CRDTG last update 23 February 2009
EUROPEAN COMMISSION
Internal Market DG
FINANCIAL INSTITUTIONS
Banking and Financial Conglomerates
Area:
2006/48/EC, Article 4(19)
Issue:
Definition of financial holding company
Question number:
66
Date of question:
7 April 2006
Publication of answer:
7 July 2006
Question:
How should the statement “exclusively or mainly” be defined and
calculated in the “financial holding company” definition?
Answer:
The criteria used to assess whether subsidiary undertakings are
“exclusively or mainly credit institutions or financial institutions”
may vary across Member States. It may also depend on the
group’s structure and accordingly be assessed on a case by case
basis. Nevertheless, based on current supervisory practices, some
criteria for defining whether subsidiaries are “exclusively or
mainly credit institutions or financial institutions” include:
•
the total assets/returns of the subsidiaries with the status of
credit or financial institutions compared to the total
assets/returns of the group;
•
the number of these subsidiary undertakings; and
•
the weight of participations in institutions carrying out
activities that are typical of credit institutions or investment
firms in the portfolio of permanent financial investment in
capital.
Area:
2006/48/EC, Article 4 (22) and Annex X, Part 3
Issue:
Mapping of operational risk losses
Question number:
216
Date of question:
15 February 2007
Publication of answer:
16 April 2007
Question:
The question is about mapping of losses from crystallisation of
project losses. Project risks are not directly mentioned in Table 3
of Annex X, Part 5, therefore the questions related are a) Are the
losses that stem from project management and scheduling failures
to be recorded in the loss database? b) We think disputes with
external project consultancy firms may fit the loss event type
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classification of "execution, delivery and process management" of
CRD. Is this interpretation in line with CRD? c.) Or is the
"clients, products, and business practices" category is more
suitable? We also recognise that "clients, products, and business
practices" definition also calls for losses arising from the nature or
design of a product. May this definition be extended to include
project design and deliverance?
Answer:
Losses resulting from project management and scheduling failures
shall be included in the loss database in so far as they fall within
the definition of operational risk in Article 4(22). The loss should
be traceable to internal inadequacies or failures or to an external
event such as fraud by the employees of the consultant. The right
loss event type depends on the actual loss event. 'Execution,
Delivery and Process Management' loss event types referred to in
Table 3 of Annex X would often be the appropriate classification.
"Clients, products, and business practices" would only be
applicable in cases where the credit institution fails to meet
obligations to its own clients.
Area:
2006/48/EC, Article 4(28)
Issue:
Capital requirement for conversion factors
Question number:
12
Date of question:
9 December 2005
Publication of answer:
12 April 2006
Question:
Why does the definition include unadvised limits? This is an
inconsistency to Basel.
Answer:
The CRD text is not inconsistent with the Basel text. Paragraph
474 of the Basel text – which defines the specific requirements for
EAD estimation under the AIRB approach – refers to the "…gross
exposure of the facility upon default of the obligor".
When estimating both conversion factors and exposure values,
institutions should take into account the full extent of the potential
exposure to a customer. That is the amount that the customer could
draw without the need for a further credit decision, which may be
the higher of the advised limit (known to the customer) and the
unadvised limit (approved internally by the credit institution).
As regards the definition of default, by relating to the advised
limit, both the CRD text and the Basel text (paragraph 452, last
bullet point) make the "past due" concept more transparent to the
borrower and ensure that both institution and borrower have the
same information about the borrower’s default or non-default
status. Furthermore, even if the definition of default kicks in
before if the unadvised limit is higher (and the relevant probability
of default may tend to increase), the ultimate effect on capital
requirements will depend on the relevant credit institution's cure
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rate.
Area:
2006/48/EC, Article 4(22)
Issue:
Operational risk – strategic risk
Question number:
210
Date of question:
5 February 2007
Publication of answer:
26 February 2007
Question:
In Article 4 (22), operational risk is defined as "22) ‘operational
risk’ means the risk of loss resulting from inadequate or failed
internal processes, people and systems or from external events,
and includes legal risk". CEBS gives a definition of strategic risk
in CP03 and counts it among Pillar II risks:
"Strategic risk: the
current or prospective risk to earnings and capital arising from
changes in the business environment and from adverse business
decisions, improper implementation of decisions or lack of
responsiveness to changes in the business environment." We find
it very interesting that CRD never mentions strategic risk although
Basel II text paragraph 644 says "operational risk...but excludes
strategic and reputational risk".
a.) Is there a rationale for that?
