|
|
|
|
|
|
Basel ii Accord
Sections 377 to 421 |
(ii)
Expected loss for SL exposures subject to the
supervisory slotting
criteria
377.
For SL exposures subject to the supervisory
slotting criteria, the EL amount
is
determined
by multiplying 8% by the risk-weighted assets
produced from the appropriate risk weights, as
specified below, multiplied by
EAD.
Supervisory
categories and EL risk weights for other SL
exposures
378.
The risk weights for SL, other than HVCRE, are
as follows:
Where,
at national discretion, supervisors allow banks
to assign preferential risk weights
to
other
SL exposures falling into the “strong” and
“good” supervisory categories as outlined
in
paragraph
277, the corresponding EL risk weight is 0% for
“strong” exposures, and 5% for
“good”
exposures.
Supervisory
categories and EL risk weights for
HVCRE
379.
The risk weights for HVCRE are as
follows:
Even
where, at national discretion, supervisors allow
banks to assign preferential
risk
weights
to HVCRE exposures falling into the “strong” and
“good” supervisory categories
as
outlined
in paragraph 282, the corresponding EL risk
weight will remain at 5% for
both
“strong”
and “good” exposures.
2.
Calculation of
provisions
(i)
Exposures subject to IRB
approach
380.
Total eligible provisions are defined as the sum
of all provisions (e.g.
specific
provisions,
partial write-offs, portfolio-specific general
provisions such as country risk
provisions
or general provisions) that are attributed to
exposures treated under the IRB
approach.
In addition, total eligible provisions may
include any discounts on defaulted
assets.
Specific
provisions set aside against equity and
securitisation exposures must not
be
included
in total eligible provisions.
(ii)
Portion of exposures subject to the standardised
approach to credit risk
381.
Banks using the standardised approach for a
portion of their credit risk
exposures,
either
on a transitional basis (as defined in
paragraphs 257 and 258), or on a
permanent
basis
if the exposures subject to the standardised
approach are immaterial (paragraph
259),
must
determine the portion of general provisions
attributed to the standardised or
IRB
treatment
of provisions (see paragraph 42) according to
the methods outlined in
paragraphs
382
and 383.
382.
Banks should generally attribute total general
provisions on a pro rata basis
according
to the proportion of credit risk-weighted assets
subject to the standardised and IRB approaches.
However, when one approach to determining credit
risk-weighted assets (i.e. standardised or IRB
approach) is used exclusively within an entity,
general provisions
booked
within the entity using the standardised
approach may be attributed to
the
standardised
treatment. Similarly, general provisions booked
within entities using the IRB
approach
may be attributed to the total eligible
provisions as defined in paragraph
380.
383.
At national supervisory discretion, banks using
both the standardised and IRB
approaches
may rely on their internal methods for
allocating general provisions
for
recognition
in capital under either the standardised or IRB
approach, subject to the
following
conditions.
Where the internal allocation method is made
available, the national
supervisor
will
establish the standards surrounding their use.
Banks will need to obtain prior
approval
from
their supervisors to use an internal allocation
method for this purpose.
3.
Treatment of EL and
provisions
384.
As specified in paragraph 43, banks using the
IRB approach must compare the
total
amount
of total eligible provisions (as defined in
paragraph 380) with the total EL amount
as
calculated
within the IRB approach (as defined in paragraph
375). In addition, paragraph 42
outlines
the treatment for that portion of a bank that is
subject to the standardised
approach
to
credit risk when the bank uses both the
standardised and IRB
approaches.
385.
Where the calculated EL amount is lower than the
provisions of the bank, its
supervisors
must consider whether the EL fully reflects the
conditions in the market in
which
it
operates before allowing the difference to be
included in Tier 2 capital. If specific
provisions exceed the EL amount on defaulted
assets this assessment also needs to be made
before using the difference to offset the EL
amount on non-defaulted assets.
386.
The EL amount for equity exposures under the
PD/LGD approach is deducted 50%
from
Tier 1 and 50% from Tier 2. Provisions or
write-offs for equity exposures under
the
PD/LGD
approach will not be used in the EL-provision
calculation. The treatment of EL and provisions
related to securitisation exposures is outlined
in paragraph 563.
H.
Minimum Requirements for IRB
Approach
387.
Section III.H presents the minimum requirements
for entry and on-going use of
the
IRB
approach. The minimum requirements are set out
in 12 separate sections
concerning:
(a)
composition of minimum requirements,
(b)
compliance with minimum requirements,
(c)
rating system design,
(d)
risk rating system operations,
(e)
corporate governance and oversight,
(f)
use of internal ratings,
(g)
risk quantification,
(h)
validation of internal estimates,
(i)
supervisory LGD and EAD estimates,
(j)
requirements for recognition of leasing,
(k)
calculation of capital charges for equity
exposures, and
(l)
disclosure requirements.
