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Basel ii Accord
Sections 231 to 243 |
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(iv)
Definition of retail
exposures
231.
An exposure is categorised as a retail exposure
if it meets all of the
following
criteria:
Nature
of borrower or low value of individual
exposures
•
Exposures to
individuals — such as revolving credits and
lines of credit (e.g.
credit
cards,
overdrafts, and retail facilities secured by
financial instruments) as well
as
personal
term loans and leases (e.g. instalment loans,
auto loans and leases,
student
and educational loans, personal finance, and
other exposures with similar
characteristics)
— are generally eligible for retail treatment
regardless of exposure
size,
although supervisors may wish to establish
exposure thresholds to
distinguish
between
retail and corporate exposures.
•
Residential mortgage
loans (including first and subsequent liens,
term loans and
revolving
home equity lines of credit) are eligible for
retail treatment regardless of
exposure
size so long as the credit is extended to an
individual that is an
owneroccupier
of
the property (with the understanding that
supervisors exercise
reasonable
flexibility regarding buildings containing only
a few rental units ─
otherwise
they are treated as corporate).
Loans
secured by a single or small number of
condominium or co-operative residential housing
units in a single building or complex also fall
within the scope of the residential mortgage
category. National supervisors may set limits on
the maximum number of housing units per
exposure.
•
Loans
extended to small businesses and managed as
retail exposures are
eligible
for
retail treatment provided the total exposure of
the banking group to a small
business
borrower (on a consolidated basis where
applicable) is less than
€1
million. Small business loans extended through
or guaranteed by an individual
are
subject to the same exposure
threshold.
•
It is
expected that supervisors provide flexibility in
the practical application of
such
thresholds
such that banks are not forced to develop
extensive new information
systems
simply for the purpose of ensuring perfect
compliance. It is, however,
important
for supervisors to ensure that such flexibility
(and the implied acceptance
of
exposure amounts in excess of the thresholds
that are not treated as violations)
is
not
being abused.
Large
number of exposures
232.
The exposure must be one of a large pool of
exposures, which are managed by
the
bank
on a pooled basis. Supervisors may choose to set
a minimum number of exposures
within
a pool for exposures in that pool to be treated
as retail.
•
Small
business exposures below €1 million may be
treated as retail exposures if
the
bank
treats such exposures in its internal risk
management systems consistently
over
time and in the same manner as other retail
exposures. This requires that
such
an
exposure be originated in a similar manner to
other retail exposures.
Furthermore,
it must not be managed individually in a way
comparable to corporate
exposures,
but rather as part of a portfolio segment or
pool of exposures with similar
risk
characteristics for purposes of risk assessment
and quantification. However,
this
does
not preclude retail exposures from being treated
individually at some stages of
the
risk management process. The fact that an
exposure is rated individually
does
not
by itself deny the eligibility as a retail
exposure.
233.
Within the retail asset class category, banks
are required to identify separately
three
sub-classes
of exposures:
(a)
exposures secured by residential properties as
defined above,
(b)
qualifying revolving retail exposures, as
defined in the following paragraph, and
(c)
all other retail exposures.
(v)
Definition of qualifying revolving retail
exposures
234.
All of the following criteria must be satisfied
for a sub-portfolio to be treated as
a
qualifying
revolving retail exposure (QRRE). These criteria
must be applied at a sub-portfolio level
consistent with the bank’s segmentation of its
retail activities generally. Segmentation at the
national or country level (or below) should be
the general rule.
(a)
The exposures are revolving, unsecured, and
uncommitted (both contractually
and
in
practice). In this context, revolving exposures
are defined as those where
customers’
outstanding balances are permitted to fluctuate
based on their decisions
to
borrow and repay, up to a limit established by
the bank.
(b)
The exposures are to
individuals.
(c)
The maximum exposure to a single individual in
the sub-portfolio is €100,000
or
less.