b.) How should the credit institutions evaluate whether a loss that
is claimed to be stemming from a strategic decision should be:
b.1) recorded in the operational risk loss database
b.2.) and/or counted towards operational risk regulatory capital?
c.) Can a differentiation be made between very senior executive
level strategic decisions (like Board of Directors) and senior level
tactical decisions (departments)? Can the loss amount of the event
created by strategic risk be important while deciding and
categorising a loss event as strategic risk? (between a very
profound effect to earnings and a minor-effect event).
d.) If there are provisions set against probable strategic risk losses,
we can ignore them in the AMA modelling and calculation. Is this
interpretation correct and in line with the Directive?
e.) The relevant indicator calculation in the operational risk
standard approaches does not leave strategic risk out. Is this
interpretation in line with the Directive?
Answer:
Strategic risk does not fall under the definition of operational risk
in Article 4 (22). Therefore, losses from strategic risk are neither
required to be recorded in operational risk loss databases nor to be
modelled in AMAs for capital requirement purposes. The relevant
indicator of the simpler approaches was likewise not calibrated to
reflect strategic risk.
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Area:
Directive 2006/48/EC, Article 4(28)
Issue:
Calculation of conversion factors
Question number:
84
Date of question:
30 May 2006
Publication of answer:
12 October 2006
Question:
Is it possible to have and to use for RWA estimation purpose CCF
greater then 100%? The question is related to changing credit
limits.
Suppose that at the moment of default EAD is equal to 110 and
credit limit is 120. 1 year before default when CCF is being
estimated on-balance exposure was 60 and credit limit was only
100. If one estimates CCF using limit of 100 one year before
default, he or she will get CCF of (110-60)/(100-60) or 125%. If
one uses limit at the moment at default then CCF is (110-60)/(12060) or 83%. This raises such questions:
1) Which of the two CCFs is the right one, 125% or 83%?
2) If it is 125%, should we use this 125% CCF also for nondefaulted exposures for EAD estimation purposes and by doing so
to account for possible future increase in credit limit? Or maybe
we should set condition that the final realised CCF estimate is
equal to Max(0;MIN(100%, CCF))?
3) If the answer to the second question is YES, then is the
intention of Basel II to account for possible future increases in
credit limits?
4) If the answer to the third question is YES, then shouldn't we
account for possible future increases in exposures which have only
an on-balance part, for example corporate borrower increases
long-term loan amount?
5) What is the correct way to proceed in the example above?
Answer:
Regarding questions 1) and 2), it is not possible to estimate the
conversion factor from the described observations. It appears
important that a credit institution, in estimating conversion factors,
applies a consistent treatment of observed exposures at default and
utilises relevant available information in terms of different credit
limits and drawn amounts prior to default in doing so. Comparing
both the limit and the drawn amount at the time of default only
(the "83% observation" in the correspondent's example) does not
meet the Directive requirement of estimating the currently
undrawn amount that will be drawn at default, i.e., the term
currently referring to a moment in time prior to default.
Note furthermore that Annex VII, Part 4, point 89 requires credit
institutions to reflect in the conversion factor the possibility of
additional drawings up to and after default, in principle regardless
whether within or beyond the credit limit.
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Regarding questions 3) and 4), please note that the requirement is
to reflect additional drawings and not future lending decisions
(i.e., increases in credit lines). Furthermore, future drawings need
only be reflected in the context of conversion factor estimation for
undrawn commitments.
Area:
2006/48/EC, Article 4(28)
Issue:
Estimation of credit conversion factors
Question number:
185
Date of question:
11 December 2006
Publication of answer:
15 January 2007
Question:
By reading some papers found over the Internet (a "HistoryDependent" model of Credit Conversion Factor), CCF may be
estimated according to the following formula:
CCF = [Utilisation(default)-Utilisation(a year ago since default)] /
[1 - Utilisation(a year ago since default)] and Utilisation =
Amount drawn / Credit Line
Is it right?
Answer:
Credit institutions are required to estimate the ratio of the currently
undrawn amount of a commitment that will be drawn and
outstanding at default to the currently undrawn amount of the
commitment.
A calculation as described may form one element of the estimation
process that may be considered along with other elements in order
to arrive at valid estimates. Note, however, that the above
calculation assumes that the amount of the credit line does not
change over time. If that was not the case, the calculation would
not yield results in line with the definition in Article 4(28).
Regarding guidance for the overall estimation process, please refer
to Q12, Q84 and CEBS GL 10.