It
may be helpful to note that the minimum
requirements cut across asset classes.
Therefore, more than one asset class may be
discussed within the context of a given minimum
requirement.
1.
Composition of minimum
requirements
388.
To be eligible for the IRB approach a bank must
demonstrate to its supervisor that
it
meets
certain minimum requirements at the outset and
on an ongoing basis. Many of
these
requirements
are in the form of objectives that a qualifying
bank’s risk rating systems must
fulfil.
The focus is on banks’ abilities to rank order
and quantify risk in a consistent,
reliable
and
valid fashion.
389.
The overarching principle behind these
requirements is that rating and
risk
estimation
systems and processes provide for a meaningful
assessment of borrower and
transaction
characteristics; a meaningful differentiation of
risk; and reasonably accurate
and
consistent
quantitative estimates of risk. Furthermore, the
systems and processes must be
consistent
with internal use of these estimates.
The
Committee recognises that differences in
markets, rating methodologies, banking products,
and practices require banks and supervisors to
customise their operational procedures. It is
not the Committee’s intention to dictate the
form or operational detail of banks’ risk
management policies and practices. Each
supervisor will develop detailed review
procedures to ensure that banks’ systems and
controls are adequate to serve as the basis for
the IRB approach.
390.
The minimum requirements set out in this
document apply to all asset
classes
unless
noted otherwise. The standards related to the
process of assigning exposures
to
borrower
or facility grades (and the related oversight,
validation, etc.) apply equally to
the
process
of assigning retail exposures to pools of
homogenous exposures, unless
noted
otherwise.
391.
The minimum requirements set out in this
document apply to both foundation
and
advanced
approaches unless noted otherwise. Generally,
all IRB banks must produce
their
own estimates of PD
(86) and must adhere to
the overall requirements for rating system
design,
operations, controls, and corporate governance,
as well as the requisite requirements for
estimation and validation of PD measures. Banks
wishing to use their own estimates of LGD and
EAD must also meet the incremental minimum
requirements for these risk
factors
included
in paragraphs 468 to 489.
(86) Banks are not required to
produce their own estimates of PD for certain
equity exposures and certain exposures that fall
within the SL
sub-class.
2.
Compliance with minimum
requirements
392.
To be eligible for an IRB approach, a bank must
demonstrate to its supervisor that
it
meets
the IRB requirements in this document, at the
outset and on an ongoing basis.
Banks’
overall
credit risk management practices must also be
consistent with the evolving
sound
practice
guidelines issued by the Committee and national
supervisors.
393.
There may be circumstances when a bank is not in
complete compliance with all
the
minimum
requirements. Where this is the case, the bank
must produce a plan for a
timely
return
to compliance, and seek approval from its
supervisor, or the bank must
demonstrate
that
the effect of such non-compliance is immaterial
in terms of the risk posed to
the
institution.
Failure to produce an acceptable plan or
satisfactorily implement the plan or
to
demonstrate
immateriality will lead supervisors to
reconsider the bank’s eligibility for the IRB
approach. Furthermore, for the duration of any
non-compliance, supervisors will consider the
need for the bank to hold additional capital
under Pillar 2 or take other appropriate
supervisory action.
3.
Rating system
design
394.
The term “rating system” comprises all of the
methods, processes, controls,
and
data
collection and IT systems that support the
assessment of credit risk, the assignment
of
internal
risk ratings, and the quantification of default
and loss estimates.
395.
Within each asset class, a bank may utilise
multiple rating
methodologies/systems.
For
example, a bank may have customised rating
systems for specific industries or
market
segments
(e.g. middle market, and large corporate). If a
bank chooses to use multiple
systems,
the rationale for assigning a borrower to a
rating system must be documented
and
applied
in a manner that best reflects the level of risk
of the borrower.
Banks
must not allocate borrowers across rating
systems inappropriately to minimise regulatory
capital requirements (i.e. cherry-picking by
choice of rating system). Banks must demonstrate
that each system used for IRB purposes is in
compliance with the minimum requirements at the
outset and on an ongoing basis.
(i)
Rating dimensions
Standards
for corporate, sovereign, and bank
exposures
396.
A qualifying IRB rating system must have two
separate and distinct
dimensions:
(i)
the risk of borrower default, and (ii)
transaction-specific
factors.
