“The policy in the statement must be such that it covers how the bank controls its exposures to ensure compliance with its large exposure limits, and the reporting to the FSA of its large exposures.”
Guido wonders how UTB’s policy statement must read. Guido imagines it is something like “We decided to risk lending a quarter of our shareholder capital to one borrower after the borrower’s chief fundraiser was arrested, their income collapsed and their unpopular CEO himself became the target of a police investigation into the illegal sale of honours for cash. We were reassured of the wisdom of this lending when they made their remaining and so far un-arrested fundraisers redundant. We’ll let you know if they arrest any more of our borrower’s employees.”
A bank should maintain an additional capital requirement to reflect the additional risks arising from concentration of credit exposures.
Guido wonders about the decision-making process governing this loan. In many countries this transaction would be illegal, concentrating so much risk with one borrower is bad because if that borrower fails it could pull the bank under. It certainly should worry charity trustees who as clients of the bank have a duty to consider such risks. The FSA classes charities as “vulnerable clients” and is obliged to take special care in such cases.
The bank’s internal Risk Review and Audit committees should, if procedure has been followed properly, have reviewed the risks. Internally independent appraisal of the risk management is the responsibility of Internal Audit, externally the ultimate holding organisation, Co-operative Group (CWS) Limited, through the Co-operative Group Audit & Risk Committee has responsibility. Awkwardly the Co-Op themselves have a significant exposure (£13.5m) to the risk of the Labour Party defaulting. They have appointed KPMG to carry out the audit.
If this loan has been made under political pressure from a desperate Labour party rather than in accordance with the proper commerical procedures it raises serious questions. Any potential whistleblowers* who believe that UTB has failed to follow procedure will be protected by policies designed to encourage reporting of serious malpractice.
*Guido’s server records show he gained new readers from the FSA and the Bank of England yesterday. Totty fans obviously…< /span>