Area:
2006/48/EC, Article 4(36) and Article 96(2)
Issue:
Transactions with SPV – definition of a securitisation position
Question number:
274
Date of question:
25 September 2007
Publication of answer:
11 December 2008
Question:
Article 96(2) of Directive 2006/48/EC states; “…….The providers
of credit protection to securitisation positions must be considered
to hold positions in the securitisation. Securitisation positions shall
include exposures to a securitisation arising from interest rate or
currency derivative transactions”. From this, we would assume
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that if a bank transacts an interest rate or currency derivative
position with an SPV (that has completed a securitisation) or sells
a CDS to an SPV, the banks must treat these transactions
according to the securitisation requirements. However, Article 4,
Section 36 states: ‘securitisation’ means a transaction or scheme,
whereby the credit risk associated with an exposure or pool of
exposures is tranched, having the following characteristics: (a)
payments in the transaction or scheme are dependent upon the
performance of the exposure or pool of exposures; and (b) the
subordination of tranches determines the distribution of losses
during the ongoing life of the transaction or scheme" While it
could be argued that in our example, payments depend on the
underlying credit performance of the collateral pool, as the CDS
premium paid to the Bank selling protection is dependent on the
assets of the SPV, we are unclear as to how the tranching and
subordination elements fit the example and thus, whether our
example would indeed fall under the scope of the securitisation
rules.
Answer:
In the case of any derivative transactions, it is important to
distinguish the counterparty credit risk from the risk driven by the
underlying of the derivative.
Exposures to a securitisation arising from interest rate or currency
derivative transactions
All types of over-the-counter derivative (e.g. interest-rate or
currency swaps, and credit derivatives) attract counterparty credit
risk. If the counterparty of a derivative is a securitisation SPE
(SSPE), the counterparty credit risk will be treated as a
securitisation position according to where the claim on the SSPE
counterparty would rank in the tranching of the securitisation
positions.
Providers of credit protection to securitisation positions
When it comes to credit derivatives entered into with an SSPE, a
securitisation position can arise not through counterparty credit
risk, but through credit risk assumed through the derivative. The
protection provider will have a securitisation position if either:
•
the underlying names of the credit derivative are securitisation
positions; or
•
the underlying assets are not securitisation positions, but the
credit protection covers only a tranche of the underlying
portfolio, thus creating a synthetic securitisation. This meets
the definition of a securitisation because protection payments
due from the protection provider to the protection buyer are
based on the performance of the underlying assets.
If the protection provider gives protection to the originator on one
or more of the exposures in the securitised portfolio (but without
tranching) and its position has been transferred with the
securitisation to the SPV, it does not have a securitisation position
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but an exposure on the names for which credit protection has been
provided. Consequently, it shall apply the credit risk framework.
Area:
Directive 2006/48/EC, Article 4(37)
Issue:
Definition of a securitisation - issuance of securities
Question number:
343
Date of question:
2 July 2008
Publication of answer:
12 September 2008
Question:
Article 4 (37) of Directive 2006/48/EC: ΄traditional securitisation΄
means a securitisation involving the economic transfer of the
exposures being securitised to a securitisation special purpose
entity which issues securities. This shall be accomplished by the
transfer of ownership of the securitised exposures from the
originator credit institution or through sub-participation. The
securities issued do not represent payment obligations of the
originator credit institution; Our questions: - Is it essential for a
special purpose entity to issue securities in order to be considered
as a securitisation? - Do the securities being issued by a special
purpose entity in a securitisation have to be ΄fungible securities΄?
Answer:
The claims on the securitisation special purpose entity can take
forms other than that of securities with the definition of a
traditional securitisation still being met.
Area:
2006/48/EC, Article 4 (38), Annex IX, Part 2, point 2
Issue:
Synthetic securitisation/credit protection with tranches
Question number:
257
Date of question:
25 July 2007
Publication of answer:
14 November 2007
Question:
1) Definitions of synthetic securitisation.
The definition of synthetic securitisation introduced in Article 4
(38) indicates the credit derivatives or the guarantees as the means
used in order to transfer credit risk. In Annex IX, Part 2, point 2,
when describing the minimum requirements for recognition of
significant credit risk transfer in a synthetic securitisation, the
Directive 2006/48/EC says “…credit risk …transferred to third
parties either through funded or unfunded credit protection”. If
bank A has an exposure partially collateralized by a pledge on
government bonds provided by bank B and this credit protection
creates a tranching, then does the (synthetic) securitization
treatment applies? If the securitisation framework shall not be
applied, it is hard to understand what is included in the
securitisation definition (which is based on the “tranching”
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concept, whatever the legal form is). On the other hand, it must be
noted that the abovementioned definition (Article 4, point 38) of
synthetic securitisation does not explicitly refer to collateral.