397.
The first dimension must be oriented to the risk
of borrower default. Separate
exposures
to the same borrower must be assigned to the
same borrower grade,
irrespective
of
any differences in the nature of each specific
transaction. There are two exceptions to
this.
Firstly,
in the case of country transfer risk, where a
bank may assign different
borrower
grades
depending on whether the facility is denominated
in local or foreign currency.
Secondly,
when the treatment of associated guarantees to a
facility may be reflected in an
adjusted
borrower grade. In either case, separate
exposures may result in multiple grades for the
same borrower. A bank must articulate in its
credit policy the relationship
between
borrower
grades in terms of the level of risk each grade
implies. Perceived and measured
risk
must increase as credit quality declines from
one grade to the next. The policy
must
articulate
the risk of each grade in terms of both a
description of the probability of default risk
typical for borrowers assigned the grade and the
criteria used to distinguish that level
of
credit
risk.
398.
The second dimension must reflect
transaction-specific factors, such as
collateral,
seniority,
product type, etc. For foundation IRB banks,
this requirement can be fulfilled by the
existence of a facility dimension, which
reflects both borrower and
transaction-specific
factors.
For example, a rating dimension that reflects EL
by incorporating both borrower
strength
(PD) and loss severity (LGD) considerations
would qualify. Likewise a rating system that
exclusively reflects LGD would qualify. Where a
rating dimension reflects EL and does not
separately quantify LGD, the supervisory
estimates of LGD must be used.
399.
For banks using the advanced approach, facility
ratings must reflect
exclusively
LGD.
These ratings can reflect any and all factors
that can influence LGD including, but
not
limited
to, the type of collateral, product, industry,
and purpose. Borrower characteristics may be
included as LGD rating criteria only to the
extent they are predictive of LGD. Banks may
alter the factors that influence facility grades
across segments of the portfolio as long as they
can satisfy their supervisor that it improves
the relevance and precision of their
estimates.
400.
Banks using the supervisory slotting criteria
for the SL sub-class are exempt
from
this
two-dimensional requirement for these exposures.
Given the interdependence
between
borrower/transaction
characteristics in SL, banks may satisfy the
requirements under this
heading
through a single rating dimension that reflects
EL by incorporating both
borrower
strength
(PD) and loss severity (LGD) considerations.
This exemption does not apply
to
banks
using either the general corporate foundation or
advanced approach for the SL
subclass.
Standards
for retail exposures
401.
Rating systems for retail exposures must be
oriented to both borrower and
transaction
risk, and must capture all relevant borrower and
transaction characteristics.
Banks
must assign each exposure that falls within the
definition of retail for IRB
purposes
into
a particular pool. Banks must demonstrate that
this process provides for a
meaningful
differentiation
of risk, provides for a grouping of sufficiently
homogenous exposures, and
allows
for accurate and consistent estimation of loss
characteristics at pool level.
402.
For each pool, banks must estimate PD, LGD, and
EAD. Multiple pools may share
identical
PD, LGD and EAD estimates. At a minimum, banks
should consider the following
risk
drivers when assigning exposures to a
pool:
•
Borrower risk
characteristics (e.g. borrower type,
demographics such as
age/occupation);
•
Transaction risk
characteristics, including product and/or
collateral types (e.g. loan
to
value measures, seasoning, guarantees; and
seniority (first vs. second
lien)).
Banks
must explicitly address cross-collateral
provisions where present.
•
Delinquency of
exposure: Banks are expected to separately
identify exposures that
are
delinquent and those that are
not.
(ii)
Rating structure
Standards
for corporate, sovereign, and bank
exposures
403.
A bank must have a meaningful distribution of
exposures across grades with no
excessive
concentrations, on both its borrower-rating and
its facility-rating scales.
404.
To meet this objective, a bank must have a
minimum of seven borrower grades
for
non-defaulted
borrowers and one for those that have defaulted.
Banks with lending activities
focused
on a particular market segment may satisfy this
requirement with the minimum
number
of grades; supervisors may require banks, which
lend to borrowers of diverse
credit
quality,
to have a greater number of borrower
grades.
405.
A borrower grade is defined as an assessment of
borrower risk on the basis of a
specified
and distinct set of rating criteria, from which
estimates of PD are derived. The grade
definition must include both a description of
the degree of default risk typical for borrowers
assigned the grade and the criteria used to
distinguish that level of credit risk.
Furthermore, “+” or “-” modifiers to alpha or
numeric grades will only qualify as distinct
grades if the bank has developed complete rating
descriptions and criteria for their assignment,
and separately quantifies PDs for these modified
grades.