(d)
Because the asset correlation assumptions for
the QRRE risk-weight function
are
markedly
below those for the other retail risk-weight
function at low PD values,
banks
must demonstrate that the use of the QRRE
risk-weight function is
constrained
to portfolios that have exhibited low volatility
of loss rates, relative to
their
average level of loss rates, especially within
the low PD bands. Supervisors
will
review
the relative volatility of loss rates across the
QRRE subportfolios, as well as
the
aggregate QRRE portfolio, and intend to share
information on the typical
characteristics
of QRRE loss rates across
jurisdictions.
(e)
Data on loss rates for the sub-portfolio must be
retained in order to allow analysis
of
the
volatility of loss rates.
(f)
The supervisor must concur that treatment as a
qualifying revolving retail
exposure
is
consistent with the underlying risk
characteristics of the
sub-portfolio.
(vi)
Definition of equity
exposures
235.
In general, equity exposures are defined on the
basis of the economic substance
of
the instrument. They
include both direct and indirect ownership
interests,
(59) whether voting
or
non-voting, in the assets and income of a
commercial enterprise or of a financial
institution that is not
consolidated or deducted pursuant to Part 1 of
this Framework.
(60)
An
instrument is
considered to be an equity exposure if it meets
all of the following
requirements:
•
It is
irredeemable in the sense that the return of
invested funds can be achieved
only
by
the sale of the investment or sale of the rights
to the investment or by the
liquidation
of the issuer;
•
It
does not embody an obligation on the part of the
issuer; and
•
It conveys a residual claim on the assets
or income of the
issuer.
(59) Indirect equity interests
include holdings of derivative instruments tied
to equity interests, and holdings in
corporations, partnerships, limited liability
companies or other types of enterprises that
issue ownership interests and are engaged
principally in the business of investing in
equity instruments.
(60) Where some member countries
retain their existing treatment as an exception
to the deduction approach, such equity
investments by IRB banks are to be considered
eligible for inclusion in their IRB equity
portfolios.
236.
Additionally any of the following instruments
must be categorised as an
equity
exposure:
•
An
instrument with the same structure as those
permitted as Tier 1 capital
for
banking
organisations.
•
An
instrument that embodies an obligation on the
part of the issuer and meets
any
of
the following conditions:
(1)
The issuer may defer indefinitely the settlement
of the obligation;
(2)
The obligation requires (or permits at the
issuer’s discretion) settlement
by
issuance
of a fixed number of the issuer’s equity
shares;
(3)
The obligation requires (or permits at the
issuer’s discretion) settlement
by
issuance
of a variable number of the issuer’s equity
shares and (ceteris
paribus)
any change in the value of the obligation is
attributable to,
comparable
to, and in the same direction as, the change in
the value of a
fixed number of the
issuer’s equity shares;
(61) or,
(4)
The holder has the option to require that the
obligation be settled in equity
shares,
unless either
(i)
in the case of a traded instrument, the
supervisor is
content
that the bank has demonstrated that the
instrument trades more
like
the debt of the issuer than like its equity,
or
(ii)
in the case of nontraded instruments, the
supervisor is content that the bank
has
demonstrated
that the instrument should be treated as a debt
position.
In
cases (i) and (ii), the bank may decompose the
risks for regulatory purposes, with the consent
of the supervisor.
(61) For certain obligations that
require or permit settlement by issuance of a
variable number of the issuer’s equity shares,
the change in the monetary value of the
obligation is equal to the change in the fair
value of a fixed number of equity shares
multiplied by a specified factor.
Those obligations meet the
conditions of item 3 if both the factor and the
referenced number of shares are fixed. For
example, an issuer may be required to settle an
obligation by issuing shares with a value equal
to three times the appreciation in the fair
value of 1,000 equity shares. That obligation is
considered to be the same as an obligation that
requires settlement by issuance of shares equal
to the appreciation in the fair value of 3,000
equity shares.
237.
Debt obligations and other securities,
partnerships, derivatives or other
vehicles
structured
with the intent of conveying the economic
substance of equity ownership
are
considered an equity
holding.
