Workshop on Cross-Border Supervision and Consolidated
Supervision
June 2-4, 2015, Beirut, Lebanon
Case Study: Home/host cooperation: METAC Banking Group
PART 1: Home/host arrangements and establishment of a supervisory college
You are the supervisor of METAC Banking Group, a group which owns a major domestic
bank in Lebanon and which also has significant foreign operations. You are thinking about
how to develop cross-border supervision and home/host relationships.
You should review the available information on the group’s operations and make
recommendations to your senior management covering:

The supervisory college arrangements you think are appropriate, for example:
 which format of college (universal, core, regional etc.)
 which host supervisors you think should be invited
 the frequency of college meetings and a high level agenda for the first
meeting.

Any arrangements you need to make you make the college operational and
effective, including arrangements for sharing and protecting confidential
information.

The arrangements you need to make for cooperating with any host supervisors not
included in the college arrangements that you are recommending.
METAC Banking Group includes the second largest bank in Lebanon with a full range of
retail and commercial banking operations and an extensive branch network.
The bank has expanded outside Lebanon over a number of years with the aim of providing
wider services to its Lebanese customers and building on its success in Lebanon to develop a
presence in some regional markets that can compete with the domestic banks there.
It has a long-established subsidiary in London which provides private banking services as
well as wholesale banking (the group funds itself in part from London). The London bank
also has small branches in other European Union countries.
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The group’s private bank in Switzerland is owned directly by the holding company, as is a
small life insurance company that operates only in Lebanon.
The group structure is as follows:
METAC Banking
Group Ltd
METAC Bank
Jordan
(retail bank)
METAC Bank Turkey
METAC Bank
Lebanon
METAC Bank
Switzerland
METAC Insurance
Lebanon
(full service bank)
(private bank)
(life insurance)
METAC Bank UK
METAC Bank
Egypt
(wholesale and
private bank)
(investment bank)
Branch in UAE
(wholesale banking)
(retail bank)
Branches in France
and Netherlands
(wholesale banking)
The consolidated balance sheet and key ratios as at end 2014 (in USD billions) were:
Liabilities
Retail deposits
Wholesale deposits
Interbank funding
Other liabilities
Capital (Tiers 1 and 2)
Total
23.1
12.2
5.5
2.3
7.1
50.2
Tier 1 Capital Ratio
Total Capital Ratio
Leverage Ratio
Liquidity Coverage Ratio
7.1%
10.3%
6.5%
98%
Assets
Loans to customers
Interbank loans
Central banks
Securities
Other assets
Total
25.1
10.2
3.5
3.5
7.9
50.2
The table below breaks down the group banking entities to show:




Their status (holding company, subsidiary or branch)
Their share of total group assets – excluding intra-group assets
Their share of group risk-weighted assets – which differs significantly from the share
of total assets given the risk profile of the entities
Whether their business is material to the local market – based on whether their
share exceeds 10% of local banking sector assets.
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Country
Branch or
subsidiary
Lebanon
Lebanon
Switzerland
Jordan
Turkey
UK
Holding company
Subsidiary
Affiliate
Subsidiary
Subsidiary
Subsidiary
France
Netherlands
Egypt
UAE
Branch (of London)
Branch (of London)
Subsidiary
Subsidiary
Share of
total group
assets
2%
43%
5%
12%
5%
14%
5%
2%
12%
2%
Share of group
risk assets
> 10 % local
market share
MoU?
0%
50%
2%
15%
10%
5%
1%
1%
15%
1%
Yes (40%)
No
Yes (20%)
No
No
Yes
Yes
Yes
Yes
No
No
Yes (15%)
No
No
No
Yes
No
The insurance company has assets equivalent to 10% of the group total assets.
Group management in Beirut includes central functions (also covering the Lebanese bank)
for finance and risk management.
Individual operating entities are subject to local governance (including their own boards of
directors) and local operational management. They are expected to be self-funding, except
that group foreign currency funding is managed centrally with net funding requirements
met from borrowing in the London wholesale markets.
Subsidiary companies use their own systems, but branches use the same systems as their
parent companies.
Decisions on individual credits above a certain level must be referred to a group credit
committee in Beirut.
Internal audit for the entire group (except Switzerland) is carried out by a central function in
Beirut, which is expected to operate by sending teams into the group’s foreign operations
on a three year cycle.
All the operating entities of the group are subject to supervision in the host jurisdiction. As
home supervisor you carry out consolidated supervision of the group as well as supervision
of the Lebanese bank. The group’s consolidated capital adequacy requirements are
calculated using Basel II standardized approaches, but group management are planning to
adopt more advanced approaches when the group is ready and it is permitted to do so
under the regulations.
The insurance company is subject to supervision by a separate supervisory authority in
Lebanon.
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Case Study: Home/host cooperation: METAC Banking Group
PART 2: The supervisory college meeting
The supervisory college is having its first meeting with the following agenda:
METAC Banking Group
First meeting of the College of Supervisors, Beirut, June 2015
1. Overview from home supervisor:

