EBA欧洲银行-LE_CY_4页_223kb

Summary of the Questionnaire on Market Practices on Large Exposures

General Approach to Concentration Risk

The bank adopts a general approach to concentration risk measurement and management that aligns with the current national regulatory regime in Cyprus. This approach is integrated into the bank's internal processes and is closely linked to the limits and reporting requirements set by the regulatory authorities.

Nature of Concentration Risk

The bank considers the nature of concentration risk to be not relevant or applicable due to the small size of its portfolio and high awareness of customer activities. This suggests that the bank may not have significant concentration risk in its current operations.

Counterparties and Relationships

The bank takes into account the relationships and connections between counterparties during the credit proposal evaluation process and in pricing decisions. These relationships affect the type and value of collateral accepted. The Central Bank of Cyprus has issued specific rules on "connectedness of counterparties," which the bank follows. However, no detailed information is provided on how these relationships are assessed or managed in practice.

Measurement of Exposures

The bank defines the amount at risk as the total of the loan/facility amount and accrued interest. It includes both funded and non-funded facilities, such as guarantees and letters of credit, as well as undrawn but approved facilities. There are no derivative exposures or structured transactions in the current portfolio.

For single-name concentration risk, the bank groups all related counterparties under a single name. No systematic measurement of sectoral or geographic concentration risk is currently in place. Strategic decisions on sectors to support or avoid are made by the mother company in Greece. The measurement of single-name concentration risk is integrated into internal decision-making, particularly during new or additional facility discussions.

Monitoring and Management of Risk

The bank manages concentration risk based on predefined limits, following the Central Bank of Cyprus guidelines for capital adequacy:

• Single-name exposures should not exceed 25% of the bank’s regulatory capital.
• The total exposure to a single customer (if it exceeds 10% of regulatory capital) should not exceed 800% of total regulatory capital.

The type of counterparty is a material factor in risk management. For instance, facilities granted to government or semi-government entities are considered to have zero risk if fully secured by a government guarantee. For corporate counterparties, creditworthiness, business nature, financial status, and security are key factors in risk assessment. The bank uses a variety of collateral types, including mortgages, bank guarantees, government guarantees, pledged deposits, and personal guarantees. However, for regulatory capital purposes, only certain collateral types are recognized, with varying weights (e.g., mortgages at 50%, government guarantees and pledged deposits at 100%, and bank guarantees at 80%).

Haircutting is determined by regulatory instructions. The bank does not currently apply a specific approach for managing other concentration risks such as sectoral, geographic, or collateral issuer risks.

Stress Testing

Stress testing is not currently relevant or applicable to the bank’s operations, indicating that the bank may not have a formal process in place for assessing the impact of extreme scenarios on its concentration risk.

Single Entity vs Group Level

Concentration risk is measured at both the individual entity and group levels. At the group level, the parent bank, Emporiki Bank S.A., prepares reports every three months for all customers or groups of customers with gross credit exposure equal to or greater than 10% of the bank’s shareholders' funds. Cross-border intra-group exposures are monitored by the parent bank, and a more systematic approach will be adopted when implementing Basel II rules.

Credit Risk Mitigation

The bank does not differentiate between credit risk mitigation techniques for large and small exposures. It utilizes various collateral types, including:

• Mortgage over property
• Bank guarantees
• Government guarantees
• Pledged deposits
• Assignment of shares
• Fixed and floating charges over corporate assets
• Discounting of cheques
• Personal guarantees
• Other forms (e.g., assignment of contract proceeds, sale agreements, life insurance policies)

For regulatory capital purposes, not all collateral types are recognized, with different weightings applied.

Indirect Concentration Risk

The bank does not currently consider indirect concentration risk arising from exposures to collateral issuers, except for cases where other banks provide unfunded credit protection in the form of bank guarantees. Annual limits are set by the parent bank for indirect exposure to third banks, but these are considered soft due to limited monitoring capabilities. A more systematic approach will be adopted under Basel II.

Governance and Reporting

Reports on single-name concentration risk are provided to senior management and regulatory authorities in Cyprus, as well as the parent bank in Greece. These reports are consistent across all entities. However, the management information system does not support automatic monitoring of limits, leading to manual checks and potential human error. Delays in limit approvals may result in the use of temporary limits.

Regulatory Environment

The large exposures regime is considered effective in addressing key risks, especially in the small and open Cypriot market. Current limits are satisfactory from a prudential and level playing field perspective. However, the regime may constrain business decisions, as it affects the ability to extend credit to certain clients, potentially leading to lost business opportunities and reduced profitability. The bank also notes that the current regulatory framework may not fully capture other concentration risks, such as sectoral, which could be significant given the economic structure of Cyprus.

Conclusion

The bank’s approach to concentration risk is primarily focused on single-name exposure, with limited consideration for other types of concentration risk. It follows the regulatory regime in Cyprus and the parent bank in Greece, and plans to adopt more comprehensive measures under Basel II. The governance structure ensures that risk monitoring and reporting are consistent across all levels, although current limitations in the management system may affect the effectiveness of these processes.