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Indian Banking in the New Millenium
Implementation of consolidated supervision
The Proposed Framework
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Monitoring Intra-group Transactions and Exposures:
The new reporting framework has been developed for tracking the following: large intra-group transactions manifest in major markets viz. equity, loans, debt, repo, inter-bank, call money, derivatives, etc. carried out for any purpose (trading or investment); build up of any disproportionate exposure (both fund based as well as non-fund based) of any entity to other group entities; any group-level concentration of exposure to various financial market segments and counterparties outside the group; and information available with any supervisor regarding an entity coming under its jurisdiction that may have a wider bearing. As one of the key objectives of the new framework is 'capturing ITEs manifest in all markets', the Group attempted to identify a set of parameters that could reflect the ITEs arising out of:
In respect of (ii) above, the Group suggests a matrix format to capture all transactions and exposures pair-wise. Further, both the aggregate volume of transactions during the reporting period as well as the outstanding positions as at the end of reporting period will have to be furnished. In addition to capturing transactions between two group entities during the reporting period at an aggregate level, all individual transactions above specified thresholds will have to be reported individually. Since there is no uniform definition of 'regulatory capital' across all sectors, it would not be possible to keep the threshold as a percentage of regulatory capital for all entities, as is being done in some countries such as Canada. The Group, therefore, decided on keeping absolute thresholds to begin with - Rs. 1.00 crore for fund-based transactions and Rs. 10.00 crore for non-fund based transactions. The same could be revisited subsequently based on experience. As regards the exposures of each individual entity to various markets, the same are being tracked by the respective regulators; but it was considered desirable to capture the aggregate exposure at the group level. The Group, therefore, proposes to incorporate this aspect in the new reporting mechanism. The total volume of transactions undertaken by each material entity during the reporting period and the outstanding position in respect of each entity would have to be reported individually. For aggregating the exposure at group level, however, all intra-group transactions would have to be netted off. This would give only a broad indication about the size of exposure concentration at the group level in each market not highlighting the actual risks inherent in those exposures. Risk measurement and management models at a 'group level' have not been considered for the present given the need for existing framework to stabilise. The Group further recommends furnishing of data in respect of top 20 exposures to counterparties outside the group in respect of each group entity with the objective of tracking concentration of the groups' exposure to outside counterparties. The responsibility of identifying and furnishing details to the principal regulator in such cases would lie with the designated entity. The Group recommends differential periodicities for the different parameters - transaction related parameters may be reported at monthly intervals (to begin with) while the other stock parameters (important financial indicators, commonality of back office and other service arrangements, etc.) may be reported on a quarterly basis To avoid multiplicity of interfaces between the regulator/s and the regulated entities, it is proposed that a designated entity within the respective groups/conglomerates may be assigned the responsibility of furnishing data (as per the formats finalized) in respect of all the financial subsidiaries/associates constituting the conglomerate to its regulator (which may be termed as the Principal Regulator for the group). It was decided that in respect of all conglomerates having a bank, the bank may be the designated entity. For non-bank conglomerates, the designated entity may be the one having a significant presence in the respective financial market segment (as defined above). As per the proposed framework, the 'designated entity' would submit the periodic reports to the 'principal regulator'. It is further suggested that a complete database in respect of all the information received from all the conglomerates be maintained at the nodal cell, RBI to address issues arising out of data dis-aggregation. Each designated entity for the conglomerates may, therefore, also submit the above Return to the nodal cell at RBI as well. The modalities of electronic data submission and the database issues need to be addressed. The group flags this as an isssue for further development. However, it is clarified that the primary responsibility of analyzing the furnished data would lie with the 'principal regulator'. The analysis by the principal regulator would basically involve the tracking of the parameters set out in para 3.4.1. Subsequent to this, however, any material information may have to be shared by the 'principal regulator' with other regulators. The detailed operational flow is covered separately in the next chapter. Internationally, almost all supervisory regimes have prescribed some form or the other of firewalls in varying degrees:
This issue had also been raised by the Committee on Consolidated Supervision which had recommended that the regulator should set limits on connected lending transactions, particularly, on those that are not conducted on an arms-length basis. The Group, however, recommends, threshold levels in regard to intra-group transactions for the purpose of reporting only. Thresholds for case to case approval could be considered a year later after gaining experience and having sufficient database. In respect of ceilings on intra-group exposures, currently there are no uniform practices across various segments. The investment regulations prescribed by IRDA for insurance companies cap the investments made by an insurance company in its own group companies at 5% of its controlled funds/assets. The exposure norms mandated by RBI in respect of banks, however, do not specifically recommend the treatment to be given to intra-group borrowings. The Group, therefore, recommends prescribing intra-group exposure ceilings within the existing exposure limits. Apart from the above report on intra-group transactions and exposures that may be submitted by the market entities, a mechanism for exchange of other information in respect of the identified groups between the three regulators need to be put in place. The regulator/s within whose jurisdiction any of the group entities operates may share information about those entities with the principal regulator. The issue of ensuring adequate risk management processes by the conglomerates had also been broached upon by the earlier committee on Consolidated Supervision which had recommended that the financial conglomerates must have limits and controls in place to manage their intra-group transactions and exposures. However, since the 'conglomerate' focus is still to concretise in the overallregulatory/ supervisory process, the respective regulators could ensure effective oversight by both the board and senior management of each regulated entity at individual level. They could mandate all regulated entities to have formal policies in regard to intra-group transactions. The same could be extended to the conglomerate level at a later stage depending on the level of preparedness of the entities. |
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