key developments and issues

preparation for meeting with bank management
2. Questions and updates from host supervisors
3. Presentation and discussion with bank management

followed by supervisors’ discussion of key points
4. Update to risk assessment (led by home supervisor)
5. Specific issue: adequacy of group internal audit
All the host supervisors, except those of the branches in France and Netherlands, are
attending the meeting. (The insurance supervisor is not attending.)
You are representing one of the seven supervisory agencies participating in the college
meeting. Using the background material and briefs for each country (next pages), you
should prepare key aspects of your approach to the college meeting. You should cover,
for example:

The three key points you think you need to share with other supervisors about the
entity for which you are the supervisor.

The three key points you want to raise with the home supervisor and/or other
supervisors

Your proposals, if any, for joint working over the next year.
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Home supervisor, Lebanon
You have a good relationship with the management of the bank in Lebanon.
You think the group has a sound business model, including a sensible plan for expanding
internationally (Lebanon is a small market). You think that the bank in Lebanon is wellmanaged, but are not sure how well-managed are the foreign operations, most of which you
have not been able to visit in recent years.
You have some supervisory concerns. The international expansion of the group has
stretched its financial resources. You are not comfortable with the group capital or liquidity
ratios. Loan losses are rising in many parts of the group and you question whether credit
controls are adequate.
You also think that the group’s expansion has stretched management resources. The same
team manage the bank in Lebanon and the group as a whole and oversight of foreign
operations may be receiving too little attention.
You think that group internal audit is excellent, however - based on work they have done in
Lebanon.
You are expecting the bank to hold capital at a level significantly above the minimum
amount in future, although you have not decided exactly how much as yet. You have noted
that the management are keen to use advanced approaches under Basel II/III in due course,
but you think they will take years to be ready to do so.
You rate the Lebanon bank as Medium High risk on your scale of risk assessment (H, MH,
ML and L).
Host supervisor, Jordan
You are supervising the bank in Jordan intensively. You have a number of concerns about
the strategy and note that the bank is significant in your jurisdiction.
Loan losses have been increasing (latest NPL ratio is up from 2% to 5%). Half the NPLs by
value are loans that were approved in Beirut.
You suspect that the risk management function relies too much on Beirut.
Although the bank is meeting your minimum capital ratios (6% Tier 1 and 10% total capital),
you intend to press for more capital to be injected by the parent given your concerns. You
would like to see minimum ratios of Tier 1 of 10% and Total Capital of 12% and any extra to
reflect the bank’s stats as a Domestic-SIB (though you are still working on your approach).
You have not told the home supervisor about these plans.
You met with group internal audit recently when they visited Jordan for the first time in four
years. You were not impressed by the team you met and found their understanding of local
market conditions to be poor.
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You rate the bank as High risk on your scale of risk assessment (H, MH, ML and L).
Host supervisor, Turkey
Although the bank is not large in your jurisdiction, you have recently undertaken on-site
supervisory work (a full scope examination) and identified no significant issues with the
bank.
The bank has been expanding significantly since a recent acquisition of a small competitor
bank. You have observed that the acquisition was followed by significant job losses.
Capital is well above your minimum requirements.
You noted that the management of the bank claimed to rely extensively on group controls in
Beirut, but there was no evidence that group risk management exercised oversight of their
risks in practice. Group management had not visited the bank in Turkey. Internal Audit had
done no work there for a least four years.
You rate the bank as Medium High risk on your scale of risk assessment (H, MH, ML and L).
Host supervisor, UK
You had initially intended to decline the invitation to attend the college, but have decided to
come to this first meeting as a courtesy to the home supervisor.
The operation in London is small relative to the UK market and you undertake limited
supervision - the meeting you held with London management in preparation for this college
meeting is the first time you have seen them for 18 months. You still know little about the
operation, although you think that the business model is sensible and you found local
management to be competent.
You know that the bank had difficulties meeting the requirement for adequate liquidity in
London. The most recent annual accounts and auditors’ management letter suggested that
