Supervision of Groups: Case Study Keith Pooley Workshop on Cross-Border Supervision and Consolidated Supervision June 2-4, 2015 Beirut, Lebanon

Middle East Bank Group The group is being formed from a number of existing companies and will be subject to consolidated supervision for the first time. You are the supervisor of the group. Based on the details of the group that you have received (see below), you should: define the scope of the banking group for consolidated supervision purposes; summarise your view of the group and any supervisory issues, including: whether the group has adequate capital at the group level; the extent of intra-group exposures and potential risk concentrations; and whether the group’s governance and controls are adequate. list the main supervisory work you would expect to undertake on the group over the next year.

Jordan Holdings Group Jordan Industries MEB Holdings Jordan Motors The Group consists of: A holding company – with no business (it exists only to hold the shares of the operating companies in the Group) A financial services sub-group including: Two banks: Middle East Bank, a full service bank with branches across the country AB Bank, a specialist corporate lending business based in the capital MEB Consumer Loans and MEB Mortgages, that are both unregulated. They lend to retail customers and do not take deposits. MEB Consumer Loans and MEB Mortgages are partly funded by Middle East Bank, which also provides some funding to AB Bank AB Bank has 25% and 40% investments respectively in AB (Corporate Finance) and AB (Derivatives) Two non-financial companies: Jordan Motors, a large motor manufacturing company and Jordan Trading, which is a medium sized trading house involved in import/export business in a wide range of goods and services Jordan Industries MEB Holdings Jordan Motors Middle East Bank AB Bank Jordan Trading 25% 40% MEB Consumer loans AB Corporate Finance AB Derivatives MEB mortgages

Middle East Bank Group Middle East Bank provides significant funding for the group companies - both the financial services businesses (AB Bank, MEB Consumer Loans and MEB Mortgages) and the non-financial companies (Jordan Motors and Jordan Trading). AB Bank on-lends to AB Corporate Finance and AB Derivatives Both Middle East Bank and AB Bank have boards of directors, which comprise the chief executive (CEO) of each bank, 3 representatives of the shareholders (Jordan Industries) and one independent director (the same one on each bank board). AB Bank has two appointees on the board of AB Corporate Finance and and three on the board of AB Derivatives There is also a group board and a chief executive and other senior managers at Jordan Industries. The Jordan Industries group has a centralized approach to management and key decisions are taken at group level. Finance and internal audit are provided at group level. The banks have their own risk management functions and credit committees, although decisions on larger credits are taken at the level of Jordan Industries. The same external auditing firm carries out audits on the whole group. While the banks and finance companies are profitable, the wider group is loss-making.  

Middle East Bank Group -175 -475 Middle East Bank AB Bank MEB Consumer MEB Mortgages -175 -475

Middle East Bank Group AB Bank (Egypt) Jordan Industries MEB Holdings international expansion The group has expanded outside Jordan by establishing a subsidiary of AB Bank in Egypt (see below). This new bank will be raising funding and seek lending opportunities for AB Bank in Egypt. The Central Bank of Egypt has agreed to grant the new bank a banking license. How would the establishment of this bank affect your approach to consolidated supervision? Would you include AB Bank (Egypt) in the banking group for the purposes of consolidated supervision? How would expect the new bank to affect the group’s capital adequacy etc.? How would you propose to change your supervisory program for next year to reflect the new foreign subsidiary? What would you expect to ask the Central Bank of Egypt? Jordan Industries MEB Holdings Jordan Motors Middle East Bank AB Bank Jordan Trading 25% 40% MEB Consumer loans AB Corporate Finance AB Derivatives MEB mortgages AB Bank (Egypt)