2) Investor’s treatment
If the securitisation framework applies, let’s suppose that bank B
is an SA bank. We envisage the following consequence: Bank B
holds the first loss protection (by providing the collateral), but
because it is an investor no cap will apply to the first loss exposure
of bank B (the Standardized Approach does not allow for a cap for
banks which are neither originator nor sponsor). Therefore, we
might come up with a very odd situation: if bank B fully
collateralized the exposure, it could be charged a capital
requirement lower than the one applied in case it partially
collateralized the exposure. An example might help:
- bank A has exposures equal to 100 weighted 100% which are
securitised; the capital requirement applied to these exposures is
equal to 8 (100 x 100% x 8%);
- if bank B provides full credit protection via collateral (CCF
100%), it is charged with a capital requirement of 8 (i.e. 100 x
100% x 100% x 8%);
- if bank B provides partial credit protection that covers the first
loss for 10 (CCF 100%), the capital requirement amounts to 10, as
no cap applies.
Answer:
1) Yes, the (synthetic) securitisation treatment applies
2) No, the outcome of the above example does not represent an
odd situation. The higher capital requirement reflects one of the
key assumptions underpinning the securitisation framework, i.e.
junior unrated losses broadly represents a proxy of expected losses
associated with the underlying portfolio and, as such, should
attract the highest capital charge.
The absence of a cap to capital requirements for investors'
securitisation positions reflects the outcome of the legislative
process at the EU level.
Area:
Directive 2006/48/EC, Article 4(44)
Issue:
Synthetic securitisations: status of SSPE
Question number:
110
Date of question:
28 June 2006
Publication of answer:
28 November 2006
Question:
An unclear issue for us is the status of the SSPE in the synthetic
securitisation. Is the consolidation of the SSPE to the originator an
important issue when a synthetic securitisation transaction is in
question?
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As the originator can carry out the risk transfer without the SSPE
it would seem logical that even if the SSPE were consolidated into
the originator, the transaction would still be considered to be
eligible for Basel II securitisation framework. Also, based on the
following definitions of SPEs, SPVs and SSPEs we would like to
raise the question, when the assets and liabilities of the mentioned
entities may or may not be required to be consolidated to the entity
that created them.
FSI tutorials: A special purpose entity (SPE), sometimes referred
to as a special purpose vehicle (SPV), can be any corporation, trust
or other such entity established for a specific purpose (including a
physical or synthetic securitisation). The SPE must have a
structure that makes it completely independent from its originator
or seller in terms of their credit risk exposures.
A special purpose vehicle (SPV) is the entity that purchases the
assets from the originator in a securitisation. The SPV is typically
a wholly-owned subsidiary of the originator and is a "bankruptcy
remote entity".
Directive 2000/12/EC Securitisation special purpose entity
(SSPE) means a corporation trust or other entity, other than a
credit institution, organised for carrying on a securitisation or
securitisations, the activities of which are limited to those
appropriate to accomplishing that objective, the structure of which
is intended to isolate the obligations of the SSPE from those of the
originator credit institution, and the holders of the beneficial
interests in which have the right to pledge or exchange these
interests without restriction.
Answer:
Article 95 states that credit institutions may apply the
securitisation framework as set out in Annex IX where significant
credit risk associated with the securitised exposures has been
transferred in accordance with the terms of Annex IX, Part 2.
This is the only test that must be met when determining whether
the approaches in Annex IX should be applied to a synthetic
securitisation. It follows from this that accounting derecognition of
the securitised credit risk exposures is neither a prerequisite for,
nor evidence of, the effectiveness or significance of credit risk
transfer for prudential purposes(see also CEBS GL10).
Area:
Directive 2006/48/EC, Article 4 (45)(a)
Issue:
Group of connected clients
Question number:
352
Date of question:
13 August 2008
Publication of answer:
7 October 2008
Question:
Article 4(45)(a) defines the group of connected clients based on
the criterion of control as follows: ‘group of connected clients’
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means: (a) two or more natural or legal persons who, unless it is
shown otherwise, constitute a single risk because one of them,
directly or indirectly, has control over the other or others
Does this definition mean that the control mechanism has to be
limited to the clients of a bank (that is to say to persons with
whom the credit institution is in a contractual relationship) or can
it be applied to whatever member of a group of companies even
though there is no contractual relationship between the bank and
the controlling entity? If the word "client" is supposed to have a
sense there must be a direct or indirect control of one client
company on another client company. This is not the case between
two sister companies (controlled by the same entity that is in no
contractual relationship with the bank) or a sister and the daughter
of her sister. If the word "client" has no sense, as soon as a bank
has a contractual relationship with two or more entities of the
same group, they are treated as a "group of connected clients"
although none of the entities has a direct or indirect control over
the others.
