Supervision of Groups: Case
Study Solution
Keith Pooley
Workshop on Cross-Border Supervision and
Consolidated Supervision
June 2-4, 2015
Beirut, Lebanon
Supervision of Groups: Case Study Solution
1 Define the scope of the banking group for consolidated supervision
purposes
Jordan
Industries
Banking
Group
Middle East
Bank
MEB Holdings
Jordan Motors
AB Bank
Jordan Trading
25%
MEB Consumer
loans
MEB
mortgages
AB Corporate
Finance
40%
AB Derivatives
Supervision of Groups: Case Study Solution
2 Summarise your view of the group and supervisory issues, including:
– whether the banking group has adequate capital at the group level;
– the extent of intra-group exposures
• Banking group capital is inadequate
- consolidated CAR only 7%:
• there is limited capital at the holding group level
• the Group’s capital is highly geared: Tier 1 52% Tier 2 48%
• there is a high level of risk weighted assets in the Consumer Loans and
Mortgages subsidiaries (which are unregulated and not subject to solo level
capital requirements)
• AB Bank includes pro-rated RWAs from AB Corporate Finance and
Derivatives
• MEB has converted sub-debt into equity for Middle East Bank and AB Bank
Supervision of Groups: Case Study Solution
• Distribution of capital across regulated entities:
– Capital adequacy of Middle East Bank is only 8% on solo basis: if MEB
Consumer and MEB Mortgages are consolidated, the CAR would be
3.6%
– AB Bank appears comfortably placed at 11%
– There is no provision for Pillar 2 risks either at the level of MEB
Holdings or Middle East Bank
• Intra-group exposures of Middle East Bank within the consolidated group
are very high – 300 is 7.5 times capital base (40).
• Middle East Bank has 10 (25% of capital) in exposures to companies not
subject to solo supervision.
- but in both cases we can see through to the risks through consolidated
supervision
Supervision of Groups: Case Study Solution
3 List the main supervisory work you would expect to undertake on the
group over the next year
• Review of the governance of the banking group:
- Is the board sufficiently independent of the management of Jordan
Industries – can they challenge the decisions of the Jordan Industries
group where these may conflict with sound management of the banks?
- Would the banks benefit from more independent directors, their own
finance and internal audit functions?
- Why are major credit decisions referred to the Jordan Industries?
- Does Middle East Bank Group have a fully constituted Board ?
- Does the Middle East Group have a Governance and Risk Management
framework that applies across the consolidated banking group?
- What is the process for preparing a Consolidated Banking Group ICAAP?
Supervision of Groups: Case Study Solution
• Review of the intra-group funding:
- Is there a documented policy on intra-group funding?
- Is intra-group funding conducted at arm’s length?
• Review policy on funding entities connected to Jordan Industries? Place
restrictions?
• Steps to improve overall group capital adequacy within a short timeframe?
• Steps to establish a policy on group liquidity management?