17. The large exposure limits presently applied in most countries are generally expressed in terms of the lending bank's capital. A sensible standardisation of approach would mean relating limits to the total capital base as defined in the Basle framework. If so, this would automatically imply some adjustment to existing limits - for example, in some countries the present limit is expressed as a percentage of what is effectively tier 1 capital. An equivalent limit in terms of total capital would obviously be somewhat lower.
18. Limits for single exposures now generally fall within the range 10-40% of total capital but 25% would seem to be a desirable target for an upper limit to be achieved as soon as practicable by those countries currently using higher limits. Anything below 10% would not seem realistic in the light of many banks' present portfolios. Anything above 25% would imply a relaxation of present supervisory constraints in most countries.
19. A number of counterparties may deserve higher exposure limits than the norm. In many countries, exposure vis-à-vis the domestic government would be exempt altogether from limits and exposures to other governments may have a higher limit, depending on perceived creditworthiness. In many cases, special rules would also be appropriate for public-sector entities below the level of central government. Short-term exposures to bank counterparties (including multilateral development banks) would also normally be subject to less restrictive limits.
20. In all cases, whatever the limits applied, there is merit in having a reporting threshold somewhat below the maximum limit (e.g. at 10% of capital). The supervisor can then devote particular attention to those exposures above the threshold and approaching the limits and may, if judged desirable, require banks to take preventive action before the exposure becomes excessively risky. In countries that do not have credit information exchange systems, which make available comparable information to the supervisory authorities, it may also be useful to require banks to report their largest exposures, regardless of whether or not they exceed the thresholds or limits set. Quite apart from providing a useful measure of the quality of the loan portfolio, reporting the most significant exposures enables the supervisor to form a judgement about possible linked exposures. More generally, notification before the limit is reached can be helpful in conveying the message that the limit is just that, not to be exceeded except in exceptional circumstances and only with the supervisor's express approval.
21. Special attention needs to be paid to loans to "connected" counterparties (i.e. those connected to the lending bank). In small banks, in particular, loans to directors and other insiders can be a significant part of the loan-book. Other forms of "connected" exposure are loans to affiliates or sister companies and loans to shareholders or owners. These types of loan can lead to conflicts of interest and in certain circumstances to dangerous leveraging within a group of companies. In many countries such loans are either forbidden or deducted from the capital of the lending bank. Where such connected loans are permitted, supervisory authorities would generally impose limits considerably lower than those applying to other borrowers unless, in certain circumstances, such exposures are collateralised to the supervisor's satisfaction. Moreover, it would be wise to impose a relatively tight constraint on the aggregate of such exposures, the precise level depending on national and local circumstances.