Answer:
The definition of a 'group of connected clients' in Article 4(45) is
risk-oriented and includes all natural and legal persons
contributing to the risk of the concerned exposure no matter
whether there is more than one contractual relationship with the
institution, and whether this or these relationships refer to the
controlling entity.
Area:
2006/48/EC, Articles 57/67
Issue:
Accounting framework used for own funds calculation
Question number:
9
Date of question:
9 December 2005
Publication of answer:
9 March 2006
Question:
Does the Directive leave it open which accounting framework for
the purpose of the calculation of own funds requirements
according to Articles 57 to 67 can be used?
Answer:
The CRD contains a number of provisions relating to which
accounting framework may be used:
•
Article 57 makes a number of references to Directive
86/635/EEC for the specification of own funds items;
•
Article 64(4) prevents the inclusion in own funds of certain
items that can arise for credit institutions that use IAS/IFRS;
•
Article 74(1) specifies how assets and off balance sheet items
should be valued, namely in accordance with the statutory
accounting framework (but does not refer to the accounting
framework for liabilities, the accounting classification of most
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Own Funds constituents).
As well as these binding provisions, Recital 30 indicates that the
calculation of own funds should "take account of" the accounting
framework to which, under national law, the credit institution is
subject.
The CRD does not legally compel credit institutions, investment
firms or supervisory authorities to use the same accounting
framework for the calculation of Own Funds as that which applies
for statutory reporting. However, clearly the logic underlying the
CRD text is that credit institutions should use either Directive
86/635/EEC or IAS/IFRS for both sides of the balance sheet. For
each credit institution, this will depend on and take account of the
choices and obligations at national level about the scope of
application of IAS/IFRS for statutory reporting.
Area:
2006/48/EC, Article 57
Issue:
ISA/IFRS own funds components
Question number:
10
Date of question:
9 December 2005
Publication of answer:
9 March 2006
Question:
Is it allowed to use IAS/IFRS-standards as own fund components
in Article 57 of Directive 2006/48/EC?
Background: Regulation 1606/2002 allows IAS/IFRS standards
for the purpose of harmonising financial information, but does not
lay down the objective of harmonising the calculation of own
funds requirements. In its relation to Directive 86/635/EEC it is
not clear, whether the value of assets, calculated for accounting
purposes on the basis of IFRS-standards, can also be used for the
purpose of the calculation the capital requirement. Directive
2006/48/EC does not lay down this objective, but includes some
prudential filters and the reference on Regulation 1606/2002 in
Article 74 of Directive 2006/48/EC.
Answer:
Yes (See Question 9)
Area:
2006/48/EC, Article 57(a)
Issue:
Definition of "value adjustments"
Question number:
130
Date of question:
26 July 2006
Publication of answer:
26 October 2006
Question:
In the CRD the term ' value adjustment' is used in various places.
Given that in previous CRD drafts the term write-offs was used
and subsequently replaced by value adjustments, we originally
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assumed that it was a mere name change (without widening the
scope). We noted that in almost all cases, the term value
adjustments was used in conjunction with provisions. Later on we
discovered that various stakeholders (peer banks, regulators) had
different interpretations of the term ' value adjustments' and we
changed our view looking at the impact of IFRS. In Article 57(e)
there is a reference to Article 37(2) of Directive 86/635/EEC
which unfortunately did not bring us any further.
Could you please clarify which of the following items are covered
in the term ' value adjustments':
1 write-offs
2 fair value adjustments (revaluations of assets, changes in market
value or book value)
3 general provisions (as opposed to specific provisions)
4 any other items?
Our interpretation is that only the items under 1 and 2 above are
captured under ' value adjustments'. We would be very grateful if
you could confirm this assumption.
Answer:
Broadly speaking, a reference to a 'value net of value adjustments'
does mean that the exposure value is the fair value or the historic
cost less specific provisions/write-offs. However, the term 'value
adjustments' as referred to in the CRD does not lend itself to a
precise and comprehensive definition, in part because of the
different accounting conventions in use (IFRS vs. national
GAAPs) and also because of the different contexts in which the
term is used.
For example, as referenced under the Own Funds rules
(2006/48/EC, Article 57 (e)), the term value adjustments is as it
was in Directive 2000/12/EC, and as such is not a new term. For
details on how this provision has been applied or interpreted, you
may refer to the CEBS publication 'Current Rules on Own Funds
and Market Trends in New Capital Instruments.' In terms of what
items are covered under this provision, it should be noted that in
accordance with Article 61, the use of the Own Funds constituents
in Article 57, "shall be left to the discretion of the Member States."
