|
2. Risk
components
359.
In general, the measure of an equity exposure on
which capital requirements is
based
is the value presented in the financial
statements, which depending on
national
accounting
and regulatory practices may include unrealised
revaluation gains. Thus, for
example,
equity exposure measures will
be:
•
For
investments held at fair value with changes in
value flowing directly
through
income
and into regulatory capital, exposure is equal
to the fair value presented in
the
balance sheet.
•
For
investments held at fair value with changes in
value not flowing through
income
but
into a tax-adjusted separate component of
equity, exposure is equal to the
fair
value
presented in the balance sheet.
•
For
investments held at cost or at the lower of cost
or market, exposure is equal
to
the cost or market
value presented in the balance sheet.
(82)
(82)
This does not affect the existing allowance of
45% of unrealised gains to Tier 2 capital in the
1988 Accord.
360.
Holdings in funds containing both equity
investments and other non-equity types
of
investments
can be either treated, in a consistent manner,
as a single investment based on
the
majority of the fund’s holdings or, where
possible, as separate and distinct investments
in
the
fund’s component holdings based on a
look-through approach.
361.
Where only the investment mandate of the fund is
known, the fund can still be
treated
as a single investment. For this purpose, it is
assumed that the fund first invests,
to
the
maximum extent allowed under its mandate, in the
asset classes attracting the
highest
capital
requirement, and then continues making
investments in descending order until
the
maximum
total investment level is reached. The same
approach can also be used for
the
look-through
approach, but only where the bank has rated all
the potential constituents of
such
a fund.
F. Rules
for Purchased
Receivables
362.
Section F presents the method of calculating the
UL capital requirements for
purchased
receivables. For such assets, there are IRB
capital charges for both default
risk
and
dilution risk. Section III.F.1 discusses the
calculation of risk-weighted assets for
default
risk.
The calculation of risk-weighted assets for
dilution risk is provided in Section
III.F.2.
The
method of calculating expected losses, and for
determining the difference between
that
measure
and provisions, is described in Section
III.G.
1.
Risk-weighted assets for default
risk
363.
For receivables belonging unambiguously to one
asset class, the IRB risk weight
for
default
risk is based on the risk-weight function
applicable to that particular exposure type, as
long as the bank can meet the qualification
standards for this particular risk-weight
function. For example, if banks cannot comply
with the standards for qualifying revolving
retail exposures (defined in paragraph 234),
they should use the risk-weight function for
other retail exposures. For hybrid pools
containing mixtures of exposure types, if the
purchasing bank cannot separate the exposures by
type, the risk-weight function producing the
highest capital requirements for the exposure
types in the receivable pool
applies.
(i)
Purchased retail
receivables
364.
For purchased retail receivables, a bank must
meet the risk quantification
standards
for
retail exposures but can utilise external and
internal reference data to estimate the
PDs
and
LGDs. The estimates for PD and LGD (or EL) must
be calculated for the receivables
on
a
stand-alone basis; that is, without regard to
any assumption of recourse or guarantees
from
the
seller or other parties.
(ii)
Purchased corporate
receivables
365.
For purchased corporate receivables the
purchasing bank is expected to apply
the
existing
IRB risk quantification standards for the
bottom-up approach. However, for
eligible
purchased
corporate receivables, and subject to
supervisory permission, a bank may
employ
the
following top-down procedure for calculating IRB
risk weights for default risk:
•
The
purchasing bank will estimate the pool’s
one-year EL for default risk,
expressed
in
percentage of the exposure amount (i.e. the
total EAD amount to the bank by
all
obligors
in the receivables pool). The estimated EL must
be calculated for the
receivables
on a stand-alone basis; that is, without regard
to any assumption of
recourse
or guarantees from the seller or other parties.
The treatment of recourse or
guarantees
covering default risk (and/or dilution risk) is
discussed separately below.
•
Given
the EL estimate for the pool’s default losses,
the risk weight for default risk
is
determined by the
risk-weight function for corporate
exposures.
(83) As
described
below,
the precise calculation of risk weights for
default risk depends on the
bank’s
ability
to decompose EL into its PD and LGD components
in a reliable manner.
Banks
can utilise external and internal data to
estimate PDs and LGDs. However,
the
advanced approach will not be available for
banks that use the foundation
approach for
corporate exposures.
(83) The firm-size adjustment for
SME, as defined in paragraph 273, will be the
weighted average by individual exposure of the
pool of purchased corporate receivables. If the
bank does not have the information to calculate
the average size of the pool, the firm-size
adjustment will not
apply.