406.
Banks with loan portfolios concentrated in a
particular market segment and range
of
default
risk must have enough grades within that range
to avoid undue concentrations
of
borrowers
in particular grades. Significant concentrations
within a single grade or grades
must
be supported by convincing empirical evidence
that the grade or grades cover
reasonably
narrow PD bands and that the default risk posed
by all borrowers in a grade
fall
within
that band.
407.
There is no specific minimum number of facility
grades for banks using the
advanced
approach for estimating LGD. A bank must have a
sufficient number of facility
grades
to avoid grouping facilities with widely varying
LGDs into a single grade. The
criteria
used
to define facility grades must be grounded in
empirical evidence.
408.
Banks using the supervisory slotting criteria
for the SL asset classes must have
at
least
four grades for non-defaulted borrowers, and one
for defaulted borrowers. The
requirements
for SL exposures that qualify for the corporate
foundation and advanced
approaches
are the same as those for general corporate
exposures.
Standards
for retail exposures
409.
For each pool identified, the bank must be able
to provide quantitative measures
of
loss
characteristics (PD, LGD, and EAD) for that
pool. The level of differentiation for
IRB
purposes
must ensure that the number of exposures in a
given pool is sufficient so as
to
allow
for meaningful quantification and validation of
the loss characteristics at the pool
level.
There
must be a meaningful distribution of borrowers
and exposures across pools. A
single
pool
must not include an undue concentration of the
bank’s total retail exposure.
(iii)
Rating criteria
410.
A bank must have specific rating definitions,
processes and criteria for
assigning
exposures
to grades within a rating system. The rating
definitions and criteria must be
both
plausible
and intuitive and must result in a meaningful
differentiation of risk.
•
The
grade descriptions and criteria must be
sufficiently detailed to allow
those
charged
with assigning ratings to consistently assign
the same grade to borrowers
or
facilities posing similar risk. This consistency
should exist across lines of
business,
departments and geographic locations. If rating
criteria and procedures
differ
for different types of borrowers or facilities,
the bank must monitor for
possible
inconsistency,
and must alter rating criteria to improve
consistency when
appropriate.
•
Written rating
definitions must be clear and detailed enough to
allow third parties to
understand
the assignment of ratings, such as internal
audit or an equally
independent
function and supervisors, to replicate rating
assignments and evaluate
the
appropriateness of the grade/pool
assignments.
•
The
criteria must also be consistent with the bank’s
internal lending standards
and
its
policies for handling troubled borrowers and
facilities.
411.
To ensure that banks are consistently taking
into account available information,
they
must
use all relevant and material information in
assigning ratings to borrowers and facilities.
Information must be current. The less
information a bank has, the more conservative
must be its assignments of exposures to borrower
and facility grades or pools.
An
external rating can be the primary factor
determining an internal rating assignment;
however, the bank must ensure that it considers
other relevant information.
SL
product lines within the corporate asset
class
412.
Banks using the supervisory slotting criteria
for SL exposures must assign
exposures
to their internal rating grades based on their
own criteria, systems and
processes,
subject
to compliance with the requisite minimum
requirements. Banks must then map these internal
rating grades into the five supervisory rating
categories. Tables 1 to 4 in Annex 6 provide,
for each sub-class of SL exposures, the general
assessment factors and
characteristics
exhibited by the exposures that fall under each
of the supervisory categories.
Each
lending activity has a unique table describing
the assessment factors and
characteristics.
(iv)
Rating assignment
horizon
414.
Although the time horizon used in PD estimation
is one year (as described in
paragraph
447), banks are expected to use a longer time
horizon in assigning ratings.
415.
A borrower rating must represent the bank’s
assessment of the borrower’s
ability
and
willingness to contractually perform despite
adverse economic conditions or
the
occurrence
of unexpected events. For example, a bank may
base rating assignments on
specific,
appropriate stress scenarios.
Alternatively,
a bank may take into account borrower
characteristics that are reflective of the
borrower’s vulnerability to adverse economic
conditions or unexpected events, without
explicitly specifying a stress scenario. The
range of economic conditions that are considered
when making assessments must be consistent with
current conditions and those that are likely to
occur over a business cycle within the
respective industry/geographic
region.
416.
Given the difficulties in forecasting future
events and the influence they will have
on
a
particular borrower’s financial condition, a
bank must take a conservative view of
projected
information.
Furthermore, where limited data are available, a
bank must adopt a conservative bias to its
analysis.
(v)
Use of models
417.
