The Basel ii
Accord
From the Basel ii Compliance Professionals Association (BCPA)
the largest association of Basel ii Professionals in the
world
(v) Sovereign guarantees and
counter-guarantees
201. As specified in paragraph 54,
a lower risk weight may be applied at
national discretion to a bank’s exposures to the
sovereign (or central bank) where the bank
is incorporated and where the exposure is denominated
in domestic currency and funded in that currency.
National authorities may extend this treatment to
portions of claims guaranteed by the sovereign (or
central bank), where the guarantee is denominated in the
domestic currency and the exposure is funded in that
currency.
A claim may be covered by a guarantee that
is indirectly counter-guaranteed by a sovereign.
Such a
claim may be treated as covered by a sovereign
guarantee provided that:
(a) the sovereign
counter-guarantee covers all credit risk elements of the
claim;
(b) both the original guarantee and the
counter-guarantee meet all operational requirements
for guarantees, except that the counter-guarantee need
not be direct and explicit to the original claim;
and
(c) the supervisor is satisfied that the cover is
robust and that no historical evidence suggests that
the coverage of the counter-guarantee is less
than effectively equivalent to that of a direct
sovereign guarantee.
6. Maturity
mismatches
202. For the purposes of calculating
risk-weighted assets, a maturity mismatch occurs when
the residual maturity of a hedge is less than that of
the underlying exposure.
(i) Definition of
maturity
203. The maturity of the underlying exposure
and the maturity of the hedge should both be defined
conservatively.
The effective maturity of the underlying
should be gauged as the longest possible remaining
time before the counterparty is scheduled to fulfil its
obligation, taking into account any applicable grace
period.
For the hedge, embedded options which may
reduce the term of the hedge should be taken into
account so that the shortest possible effective
maturity is used.
Where a call is at the discretion of
the protection seller, the maturity will always be at
the first call date.
If the call is at the discretion of
the protection buying bank but the terms of the
arrangement at origination of the hedge contain a
positive incentive for the bank to call the
transaction before contractual maturity, the remaining
time to the first call date will be deemed to be the
effective maturity.
For example, where there is
a step-up in cost in conjunction with a call feature
or where the effective cost of cover increases over
time even if credit quality remains the same or
increases, the effective maturity will be the
remaining time to the first call.
(ii) Risk weights
for maturity mismatches
204. As outlined in paragraph
143, hedges with maturity mismatches are only
recognised when their original maturities are greater
than or equal to one year.
As a result, the
maturity of hedges for exposures with original
maturities of less than one year must be matched to
be
recognised. In all cases, hedges with maturity
mismatches will no longer be recognised when they
have a residual maturity of three months or
less.
205. When there is a maturity mismatch with
recognised credit risk mitigants
(collateral,
on-balance sheet netting, guarantees and
credit derivatives) the following adjustment will
be
applied.
7. Other items related
to the treatment of CRM techniques
(i) Treatment of
pools of CRM techniques
206. In the case where a bank
has multiple CRM techniques covering a single
exposure (e.g. a bank has both collateral and
guarantee partially covering an exposure), the bank
will be required to subdivide the exposure into
portions covered by each type of CRM technique (e.g.
portion covered by collateral, portion covered by
guarantee) and the risk-weighted
assets of each
portion must be calculated separately.
When credit
protection provided by a single protection
provider has differing maturities, they must be
subdivided into separate protection as well.
(ii)
First-to-default credit derivatives
207. There are
cases where a bank obtains credit protection for a
basket of reference names and where the first default
among the reference names triggers the credit
protection and the credit event also terminates the
contract.
In this case, the bank may
recognise regulatory capital relief for the asset
within the basket with the lowest risk-weighted
amount, but only if the notional amount is less than
or equal to the notional amount of the
credit derivative.
208. With regard to the bank
providing credit protection through such an instrument,
if the product has an external credit assessment from
an eligible credit assessment institution, the risk
weight in paragraph 567 applied to securitisation
tranches will be applied.
If the product is not rated
by an eligible external credit assessment institution,
the risk weights of the assets included in the basket
will be aggregated up to a maximum of 1250% and
multiplied by the nominal amount of the protection
provided by the credit derivative to obtain the
risk-weighted asset amount.
(iii)
Second-to-default credit derivatives
209. In the case
where the second default among the assets within the
basket triggers the credit protection, the bank
obtaining credit protection through such a product will
only be able to recognise any capital relief if
first-default-protection has also be obtained or when
one of the assets within the basket has already
defaulted.
210. For banks providing credit protection
through such a product, the capital treatment is the
same as in paragraph 208 above with one exception.
The
exception is that, in aggregating the risk weights,
the asset with the lowest risk weighted amount can be
excluded
from the calculation.
   
| 