For past due items under the Standardised approach, (Annex VI,
Part 1, point 61) the reference to value adjustments refers to
specific provisions and write-offs. In a different reference, Annex
VII, Part 4, point 36 states that the EL amounts shall be subtracted
from the sum of value adjustments and provisions related to those
exposures, but the text is also explicit that in this case discounts on
balance sheet exposures purchased when in default should also be
treated as value adjustments.
These examples should serve to illustrate that a general listing of
the makeup of 'value adjustments' that applies in all instances in
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the CRD is not appropriate.
Area:
2006/48/EC, Article 57 (o)
Issue:
Deduction of short term investment in insurance undertaking
Question number:
305
Date of question:
7 January 2008
Publication of answer:
3 April 2008
Question:
The bank has short-term investment in insurance undertaking
(comprising 100 % of insurance undertaking’s capital) for resale
purposes. Does this bank have to deduct such an investment from
its capital in accordance with item (o), Article 57 of the Directive
2006/48/EC?
Answer:
This participation exceeds 20% of the capital of the insurance
undertaking and thus falls within the scope of Article 57(o)
pursuant to Article 4(10). Wherever booked (trading or banking
book), a short term investment in insurance undertaking within the
meaning of Article 4(10) shall be deducted, unless otherwise
provided for (Article 58, 59 and 60).
Area:
2006/48/EC, Article 72(3)
Issue:
Disclosure requirements
Question number:
59
Date of question:
30 March 2006
Publication of answer:
7 July 2006
Question:
The competent authorities responsible for exercising supervision
on a consolidated basis may decide not to apply paragraph 1 and 2
to credit institutions which are included within comparable
disclosures provided on a consolidated basis by a parent
undertaking established in a third country.
1) If the competent authority decides not to apply in full
paragraphs 1 and 2 to the credit institutions which are included
within comparable disclosures provided on a consolidated basis by
a parent undertaking established in a third country:
a) are significant subsidiaries in that case exempted from
disclosing information on an individual basis? (Article 72 [1 and
2])?
b) Is the EU parent credit institution (Article 72(1)) or the credit
institution controlled by an EU parent holding company (Article
72(2)) in that case exempted from disclosing information on an
individual basis?
2) If the competent authority decides not to apply in part
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paragraphs 1 and 2, does this mean that significant subsidiaries do
not have to disclose information or does this mean that EU parent
credit institutions or credit institutions controlled by an EU parent
financial holding company, do not have to disclose information on
a consolidated basis? Or does this mean that the competent
authority may choose between the two?
Answer:
EU parent credit institutions, or credit institutions controlled by an
EU parent financial holding company, are required to make
disclosure on a consolidated basis under Article 72(1) or (2)
respectively. There is no requirement for them to make disclosures
on an individual basis (unless, in the case of credit institutions
controlled by a FHC, they are also significant subsidiaries).
The consolidating supervisor can exercise the discretion in Article
72(3) in full or in part. The consequence of the exercise of the
discretion is that either no disclosures on a consolidated basis, or
partial disclosures on a consolidated basis, will be required.
1a) The significant subsidiary may still have to make disclosures if
it is located in a different Member State than the one where the
competent authority makes the decision under 72(3). The
competent authorities in that different Member State may feel that,
regardless of the disclosures by the third country parent,
disclosures are still required from the significant subsidiary in
their jurisdiction.
1b) EU parent credit institutions are in any case not required to
disclose information on an individual basis. For credit institutions
controlled by an EU parent FHC, the only disclosures they may
have to make on an individual basis are those required of
significant subsidiaries.
2) For significant subsidiaries the same argument as in 1a) applies:
disclosure may still be required by the competent authority
responsible for supervision of the significant subsidiary (where
different to the competent authority exercising the discretion in
72(3)). If the discretion in 72(3) is exercised in part, then partial
disclosures on a consolidated basis will be required by the EU
parent credit institution, or by credit institutions controlled by an
EU parent FHC. It is for the competent authority to decide on the
extent of these partial disclosures.
Area:
2006/48/EC, Article 73(2)
Issue:
Scope of application
Question number:
313
Date of question:
21 January 2008
Publication of answer:
14 May 2008
Question:
Article 73(2) of Directive 2006/48/EC provides that if the parent
undertaking of a subsidiary credit institution is a financial holding
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company which has a credit institution or a financial institution or
an asset management company as a subsidiary in a third country
(or holds a participation in such an undertaking) the requirements
laid down in Articles 75 and 123 on a sub-consolidated basis shall
apply.