Foundation
IRB treatment
366.
If the purchasing bank is unable to decompose EL
into its PD and LGD components
in
a reliable manner, the risk weight is determined
from the corporate risk-weight
function
using
the following specifications: if the bank can
demonstrate that the exposures
are
exclusively
senior claims to corporate borrowers, an LGD of
45% can be used. PD will be
calculated
by dividing the EL using this LGD. EAD will be
calculated as the outstanding
amount minus the
capital charge for dilution prior to credit risk
mitigation (KDilution).
Otherwise, PD
is the bank’s estimate of EL; LGD will be 100%;
and EAD is the amount outstanding minus
KDilution. EAD for a revolving
purchase facility is the sum of the current
amount of receivables purchased plus 75% of any
undrawn purchase commitments minus
KDilution. If
the
purchasing bank is able to estimate PD in a
reliable manner, the risk weight is determined
from the corporate risk-weight functions
according to the specifications for LGD, M and
the treatment of guarantees under the foundation
approach as given in paragraphs 287 to 296, 299,
300 to 305, and 318.
Advanced
IRB treatment
367.
If the purchasing bank can estimate either the
pool’s default-weighted average
loss
rates
given default (as defined in paragraph 468) or
average PD in a reliable manner,
the
bank
may estimate the other parameter based on an
estimate of the expected long-run
loss
rate.
The
bank may (i) use an appropriate PD estimate to
infer the long-run
default-weighted
average
loss rate given default, or (ii) use a long-run
default-weighted average loss
rate
given
default to infer the appropriate PD. In either
case, it is important to recognise that
the
LGD
used for the IRB capital calculation for
purchased receivables cannot be less than
the
long-run
default-weighted average loss rate given default
and must be consistent with the
concepts
defined in paragraph 468.
The
risk weight for the purchased receivables will
be determined using the bank’s estimated PD and
LGD as inputs to the corporate risk-weight
function. Similar to the foundation IRB
treatment, EAD will be the amount outstanding
minus
KDilution. EAD for a revolving
purchase facility will be the sum of the current
amount of receivables purchased plus 75% of any
undrawn purchase commitments minus
KDilution (thus,
banks using the advanced IRB approach will not
be permitted to use their internal EAD estimates
for undrawn purchase
commitments).
368.
For drawn amounts, M will equal the pool’s
exposure-weighted average
effective
maturity
(as defined in paragraphs 320 to 324). This same
value of M will also be used
for
undrawn
amounts under a committed purchase facility
provided the facility contains effective
covenants, early amortisation triggers, or other
features that protect the purchasing bank
against a significant deterioration in the
quality of the future receivables it is required
to
purchase
over the facility’s term. Absent such effective
protections, the M for undrawn
amounts
will be calculated as the sum of (a) the
longest-dated potential receivable under
the
purchase
agreement and (b) the remaining maturity of the
purchase facility.
2.
Risk-weighted assets for dilution
risk
369.
Dilution refers to the possibility that the
receivable amount is reduced through
cash
or non-cash credits
to the receivable’s
obligor.
(84) For
both corporate and retail
receivables,
unless
the bank can demonstrate to its supervisor that
the dilution risk for the
purchasing
bank
is immaterial, the treatment of dilution risk
must be the following: at the level of
either
the
pool as a whole (top-down approach) or the
individual receivables making up the
pool
(bottom-up
approach), the purchasing bank will estimate the
one-year EL for dilution risk,
also
expressed in percentage of the receivables
amount.
Banks
can utilise external and internal data to
estimate EL. As with the treatments of default
risk, this estimate must be computed on a
stand-alone basis; that is, under the assumption
of no recourse or other support from the seller
or third-party guarantors.
For
the purpose of calculating risk weights for
dilution risk, the corporate risk-weight
function must be used with the following
settings: the PD must be set equal to the
estimated EL, and the LGD must be set at 100%.
An appropriate maturity treatment applies when
determining the capital requirement for dilution
risk. If a bank can demonstrate that the
dilution risk is appropriately monitored and
managed to be resolved within one year, the
supervisor may allow the bank to apply a
one-year maturity.
(84) Examples include offsets or
allowances arising from returns of goods sold,
disputes regarding product quality, possible
debts of the borrower to a receivables obligor,
and any payment or promotional discounts offered
by the borrower (e.g. a credit for cash payments
within 30 days).
370.
This treatment will be applied regardless of
whether the underlying receivables
are
corporate
or retail exposures, and regardless of whether
the risk weights for default risk
are
computed
using the standard IRB treatments or, for
corporate receivables, the
top-down
treatment
described above.