(62) This
includes liabilities from which the return is
linked to that of equities.
(63) Conversely, equity
investments that are structured with the intent
of conveying
the economic substance of debt holdings or
securitisation exposures would not
be
considered
an equity holding.
(62) Equities that are recorded as
a loan but arise from a debt/equity swap made as
part of the orderly realisation or restructuring
of the debt are included in the definition of
equity holdings. However, these instruments may
not attract a lower capital charge than would
apply if the holdings remained in the debt
portfolio.
(63) Supervisors may decide not to
require that such liabilities be included where
they are directly hedged by an equity holding,
such that the net position does not involve material
risk.
238.
The national supervisor has the discretion to
re-characterise debt holdings
as
equities
for regulatory purposes and to otherwise ensure
the proper treatment of
holdings
under
Pillar 2.
(vii)
Definition of eligible purchased
receivables
239.
Eligible purchased receivables are divided into
retail and corporate receivables
as
defined
below.
Retail
receivables
240.
Purchased retail receivables, provided the
purchasing bank complies with the
IRB
rules
for retail exposures, are eligible for the
top-down approach as permitted within
the
existing
standards for retail exposures. The bank must
also apply the minimum
operational
requirements
as set forth in Sections III.F and
III.H.
Corporate
receivables
241.
In general, for purchased corporate receivables,
banks are expected to assess
the
default
risk of individual obligors as specified in
Section III.C.1 (starting with paragraph
271)
consistent
with the treatment of other corporate exposures.
However, the top-down approach
may
be used, provided that the purchasing bank’s
programme for corporate
receivables
complies
with both the criteria for eligible receivables
and the minimum operational
requirements
of this approach.
The
use of the top-down purchased receivables
treatment is limited to situations where it
would be an undue burden on a bank to be
subjected to the minimum requirements for the
IRB approach to corporate exposures that would
otherwise apply.
Primarily,
it is intended for receivables that are
purchased for inclusion in assetbacked
securitisation structures, but banks may also
use this approach, with the approval of
pervisors, for appropriate on-balance sheet
exposures that share the same
features.
242.
Supervisors may deny the use of the top-down
approach for purchased
corporate
receivables
depending on the bank’s compliance with minimum
requirements. In particular,
to
be eligible for the proposed ‘top-down’
treatment, purchased corporate receivables
must
satisfy
the following conditions:
The
receivables are purchased from unrelated, third
party sellers, and as such the
bank
has not originated the receivables either
directly or indirectly.
•
The
receivables must be generated on an arm’s-length
basis between the seller
and
the
obligor. (As such, intercompany accounts
receivable and receivables subject
to
contra-accounts
between firms that buy and sell to each other
are ineligible.64)
•
The
purchasing bank has a claim on all proceeds from
the pool of receivables or
a
pro-rata
interest in the
proceeds.65
•
National
supervisors must also establish concentration
limits above which capital
charges
must be calculated using the minimum
requirements for the bottom-up
approach
for corporate exposures. Such concentration
limits may refer to one or a
combination
of the following measures: the size of one
individual exposure relative
to
the total pool, the size of the pool of
receivables as a percentage of
regulatory
capital,
or the maximum size of an individual exposure in
the pool.
(64) Contra-accounts involve a
customer buying from and selling to the same
firm. The risk is that debts may be settled
through payments in kind rather than cash.
Invoices between the companies may be offset
against each other instead of being paid. This
practice can defeat a security interest when
challenged in court.
(65) Claims on tranches of the
proceeds (first loss position, second loss
position, etc.) would fall under the
securitisation
treatment.
243.
The existence of full or partial recourse to the
seller does not automatically
disqualify
a
bank from adopting this top-down
approach, as long as the cash flows from the
purchased
corporate
receivables are the primary protection against
default risk as determined by
the
rules
in paragraphs 365 to 368 for purchased
receivables and the bank meets the
eligibility
criteria
and operational
requirements.
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