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01 December 2011 Supervision Supervision label Factsheet

The applies to banks and investment firms on both the solo and the consolidated level. When applied at the consolidated level, it is important that the Policy Rule allows exposures entered into by subsidiaries to be netted against borrowings in the same market This is in line with the standard consolidated treatment of credit risk on the parent company’s balance sheet.

The Policy Rule must be applied at both the consolidated and the solo level. The calculation of gross country exposure on the consolidated balance sheet may disregard exposures of the subsidiary that have been funded out of locally acquired funds.

Solo level – Application at the solo level means that a material concentration of direct exposures to residents, and exposures of the supervised institution to a subsidiary in a country with nonnegligible country risk, must satisfy the Policy Rule (Section 1, under d, read in conjunction with Section 2). Any exposures of the foreign subsidiary to third parties resident in the same country, and funding raised by the subsidiary in that same country, do not appear in the solo balance sheet of the supervised institution and are therefore ignored.

Consolidated level – In order to determine the size of the material concentration of exposures to a country with a nonnegligible country risk, total exposures to that country are reduced by total funds raised in that country by the same subsidiary – independently, so without recourse to the group. After all, if a country risk event (as defined in the Policy Rule) occurs, the resulting exposure of the Dutch-resident supervised institution is limited to the country risk ensuing from the direct exposures to the subsidiary in question. The rest of the loans provided by the subsidiary are ‘covered’ by locally acquired funding.

Explanatory notes – solo level

In the example below, solo supervision of the parent looks at the foreign subsidiary only insofar as the parent’s capital participation and parent's the loan to the subsidiary are concerned. The gross exposure to the subsidiary under the Policy Rule is 300. Note however, that if the other 2700 in exposures held by the parent contain elements that have to be added to the said 300, and the total must remain within the applicable thresholds under the Policy Rule.

 

Parent P Subsidiary S
Holding in S 100 Equity capital 1000   Credits 1000 Equity capital 100
Loan to S 200 Borrowed cap 2000       Loan fr. P 200
Other 2700           Other borrowed cap. 700
                 
  3000   3000     1000   1000

Explanatory notes – consoldiated level

The supervised institution must also comply with the Policy Rule on a consolidated basis. Here, the balance sheet look like this:

P – Consolidated
Loans P 2700 Eq. cap. 1000
Loans S 1000 Bor. cap. P 2000
    Bor. cap. S 700
       
  3700   3700

At first sight, the gross exposure under the Policy Rule would appear to be 1000 (again, not counting possible nonnegligible country risks under the Policy Rule as part of the parent’s exposures of 2700). However, because the subsidiary has raised 700 in local funding, that part of the exposure may be used to cover the local exposures and be disregarded here. This again leaves a gross exposure of 300.

The following example serves to explain that the gross exposure to a subsidiary in a particular country may only be reduced by the amount of funding raised by the subsidiary in that same country. Subsidiary S is located in a country with a nonnegligible country risk. Therefore the exposures to that country are subject to the Policy Rule. Another subsidiary of the supervised institution, T, provides some of the funding of subsidiary S.

Parent P   Subsidiary S
Holding in S 100 Equity capital 1000   Credits 1000 Equity capital 100
Loan to S 200 Borrowed cap. 2000       Loan fm. P 200
Holding in T 50           Loan fm. T 40
Loan to T 75              
Other  2575            Other borrowed cap. 660
                 
  3000   3000     1000   1000
          Subsidiary T
          Loan to S 40 Eq. cap. 50
          Credits 360 Loan fm. P 75
              Other bor. cap. 275
                 
            400    400 

The consoldidated balance sheet for the abover situation looks as shown. Since part of the credits extended by subsidiary S to parties in a country with a nonnegligible country risk is funded by subsidiary T, the amount of locally funded exposures is smaller and the gross country risk exposure on the consolidated balance sheet is higher (340 instead of 300 – under the same proviso regarding country risk thresholds [1].
The funding provided by subsidiary T to subsidiary S must not be deducted when caclulating the gross exposure of S. If a country risk event occurs, subsidiary S cannot be assumed to be able to meet its obligations to T. Therefore the event may affect the consolidated balance sheet.

Consolidated
Credits P 2575 Eq. cap. 1000
Credits S 1000 B. cap. P 2000
Credits T 360 B. cap. S 660
    B. cap. T 275
       
  3935   3935

_______
[1] The 360 in credits are assumed to have been extended by subsidiary T in the country where it is located. This country is assumed to lie outside the scope of the Policy Rule.

Sector(s)

  • Banks