1. Is Article 73(2) applicable in the case where the parent
undertaking is a financial holding company registered and
operating in a third country?
2. If yes, what is the perimeter of the sub-consolidation regarding
the subsidiary credit institution that operates in a member state and
which methods can be implemented e.g. full consolidation,
proportional consolidation etc.
3. Finally, if the subsidiary credit institution which operates in a
member state was to sub-consolidate on the ‘basis of the financial
situation of the financial holding company’, would this be
performed by assessing the consolidated position of the financial
holding company?
Answer:
For background information on how to implement Article 73(2),
see answer to CRDTG question 8. This question does not relate to
the implementation of Article 73(2) (which implies a 'subconsolidation') but refers to the way consolidation shall be
performed where the 'parent' of a EU credit institution is a FHC in
a third country.
1. Unless the financial holding company is subject to consolidated
supervision by a third country which is deemed equivalent in
accordance with Article 143 (i.e. the financial holding company in
the third country consolidates the entity in a third country), the
subsidiary credit institution may be subject to consolidation in
accordance with Article 143(3) on the basis of the consolidated
financial position of the financial holding company.
2. When applicable, consolidation shall be performed in
accordance with the rules laid down in Article 133.
3. See answer to CRDTG question 8. Please note that a financial
holding company in a third country is not regulated by EU
Directives.
Area:
2006/48/EC, Article 73(2)
Issue:
Sub-consolidation
Question number:
324
Date of question:
26 February 2008
Publication of answer:
14 May 2008
Question:
In addition to CRDTG Question number 8, we have a question
regarding sub-consolidation. As a result of the requirements of
article 73(2) of the CRD, subsidiary credit institutions which are
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not a parent credit institution in a Member state, but which do
have a subsidiary credit institution, a financial institution or an
asset management company outside the EU, are subject to
consolidated supervision at their own level. This is referred to as
sub-consolidated supervision.
In the practical application,
questions have been raised on the rationale behind the
requirements for sub-consolidated supervision. This rationale is
important, as sub-consolidated supervision can result in high
administrative burden for credit institutions. Our question to the
CRDTG is twofold :
1) Sub-consolidation is only required when there are subsidiary
credit institutions outside the EU. When there are only subsidiary
credit institutions inside the EU, sub-consolidation is not
applicable according to the article. What is the rationale behind
sub-consolidation in case of subsidiary credit institutions outside
the EU?
2) Would this rationale be harmed when a Member State would
assess the necessity of sub-consolidated supervision on a case by
case basis, for example taking into account the materiality (in
terms of risk) of the Non-EU subsidiary or by applying more or
less the same waiver requirements as can be used to waive
supervision on a solo basis? (notably: integrated risk management
and transferability of capital within the group).
Answer:
1. Article 73(2) implements Basel paragraph 22, requiring the
framework to be applied 'at every tier within a banking group'.
This is a specific requirement for 'internationally active subgroup'. Under the CRD, they are defined as institutions having a
subsidiary credit institution, a financial institution or an asset
management company outside the EU.
2. Application of this provision is mandatory.
Area:
2006/48/EC, Article 73(2)
Issue:
Sub-consolidation of Financial Holding Companies
Question number:
8
Date of question:
9 December 2005
Publication of answer:
12 April 2006
Question:
Article 73(2) (scope) requiring sub-consolidation notably in the
calculation of own funds requirements when credit institutions
have a subsidiary (or hold a participation) in a third country. We
understand this provision perfectly well in the case of CI with a
subsidiary in a third country, but what's the perimeter of the subconsolidation required for institutions whose mother FHC have
subsidiaries in a third country?
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Answer:
This was discussed at length during the drafting of the proposal
and during the Council and EP negotiations. The answer will
depend on whether the Member State has chosen to supervise
financial holding companies (FHCs) directly, or not.
If the Member State does supervise the FHC directly, then the
perimeter of consolidation is the FHC and the third country entity.
If the Member State does not supervise FHCs directly, the only
practical solution is to consolidate to the "nearest" credit
institution in the group structure. The actual perimeter depends on
the group structure.
Some examples are shown in the diagrams attached.
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THIRD COUNTRIES
MEMBER STATE 1
MEMBER STATE 2
1A
FHC
2A
FHC
EX
1B
BANK
2B
BANK
1. If the Member State does not directly supervise FHCs, then under Article 71(2), 1B consolidates at EU level on the basis of the
financial situation of 1A. 2. Under Article 73(2), 2B sub-consolidates on the basis of the financial situation of 2A including the
entity “EX” outside the EU. 3. However, if the Member State applies supervision directly to FHCs, then under Article 73(2) 2A
1
consolidates EX; and 4. Under Article 71(2) 1A consolidates all the other entities (which gives the same result as 2).
