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Basel ii Accord
Section 285 to 305 |
2. Risk
components
(i)
Probability of default
(PD)
285.
For corporate and bank exposures, the PD is the
greater of the one-year PD
associated
with the internal borrower grade to which that
exposure is assigned, or 0.03%.
For
sovereign exposures, the PD is the one-year PD
associated with the internal
borrower
grade
to which that exposure is assigned.
The
PD of borrowers assigned to a default grade(s),
consistent with the reference definition of
default, is 100%. The minimum requirements for
the derivation of the PD estimates associated
with each internal borrower grade are outlined
in paragraphs 461 to 463.
(ii)
Loss given default (LGD)
286.
A bank must provide an estimate of the LGD for
each corporate, sovereign and
bank
exposure.
There are two approaches for deriving this
estimate: a foundation approach
and
an
advanced approach.
LGD
under the foundation
approach
Treatment
of unsecured claims and non-recognised
collateral
287.
Under the foundation approach, senior claims on
corporates, sovereigns and
banks
not
secured by recognised collateral will be
assigned a 45% LGD.
288.
All subordinated claims on corporates,
sovereigns and banks will be assigned
a
75%
LGD. A subordinated loan is a facility that is
expressly subordinated to another
facility.
At
national discretion, supervisors may choose to
employ a wider definition of
subordination.
This
might include economic subordination, such as
cases where the facility is
unsecured
and
the bulk of the borrower’s assets are used to
secure other exposures.
Collateral
under the foundation approach
289.
In addition to the eligible financial collateral
recognised in the standardised
approach,
under the foundation IRB approach some other
forms of collateral, known as
eligible
IRB collateral, are also recognised.
These
include receivables, specified commercial and
residential real estate (CRE/RRE), and other
collateral, where they meet the
minimum requirements set out
in paragraphs 509 to
524.
(73) For
eligible financial collateral, the
requirements
are identical to the operational standards as
set out in Section II.D beginning with paragraph
111.
(73) The Committee, however,
recognises that, in exceptional circumstances
for well-developed and longestablished markets,
mortgages on office and/or multi-purpose
commercial premises and/or multi-tenanted
commercial premises may have the potential to
receive alternative recognition as collateral in
the corporate portfolio.
Please refer to footnote 29
of paragraph 74 for a discussion of the
eligibility criteria that would apply. The LGD
applied to the collateralised portion of such
exposures, subject to the limitations set out in
paragraphs 119 to 181 (i) of the standardised
approach, will be set at 35%. The LGD applied to
the remaining portion of this exposure will be
set at 45%. In order to ensure consistency with
the capital charges in the standardised approach
(while providing a small capital incentive in
the IRB approach relative to the standardised
approach), supervisors may apply a cap on the
capital charge associated with such
exposures
so as to achieve comparable
treatment in both
approaches.
Methodology
for recognition of eligible financial collateral
under the foundation
approach
290.
The methodology for the recognition of eligible
financial collateral closely follows
that
outlined
in the comprehensive approach to collateral in
the standardised approach in
paragraphs
147 to 181 (i). The simple approach to
collateral presented in the
standardised
approach
will not be available to banks applying the IRB
approach.
291.
Following the comprehensive approach, the
effective loss given default
(LGD*)
applicable
to a collateralised transaction can be expressed
as follows, where:
•
LGD
is that of the senior unsecured exposure before
recognition of collateral
(45%);
•
E is
the current value of the exposure (i.e. cash
lent or securities lent or
posted);
•
E* is
the exposure value after risk mitigation as
determined in paragraphs 147
to
150
of the standardised approach. This concept is
only used to calculate LGD*.
Banks
must continue to calculate EAD without taking
into account the presence of
any
collateral, unless otherwise
specified.
LGD*
= LGD x (E* / E)
292.
Banks that qualify for the foundation IRB
approach may calculate E* using any
of
the
ways specified under the comprehensive approach
for collateralised transactions
under
the
standardised approach.
293.
Where repo-style transactions are subject to a
master netting agreement, a
bank
may
choose not to recognise the netting effects in
calculating capital. Banks that want
to
recognise
the effect of master netting agreements on such
transactions for capital
purposes
must
satisfy the criteria provided in paragraph 173
and 174 of the standardised
approach.
The
bank must calculate E* in accordance with
paragraphs 176 and 177 or 178 to 181 (i)
and
equate
this to EAD. The impact of collateral on these
transactions may not be
reflected
through
an adjustment to LGD.
Carve
out from the comprehensive
approach
294.
As in the standardised approach, for
transactions where the conditions in
paragraph
170
are met, and in addition, the counterparty is a
core market participant as specified
in
paragraph
171, supervisors may choose not to apply the
haircuts specified under the
comprehensive
approach, but instead to apply a zero
H.
Methodology
for recognition of eligible IRB
collateral
295.
The methodology for determining the effective
LGD under the foundation
approach
for
cases where banks have taken eligible IRB
collateral to secure a corporate exposure
is
as
follows.
