Udenna Corp. owned by businessman Dennis Uy managed to pay $4-million debt last month to a government agency and a consortium of banks led by BDO Unibank Inc. and averted a default.

Uy, a close associate of former President Rodrigo Duterte, grew his empire over the last six years to include gaming, shipping, education and construction to fast food, ferries, tourism, telecoms, among others.