Related party exposure limits

Background

Section 36 of the Non-bank Deposit Takers Act 2013 provides that regulations may be made imposing a requirement on trustees and licensed NBDTs to ensure their trust deeds include a maximum limit on exposures to related parties.

Related party lending (sometimes referred to as connected exposures) refers to a licensed NBDT advancing funds to a person who is associated in some way to the NBDT. Such a person may be a director or employee of the licensed NBDT, a subsidiary, sister subsidiary or a shareholder. The full definition is in section 6 of the Act.

Having a limit on exposure to related parties reduces the ability for such related parties to extract benefits from the NBDT at the NBDT’s or its depositors’ expense. For example, it ensures that the minimum capital requirements are not undermined by owners borrowing back their capital investment.

Restrictions on related party exposures

The Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 require a limit on aggregate credit exposures of the licensed NBDT, or the borrowing group, to all related parties to be specified in the trust deed. The regulations state that related party exposures should not exceed a maximum limit of 15 percent of capital.