•
Exposures where the
minimum eligibility requirements are met, but
the ratio of the
current
value of the collateral received (C) to the
current value of the exposure (E)
is
below
a threshold level of C* (i.e. the required
minimum collateralisation level for
the
exposure)
would receive the appropriate LGD for unsecured
exposures or those
secured
by collateral which is not eligible financial
collateral or eligible IRB
collateral.
Exposures
where the ratio of C to E exceeds a second,
higher threshold level of C**
(i.e.
the required level of over-collateralisation for
full LGD recognition) would be
assigned
an LGD according to the following
table.
The
following table displays the applicable LGD and
required over-collateralisation levels
for
the
secured parts of senior
exposures:
Senior
exposures are to be divided into fully
collateralised and
uncollateralised
portions.
•
The
part of the exposure considered to be fully
collateralised, C/C**, receives
the
LGD
associated with the type of
collateral.
•
The
remaining part of the exposure is regarded as
unsecured and receives an
LGD
of
45%.
(74)
Other collateral excludes physical assets
acquired by the bank as a result of a loan
default.
Methodology
for the treatment of pools of
collateral
296.
The methodology for determining the effective
LGD of a transaction under the
foundation
approach where banks have taken both financial
collateral and other eligible
IRB
collateral
is aligned to the treatment in the standardised
approach and based on the following
guidance.
•
In
the case where a bank has obtained multiple
forms of CRM, it will be required
to
subdivide
the adjusted value of the exposure (after the
haircut for eligible financial
collateral)
into portions each covered by only one CRM type.
That is, the bank must
divide
the exposure into the portion covered by
eligible financial collateral,
the
portion
covered by receivables, the portion covered by
CRE/RRE collateral, a
portion
covered by other collateral, and an unsecured
portion, where relevant.
•
Where
the ratio of the sum of the value of CRE/RRE and
other collateral to the
reduced
exposure (after recognising the effect of
eligible financial collateral
and
receivables
collateral) is below the associated threshold
level (i.e. the minimum
degree
of collateralisation of the exposure), the
exposure would receive the
appropriate
unsecured LGD value of 45%.
The
risk-weighted assets for each fully secured
portion of exposure must be
calculated
separately.
LGD
under the advanced
approach
297.
Subject to certain additional minimum
requirements specified below,
supervisors
may
permit banks to use their own internal estimates
of LGD for corporate, sovereign
and
bank
exposures. LGD must be measured as the loss
given default as a percentage of
the
EAD.
Banks eligible for the IRB approach that are
unable to meet these additional minimum
requirements must utilise the foundation LGD
treatment described above.
298.
The minimum requirements for the derivation of
LGD estimates are outlined in
paragraphs
468 to 473.
Treatment
of certain repo-style
transactions
299.
Banks that want to recognise the effects of
master netting agreements on
repo-style
transactions
for capital purposes must apply the methodology
outlined in paragraph 293 for
determining
E* for use as the EAD. For banks using the
advanced approach, own LGD
estimates
would be permitted for the unsecured equivalent
amount (E*).
Treatment
of guarantees and credit
derivatives
300.
There are two approaches for recognition of CRM
in the form of guarantees and
credit
derivatives in the IRB approach: a foundation
approach for banks using
supervisory
values
of LGD, and an advanced approach for those banks
using their own internal
estimates
of LGD.
301.
Under either approach, CRM in the form of
guarantees and credit derivatives
must
not
reflect the effect of double default (see
paragraph 482). As such, to the extent that
the
CRM
is recognised by the bank, the adjusted risk
weight will not be less than that of
a
comparable
direct exposure to the protection provider.
Consistent with the
standardised
approach,
banks may choose not to recognise credit
protection if doing so would result in
a
higher
capital requirement.
Recognition
under the foundation
approach
302.
For banks using the foundation approach for LGD,
the approach to guarantees and
credit
derivatives closely follows the treatment under
the standardised approach as
specified
in
paragraphs 189 to 201.
The
range of eligible guarantors is the same as
under the standardised approach except that
companies that are internally rated and
associated with a PD equivalent to A- or better
may also be recognised under the foundation
approach. To receive recognition, the
requirements outlined in paragraphs 189 to 194
must be met.
303.
Eligible guarantees from eligible guarantors
will be recognised as follows:
•
For
the covered portion of the exposure, a risk
weight is derived by
taking:
–
the risk-weight function appropriate to the type
of guarantor, and
–
the PD appropriate to the guarantor’s borrower
grade, or some grade
between
the underlying obligor and the guarantor’s
borrower grade if the
bank
deems a full substitution treatment not to be
warranted.
•
The
bank may replace the LGD of the underlying
transaction with the LGD
applicable
to the guarantee taking into account seniority
and any collateralisation of
a
guaranteed commitment.
304.
The uncovered portion of the exposure is
assigned the risk weight associated
with
the
underlying obligor.
305.
Where partial coverage exists, or where there is
a currency mismatch between the
underlying
obligation and the credit protection, it is
necessary to split the exposure into
a
covered
and an uncovered amount.
The
treatment in the foundation approach follows
that outlined in the standardised approach in
paragraphs 198 to 200, and depends upon whether
the cover is proportional or
tranched.
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