there had been internal control failings in the financial control area, but noted that they had
been rectified.
You know that your colleagues in the Financial Conduct Authority are investigating the bank
for potential weakness in AML/CFT controls and the initial findings, which are no public, are
not positive.
You do not rate the bank on your scale of risk assessment as it is too small.
Host supervisor, Egypt
The bank in Egypt has had serious problems, with high loan losses affecting profitability.
Most of the losses have been in retail lending. NPLs have now fallen from a peak of 10% of
the total to 8%.
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Capital ratios are under pressure and the bank has breached its minimum Tier 1 capital ratio
of 6% in the most recent quarter. You have asked the management for a plan to rectify the
capital shortfall within two months. You notified the home supervisor of this requirement,
but have heard nothing from them.
You have met with the bank’s external auditor to discuss the annual audit in the context of
the increased loan losses. You were surprised that it was not the same firm as the auditor of
the parent. You have doubts about the local auditor’s capacity to undertake audit work to
the required high standard.
You rate the bank as High risk on your scale of risk assessment (H, MH, ML and L).
Host supervisor, UAE
The operation is small and you do not have a detailed knowledge of its business or the risks.
It maintains capital well in excess of the minimum, which gives you comfort. But as you have
limited knowledge of the bank’s risks and the strategy (e.g., likelihood of significant growth
in the business), you are not sure if you should be devoting more time to the institution.
You are keen to learn about group management and home supervision to establish how far
you can rely on the parent and its supervisor. You are concerned that you have not had any
communication from the home supervisor since the bank was established in the UAE and
you suspect that they have little time for your needs as the UAE operation is small in
relation to the group as a whole.
In addition, the UAE operation places surplus funds with the parent bank on a regular basis
up to the large exposures limit. They have asked for a waiver from that limit so that they can
place even more funds in Lebanon. You have not responded yet – or informed the home
supervisor.
You are uncomfortable that you do not have an MoU with the home supervisor or with any
of the host supervisors attending the supervisory college.
You rate the bank as Low risk on your scale of risk assessment (H, MH, ML and L).
Host supervisor, Switzerland
The bank’s business is increasingly focused on fund management for wealthy clients and it is
reducing its lending. Capital ratios are well above the minimum requirement.
Your own expertise is mainly in fund management rather than bank supervision. However,
you do make sure that the bank is effectively ring-fenced from the rest of the group – you
are concerned by the risk of contagion from problems in the rest of the group and
reputational damage.
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You have some concerns about the bank’s compliance with client assets requirements and
have commissioned a consultant firm to examine the bank. It has not reported back yet.
You have insisted on strong local governance and that the bank has local internal audit,
reporting to the audit committee.
You are concerned that the bank is about to come under investigation by foreign authorities
for assisting customers to evade tax liabilities. There could be extensive publicity. You have
not reported this to the home supervisor.
You rate the bank as Medium Low risk on your scale of risk assessment (H, MH, ML and L),
but will reassess and may increase this rating later in the year.
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Case Study: Home/host cooperation: METAC Banking Group
PART 3: Resolution planning
As the home supervisor for the METAC Banking Group, you are now considering your
preparedness for a crisis affecting the group, including the possibility that the group may
have to be resolved.
The college of supervisors for the group, which you have established is meeting regularly,
exchanging supervisory information and generally working well.
You should review the relevant information about the group, including its structure, the
degree of integration in its management and its systems and infrastructure and make
recommendations to your senior management covering:
1. The strategy for resolution of the group, for example whether to adopt an SPE or an
MPE approach or a hybrid of the two.
2. Any measures you think could be required of the group to improve resolvability,
depending of course on your preferred resolution strategy.
3. Your approach to the development of the resolution strategy, for example:
 what use you will make of the college of supervisors
 how you will approach the challenge of differing national powers
 the potential for use of public money to be needed; and
 the amount of loss-absorbing capacity (TLAC).
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