GCC banking sector should consider the exposures to all connected as a large single element for reporting and compliance purposes in the backdrop of new Basel norms, says an IMF paper
By Santhosh V Perumal/Business Reporter
Concentration of ownership and control in the Gulf Cooperation Council (GCC) corporate sector is high than in most advanced and emerging countries, thus becoming imperative for the Gulf banking sector to consistently measure, aggregate and control large single exposure according to a working paper of International Monetary Fund (IMF).
Ownership in the GCC countries is concentrated in public sector institutions, holding companies, financial institutions, and family group. Public sector institutions have the highest number of ownership links and are at the centre of the ownership networks and holding companies, financial institutions, and family groups are also key shareholders with a high number of ownership links, IMF paper titled ‘Integrated Ownership and Control in the GCC Corporate Sector’ said.
Therefore, the GCC banking sector should consider the exposures to all connected as a large single exposure for reporting and compliance purposes in the backdrop of new Basel supervisory framework for measuring and controlling large exposures, which will take effect from January 1, 2019, said the report authored by André Oliveira Santos.
Integrated ownership in publicly listed GCC corporates by the ultimate shareholder is determined by both the direct and indirect ownership links, the paper said, adding GCC shareholders can have large integrated ownership if indirect ownership at the corporate level is also taken into account.
“In this case, the effective ownership associated with the ultimate shareholder is larger than the one implied by the direct links and helps create a wedge between direct ownership and control in corporates,” the paper said.
Finding that the GCC corporate, financial and public sectors are characterised by a high degree of interconnectedness, it said ownership links in the corporate, financial, and public sectors imply close connections among industrial, commercial, and financial groups, and sovereigns.
Large industrial and commercial groups have ownership stakes in banks, while GCC governments - through different government agencies - have stakes in several groups, the paper said.
Financial groups are also shareholders in banks, industrial, and commercial groups, it said, adding “as a consequence, the GCC banks may have exposures to a group of counterparties with dependencies that imply they are all likely to fail simultaneously.”
Under the Basel framework for measuring and controlling, large exposures were defined as the sum of all exposures to counterparty or to a group of connected counterparties equal to or above 10% of the capital base (Tier 1 capital).
The new Basel framework has further defined connected counterparties as a group of counterparties linked by a control relationship (either direct or indirect) or an economic interdependence. In this case, the exposures to all connected counterparties should be considered as a large single exposure for reporting and compliance purposes, it said.
“A key lesson from the financial crisis is that it is important for banks to consistently measure, aggregate and control exposures to these counterparties,” it said.
Highlighting that network analysis is a useful way to visualise connected counterparties through the direct and indirect ownership and control links; it said directed ownership networks are a system of links among shareholders and corporates organised in a way that visual inspection and analysis are made easier.
Shareholders have portfolios comprising direct investments in corporates, it said, adding they can also have indirect stakes in corporates that are part of investments by corporates in which they hold shares. In this case, integrated ownership and control are determined by the direct and indirect links in the ownership network, it added.