3.
Treatment of purchase price discounts for
receivables
371.
In many cases, the purchase price of receivables
will reflect a discount (not to
be
confused
with the discount concept defined in paragraphs
308 and 334) that provides
first
loss
protection for default losses, dilution losses
or both (see paragraph 629). To the extent
a
portion
of such a purchase price discount will be
refunded to the seller, this
refundable
amount
may be treated as first loss protection under
the IRB securitisation
framework.
Nonrefundable
purchase price discounts for receivables do not
affect either the EL-provision
calculation
in Section III.G or the calculation of
risk-weighted assets.
372.
When collateral or partial guarantees obtained
on receivables provide first loss protection
(collectively referred to as mitigants in this
paragraph), and these mitigants
cover
default
losses, dilution losses, or both, they may also
be treated as first loss protection
under
the
IRB securitisation framework (see paragraph
629). When the same mitigant covers
both
default
and dilution risk, banks using the Supervisory
Formula that are able to calculate
an
exposure-weighted
LGD must do so as defined in paragraph
634.
4.
Recognition of credit risk
mitigants
373.
Credit risk mitigants will be recognised
generally using the same type of
framework
as set forth in
paragraphs 300 to 307.
(85) In
particular, a guarantee provided by the seller
or a
third party will be treated using the existing
IRB rules for guarantees, regardless of whether
the guarantee covers default risk, dilution
risk, or both.
•
If
the guarantee covers both the pool’s default
risk and dilution risk, the bank
will
substitute
the risk weight for an exposure to the guarantor
in place of the pool’s total
risk
weight for default and dilution
risk.
•
If
the guarantee covers only default risk or
dilution risk, but not both, the bank
will
substitute
the risk weight for an exposure to the guarantor
in place of the pool’s risk
weight
for the corresponding risk component (default or
dilution). The capital
requirement
for the other component will then be
added.
•
If a
guarantee covers only a portion of the default
and/or dilution risk, the
uncovered
portion
of the default and/or dilution risk will be
treated as per the existing CRM
rules
for
proportional or tranched coverage (i.e. the risk
weights of the uncovered risk
components
will be added to the risk weights of the covered
risk components).
(85) At national supervisory
discretion, banks may recognise guarantors that
are internally rated and associated with a PD
equivalent to less than A- under the foundation
IRB approach for purposes of determining capital
requirements for dilution
risk.
373
(i). If protection against dilution risk has
been purchased, and the conditions
of
paragraphs
307 (i) and 307 (ii) are met, the double default
framework may be used for the
calculation
of the risk-weighted asset amount for dilution
risk.
In
this case, paragraphs 284 (i) to 284 (iii) apply
with PDo
being equal to
the estimated EL, LGDg
being
equal to 100 percent,
and effective maturity being set according to
paragraph 369.
G.
Treatment of Expected Losses and Recognition of
Provisions
374.
Section III.G discusses the method by which the
difference between provisions
(e.g.
specific
provisions, portfolio-specific general
provisions such as country risk provisions
or
general
provisions) and expected losses may be included
in or must be deducted from
regulatory
capital, as outlined in paragraph
43.
1.
Calculation of expected
losses
375.
A bank must sum the EL amount (defined as EL
multiplied by EAD) associated
with
its
exposures (excluding the EL amount associated
with equity exposures under the PD/LGD approach
and securitisation exposures) to obtain a total
EL amount. While the EL amount associated with
equity exposures subject to the PD/LGD approach
is excluded from the total EL amount, paragraphs
376 and 386 apply to such exposures. The
treatment of EL for securitisation exposures is
described in paragraph 563.
(i)
Expected loss for exposures other than SL
subject to the supervisory slotting
criteria
376.
Banks must calculate an EL as PD x LGD for
corporate, sovereign, bank, and
retail
exposures
both not in default and not treated as hedged
exposures under the double
default
treatment.
For corporate, sovereign, bank, and retail
exposures that are in default,
banks
must
use their best estimate of expected loss as
defined in paragraph 471 and banks on
the
foundation
approach must use the supervisory LGD.
For
SL exposures subject to the supervisory slotting
criteria EL is calculated as described in
paragraphs 377 and 378. For equity exposures
subject to the PD/LGD approach, the EL is
calculated as PD x LGD unless paragraphs 351 to
354 apply. Securitisation exposures do not
contribute to the EL amount, as set out in
paragraph 563. For all other exposures,
including hedged exposures under the double
default treatment, the EL is
zero.
|
