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 Middle East Bank MEB Holdings MEB Consumer loans MEB mortgages Jordan Industries Jordan Motors Jordan Trading AB Derivatives AB Bank AB Corporate Finance 25% 40% Banking Group

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?