Relation between interconnectedness through control and interconnectedness through economic dependency

In the following scenario, the reporting institution has exposures to all entities shown in the diagram below. A controls A¹ and A² , B controls B¹ . Furthermore, B¹ is economically dependent on A² (one-way dependency):

Grouping requirement: In this scenario, the reporting institution should come to the conclusion that B¹ is in any case to be included in the group of connected clients of A (the group thus consisting of A, A¹ , A² and B¹ ) as well as of B (the group thus consisting of B and B¹ ):

In case of financial problems for A, A² and ultimately B¹ will also experience financial difficulties on account of their legal (A² ) and economic (B¹ ) dependency respectively. The forming of three different groups (A + A¹ + A² , A² + B¹ , B + B¹ ) would not be sufficient to capture the risk stemming from A, because B¹ , although dependent on A² and thus on A itself, would be carved out of the single risk of group A.

Scenario C/E 2: Combined occurrence of control and economic dependency (two-way

In this scenario, the economic dependency of A² and B¹ is not only one way but mutual: Grouping requirement: A² would need to be included additionally in group B, and B¹ would need to be included additionally in group A:

In a variation on scenario C/E 1 above, B¹ also controls two entities (B² and B³ ). In this case, the financial difficulties of A will pass through A² and B¹ down to the two subsidiaries of B¹ (‘downstream contagion’).

Grouping requirement:

The control relationship between B and B¹ does not automatically lead to including B in the group of connected clients of A, as financial problems for A are not likely to result in financial difficulties for B. However, the controlling entity B needs to be included in the group of A if B¹ forms such an important part of group B that B is economically dependent on B¹ . In this case, the financial difficulties of A will proceed not only downwards but also upwards to B, causing payment difficulties for B (i.e. all entities now form a single risk).

Grouping requirement: