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Basel ii Accord 109
to 128 |
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D. The standardised
approach ─ credit risk
mitigation
1.
Overarching
issues
(i)
Introduction
109.
Banks use a number of techniques to mitigate the
credit risks to which they are
exposed.
For example, exposures may be collateralised by
first priority claims, in whole or
in
part
with cash or securities, a loan exposure may be
guaranteed by a third party, or a
bank
may
buy a credit derivative to offset various forms
of credit risk.
Additionally
banks may agree to net loans owed to them
against deposits from the same
counterparty.
110.
Where these techniques meet the requirements for
legal certainty as described in
paragraph
117 and 118 below, the revised approach to CRM
allows a wider range of credit
risk
mitigants to be recognised for regulatory
capital purposes than is permitted under
the
1988
Accord.
(ii)
General remarks
111.
The framework set out in this Section II is
applicable to the banking book
exposures
in
the standardised approach.
For
the treatment of CRM in the IRB approach, see
Section III.
112.
The comprehensive approach for the treatment of
collateral (see paragraphs 130
to
138
and 145 to 181) will also be applied to
calculate the counterparty risk charges for
OTC
derivatives
and repo-style transactions booked in the
trading book.
113.
No transaction in which CRM techniques are used
should receive a higher capital
requirement
than an otherwise identical transaction where
such techniques are not used.
114.
The effects of CRM will not be double counted.
Therefore, no additional
supervisory
recognition
of CRM for regulatory capital purposes will be
granted on claims for which an
issue-specific
rating is used that already reflects that CRM.
As
stated in paragraph 100 of the section on the
standardised approach, principal-only ratings
will also not be allowed within the framework of
CRM.
115.
While the use of CRM techniques reduces or
transfers credit risk, it
simultaneously
may
increase other risks (residual risks). Residual
risks include legal, operational,
liquidity
and
market risks.
Therefore,
it is imperative that banks employ robust
procedures and processes to control these risks,
including strategy; consideration of the
underlying credit; valuation; policies and
procedures; systems; control of roll-off risks;
and management of concentration risk arising
from the bank’s use of CRM techniques and its
interaction with the bank’s overall credit risk
profile.
Where
these risks are not adequately controlled,
supervisors may impose additional capital
charges or take other supervisory actions as
outlined in Pillar 2.
116.
The Pillar 3 requirements must also be observed
for banks to obtain capital relief
in
respect
of any CRM techniques.
(iii)
Legal certainty
117.
In order for banks to obtain capital relief for
any use of CRM techniques, the
following
minimum standards for legal documentation must
be met.
118.
All documentation used in collateralised
transactions and for documenting
onbalance
sheet
netting, guarantees and credit derivatives must
be binding on all parties and
legally
enforceable in all relevant jurisdictions.
Banks
must have conducted sufficient legal review to
verify this and have a well founded legal basis
to reach this conclusion, and undertake such
further review as necessary to ensure continuing
enforceability.
2. Overview of Credit
Risk Mitigation
Techniques
(38)
(i)
Collateralised
transactions
(38) See Annex 10 for an overview
of methodologies for the capital treatment of
transactions secured by
financial
collateral under the standardised
and IRB
approaches.
119.
A collateralised transaction is one in
which:
•
banks
have a credit exposure or potential credit
exposure; and
•
that
credit exposure or potential credit exposure is
hedged in whole or in part
by
collateral posted by
a counterparty
(39) or by a
third party on behalf of the
counterparty.
39 In this section “counterparty”
is used to denote a party to whom a bank has an
on- or off-balance sheet credit exposure or a
potential credit exposure. That exposure may,
for example, take the form of a loan of cash or
securities (where the counterparty would
traditionally be called the borrower), of
securities posted as collateral, of a commitment
or of exposure under an OTC derivatives
contract.
120.
Where banks take eligible financial collateral
(e.g. cash or securities, more
specifically
defined in paragraphs 145 and 146 below), they
are allowed to reduce their
credit
exposure
to a counterparty when calculating their capital
requirements to take account of the risk
mitigating effect of the
collateral.
Overall
framework and minimum
conditions
121.
Banks may opt for either the simple approach,
which, similar to the 1988
Accord,
substitutes
the risk weighting of the collateral for the
risk weighting of the counterparty for the
collateralised portion of the exposure
(generally subject to a 20% floor), or for
the
comprehensive
approach, which allows fuller offset of
collateral against exposures,
by
effectively
reducing the exposure amount by the value
ascribed to the collateral.
Banks
may operate under either, but not both,
approaches in the banking book, but only under
the comprehensive approach in the trading book.
Partial collateralisation is recognised in both
approaches. Mismatches in the maturity of the
underlying exposure and the collateral will only
be allowed under the comprehensive
approach.
122.
However, before capital relief will be granted
in respect of any form of collateral,
the
standards
set out below in paragraphs 123 to 126 must be
met under either approach.
123.
In addition to the general requirements for
legal certainty set out in paragraphs
117
and
118, the legal mechanism by which collateral is
pledged or transferred must ensure
that
the
bank has the right to liquidate or take legal
possession of it, in a timely manner, in
the
event
of the default, insolvency or bankruptcy (or one
or more otherwise-defined
credit
events
set out in the transaction documentation) of the
counterparty (and, where
applicable,
of
the custodian holding the collateral).
Furthermore
banks must take all steps necessary to fulfil
those requirements under the law applicable to
the bank’s interest in the collateral for
obtaining and maintaining an enforceable
security interest, e.g. by registering it with a
registrar, or for exercising a right to net or
set off in relation to title transfer
collateral.
124.
In order for collateral to provide protection,
the credit quality of the counterparty
and
the
value of the collateral must not have a material
positive correlation. For example,
securities
issued by the counterparty ─ or by any related
group entity ─ would provide
little
protection
and so would be ineligible.
125.
Banks must have clear and robust procedures for
the timely liquidation of
collateral
to
ensure that any legal conditions required for
declaring the default of the counterparty
and
liquidating
the collateral are observed, and that collateral
can be liquidated promptly.
126.
Where the collateral is held by a custodian,
banks must take reasonable steps
to
ensure
that the custodian segregates the collateral
from its own assets.
127.
A capital requirement will be applied to a bank
on either side of the
collateralised
transaction:
for example, both repos and reverse repos will
be subject to capital requirements. Likewise,
both sides of a securities lending and borrowing
transaction will be
subject
to explicit capital charges, as will the posting
of securities in connection with
a
derivative
exposure or other borrowing.
128.
Where a bank, acting as an agent, arranges a
repo-style transaction (i.e. repurchase/reverse
repurchase and securities lending/borrowing
transactions) between
a
customer and a third party and provides a
guarantee to the customer that the third
party
will
perform on its obligations, then the risk to the
bank is the same as if the bank
had
entered
into the transaction as a principal. In such
circumstances, a bank will be required
to
calculate
capital requirements as if it were itself the
principal.
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