8. Control and management procedures for identifying connected clients

Institutions should have a thorough knowledge of their clients and their clients’ relationships. Institutions should also ensure that their staff understand and apply these guidelines.

Identification of possible connections among clients should be an integral part of an institution’s credit granting and surveillance process. The management body and senior management should ensure that adequate processes for the identification of connections among clients are documented and implemented.

Institutions should identify all control relationships among their clients and document as appropriate. Institutions should also investigate, and document as appropriate, any potential economic dependencies among their clients. Institutions should take reasonable steps and use readily available information to identify these connections. If, for example, an institution becomes aware that clients have been considered interconnected by another institution (e.g. because of the existence of a public register), it should take into account that information.

The efforts that institutions put into the investigation of economic dependencies among their clients should be proportionate to the size of the exposures. Therefore, institutions should strengthen their investigations, by extensive research of any type of ‘soft information’ as well as information that goes beyond the institutions’ clients, in all cases where the sum of all exposures to one individual client exceeds 5% of Tier 1 capital.¹³

¹³ The threshold refers to the institution’s Tier 1 capital for the purposes of applying these guidelines on an individual basis. The threshold refers to the Tier 1 capital of the group of the institution for the purposes of applying these guidelines on a subconsolidated or consolidated basis.

To assess grouping requirements based on a combination of control and economic dependency relationships, institutions should collect information on all entities forming a chain of contagion. Institutions might not be able to identify all clients that constitute a single risk if there are interconnections that stem from entities that are not in a business relationship with the institution and are therefore unknown to the institution (see scenario Mm 1 in the annex). However, if an institution becomes aware of interconnections via entities outside its clientele, it should use this information when assessing connections.

Control and management procedures for identifying connected clients should be subject to periodic review to ensure their appropriateness. Institutions should also monitor changes to interconnections, at least in the context of their periodic loan reviews and when a substantial increase to a loan is planned.