The requirements in this section apply to
statistical models and other
mechanical
methods
used to assign borrower or facility ratings or
in estimation of PDs, LGDs, or
EADs.
Credit
scoring models and other mechanical rating
procedures generally use only a subset of
available information. Although mechanical
rating procedures may sometimes avoid some of
the idiosyncratic errors made by rating systems
in which human judgement plays a
large
role,
mechanical use of limited information also is a
source of rating errors.
Credit
scoring models and other mechanical procedures
are permissible as the primary or partial basis
of rating assignments, and may play a role in
the estimation of loss characteristics.
Sufficient human judgement and human oversight
is necessary to ensure that all relevant and
material information, including that which is
outside the scope of the model, is also taken
into consideration, and that the model is used
appropriately.
•
The
burden is on the bank to satisfy its supervisor
that a model or procedure
has
good
predictive power and that regulatory capital
requirements will not be
distorted
as
a result of its use. The variables that are
input to the model must form a
reasonable
set of predictors. The model must be accurate on
average across the
range
of borrowers or facilities to which the bank is
exposed and there must be no
known
material biases.
•
The
bank must have in place a process for vetting
data inputs into a
statistical
default
or loss prediction model which includes an
assessment of the accuracy,
completeness
and appropriateness of the data specific to the
assignment of an
approved
rating.
•
The
bank must demonstrate that the data used to
build the model are
representative
of
the population of the bank’s actual borrowers or
facilities.
When
combining model results with human judgement,
the judgement must take
into
account all relevant and material information
not considered by the model.
The
bank
must have written guidance describing how human
judgement and model
results
are to be combined.
•
The
bank must have procedures for human review of
model-based rating
assignments.
Such procedures should focus on finding and
limiting errors
associated
with known model weaknesses and must also
include credible ongoing
efforts
to improve the model’s
performance.
•
The
bank must have a regular cycle of model
validation that includes monitoring
of
model
performance and stability; review of model
relationships; and testing of
model
outputs
against outcomes.
(vi)
Documentation of rating system
design
418.
Banks must document in writing their rating
systems’ design and operational
details.
The
documentation must evidence banks’ compliance
with the minimum standards, and must address
topics such as portfolio differentiation, rating
criteria, responsibilities of parties that rate
borrowers and facilities, definition of what
constitutes a rating exception, parties that
have authority to approve exceptions, frequency
of rating reviews, and
management
oversight
of the rating process.
A
bank must document the rationale for its choice
of internal rating criteria and must be able to
provide analyses demonstrating that rating
criteria and procedures are likely to result in
ratings that meaningfully differentiate risk.
Rating criteria and procedures must be
periodically reviewed to determine whether they
remain fully applicable to the current portfolio
and to external conditions.
In
addition, a bank must document a history of
major changes in the risk rating process, and
such documentation must support identification
of changes made to the risk rating process
subsequent to the last supervisory review. The
organisation of rating assignment, including the
internal control structure, must also be
documented.
419.
Banks must document the specific definitions of
default and loss used internally
and
demonstrate
consistency with the reference definitions set
out in paragraphs 452 to 460.
420.
If the bank employs statistical models in the
rating process, the bank must
document
their
methodologies. This material
must:
•
Provide a detailed
outline of the theory, assumptions and/or
mathematical and
empirical
basis of the assignment of estimates to grades,
individual obligors,
exposures,
or pools, and the data source(s) used to
estimate the model;
•
Establish a rigorous
statistical process (including out-of-time and
out-of-sample
performance
tests) for validating the model;
and
•
Indicate any
circumstances under which the model does not
work effectively.
421.
Use of a model obtained from a third-party
vendor that claims proprietary
technology
is
not a justification for exemption from
documentation or any other of the requirements
for
internal
rating systems. The burden is on the model’s
vendor and the bank to satisfy
supervisors.
|
| | | |
|
Sarbanes Oxley
Training
Courses
designed to provide with the knowledge and skills needed to understand and
support Sarbanes-Oxley compliance.
www.sarbanes-oxley-training.com
Basel ii
Training
Courses
designed to provide with the knowledge and skills needed to understand and
support Basel ii compliance.
www.basel-ii-training.com
Sarbanes Oxley
Act
Sarbanes
Oxley Compliance: Books, Software, Certification, Training and
Resources.
www.sarbanes-oxley-act.biz
Basel ii Accord
Basel ii
Compliance: Books, Software, Certification, Training and
Resources
http://www.basel-ii-accord.com/
Compliance Training
Sarbanes
Oxley, Basel ii, Data Protection Directive, Information Security
Training
www.compliance-training.net
|
|