AmendmentInvestment

Large Exposures to Counterparty or Group of Connected Counterparties (Directive No. 1015/2024)

National Bank Of Ethiopia1015/2024

Summary

This directive establishes prudential limits for large exposures banks can have to a single counterparty or a group of connected counterparties to ensure financial soundness and manage risk concentrations. It defines terms, sets exposure limits, outlines exclusions, specifies calculation methods for exposure values, details criteria for identifying connected counterparties, requires reporting, mandates internal policies and procedures, and provides a transition period for compliance. It also repeals a previous directive on credit exposures.

Who's affected

All commercial banks licensed by the National Bank of Ethiopia.

Action required

Banks must review their current exposure levels and develop an action plan within 90 days if they exceed the new limits, with a maximum of three years to comply.

Key points

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  • Sets a 25% exposure limit to a single counterparty or group of connected counterparties relative to a bank's total capital.
  • Defines 'Large Exposure' as 10% of a bank's total capital for reporting purposes.
  • Identifies criteria for determining 'Groups of Connected Counterparties' based on control and economic interdependencies.
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    • Exempts exposures to government entities and certain government-backed exposures.
    • Requires banks to have robust internal policies and reporting mechanisms for managing large exposures.
    • Repeals the 'Credit Exposures to Single and Related Counterparties Directives No. SBB/53/2012'.

Requirements

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  • Aggregate sum of all exposures to a counterparty or group of connected counterparties shall not exceed 25% of the bank's total capital.
  • Banks must immediately communicate breaches of the limit to the National Bank and rectify them promptly.
  • Banks must have board-approved policies and management-implemented procedures for monitoring large exposures and risk concentrations.
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    • Policies must include exposure limits, identification and measurement processes, stress testing, and independent reviews.
    • Banks must have adequate systems to identify, measure, monitor, and aggregate exposures in a timely manner.
    • Banks not in compliance must submit an action plan within 90 days and bring exposures within limits within three years.
    • Banks must submit monthly reports on exposures exceeding 10% of total capital within 20 days of the period end.

Rights and permissions

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  • The National Bank may prohibit a bank from extending any loan or advance to any person on grounds it deems sufficient.
  • The National Bank may accept a breach of limit during interbank lending in stressed circumstances to ensure market stability.
  • Banks may deduct cash collateral and cash substitutes when computing exposure value.
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    • Banks may demonstrate to the National Bank that certain criteria do not automatically imply an economic dependence.

Restrictions

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  • Aggregate sum of all exposures to a counterparty or group of connected counterparties shall not exceed 25% of the bank's total capital.
  • Exposures to Federal Government of Ethiopia, National Bank, and State/Federal Government-Owned Enterprises are exempted.
  • Portions of exposures guaranteed by or secured by the Government are exempted if credit risk mitigation conditions are met.
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    • Intraday interbank exposures are exempted.
    • Banks must limit exposures to single or connected counterparties.
    • Banks must not have any single counterparty exposure exceeding 10% of total capital without reporting.

Penalties

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  • The directive implies that continued non-compliance may lead to prohibitions on extending loans or advances, as stated in Article 4.3, and potential intervention by the National Bank.

Objectives

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  • To set prudential limits to mitigate losses from counterparty failure.
  • To ensure banks have adequate policies and procedures for managing risk concentrations.
  • To maintain the financial soundness of banks.

Organizations

2
  • National Bank of Ethiopia
  • Federal Government of Ethiopia

Legal references

2
  • Banking Business Proclamation No. 592/2008 (as Amended by Proclamation No.1159/2019)
  • National Bank Capital Adequacy Directive
Original sourcehttps://justice.gov.et/en/directives/large-exposures-to-counterparty-or-group-of-connected-counterparties-directive-no-1015-2024/
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