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THIRD COUNTRIES
MEMBER STATE 1
MEMBER STATE 2
1A
FHC
2A
FHC
EX
1B
BANK
1. If the Member State does not directly supervise FHCs, then under both Articles 71(2) and 73(2), 1B sub-consolidates on the
basis of the financial situation of 1A including the non-EU entity “EX”. 2. However, if the Member State applies supervision
directly to FHCs, then under Article 73(2) 2A consolidates EX; and 3. Under Article 71(2) 1A consolidates all the other entities.
2
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THIRD COUNTRIES
MEMBER STATE 1
MEMBER STATE 2
2A
FHC
EX
1B
BANK
1. If the Member State does not directly supervise FHCs, then under Article 73(2), 1B consolidates on the basis of the financial
situation of 2A. 2. However, if the Member State applies supervision directly to FHCs, then under Article 73(2), 2A consolidates
EX. 3. In both cases, under Article 71(2), 1B consolidates on the basis of the financial situation of 2A (Article 125(2) applies).
3
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THIRD COUNTRIES
MEMBER STATE 1
MEMBER STATE 2
2A
FHC
1A
BANK
MEMBER STATE 3
EX
3A
BANK
1. If the Member State does not directly supervise FHCs, then under both Articles 71(2) and 73(2), either 1A or 3A consolidates
on the basis of the financial situation of 2A. 2. However, if the Member State applies supervision directly to FHCs, then under
Article 73(2) 2A consolidates EX; and 3. Under Article 71(2), either 1A or 3A consolidates on the basis of the financial situation of
4
2A. The choice between 1A and 3A is made based on Article 126(2).
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Area:
2006/48/EC, Article 75
Issue:
Capital requirements for counterparty credit risk arising from both
banking book and trading book positions
Question number:
322
Date of question:
25 February 2008
Publication of answer:
14 May 2008
Question:
Should capital requirements for counterparty credit risk arising
from both banking book and trading book positions be included
into capital requirements for credit risk or capital requirements for
market risk? Or should one maybe differentiate based on whether
it arises from a position in banking book or trading book (e.g. if an
exposure is in the banking book, then the CCR capital charge is
included in credit risk capital requirement and if an exposure is in
the trading book, then the CCR capital charge is included in
market risk capital requirement)?
Answer:
Capital requirements for counterparty credit risk are referred to in
Article 75(a) while in respect of credit institution's trading book
business, settlement and counterparty risk are calculated under
Article 75(b). It must be noted that under Directive 2006/49/EC,
Annex II, point 6, exposures values and risk-weighted exposures
amounts for counterparty credit risk arising from positions in the
trading book must be calculated in accordance with the relevant
provisions of Directive 2006/48/EC.
Although Directives 2006/48/EC and 2008/49/EC do not use the
term "market risk" with respect to own funds requirements, the
question could be understood as asking whether CCR exposures,
at least in the trading book, could benefit from the alternative
determination of own funds in Article 13(2) of Directive
2006/49/EC. This treatment is explicitly limited to Annexes I and
III to VI of Directive 2006/49/EC, i.e. to position risk, foreign
exchange risk and commodities risk. Since CCR is subject to
Annex II of this Directive, the alternative determination of own
funds is not available for this kind of risk.
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Area:
Directive 2006/48/EC, Article 77
Issue:
Definition of exposures
Question number:
69
Date of question:
28 April 2006
Publication of answer:
7 July 2006
Question:
In the course of the implementation work of the new Directive
texts, we have noted a problem with the wording of Article 77.
The Directive says 'exposure' for the purposes of this Section
means an asset or off-balance sheet item. This, in our opinion, is
not a complete description of what is intended to be covered. The
problem is with derivatives contracts that have a negative market
value. For the holder, they represent exposures, but having a
negative current market value they will most likely be recorded in
accounting terms on-balance as liabilities, not assets. We say
”most likely” because there may be some national differences as
the 1996 Accounting Directives leave this point open. In the past,
it was often the case that derivatives were treated as off-balance
sheets items for accounting purposes. However, that is no longer
so today. Under IFRS the normal derivatives are always to be
recorded on the balance sheet, as assets or liabilities depending on
their current value. We believe that the same is true in many
national accounting standards. We feel that the wording of Article
77 does not reflect current accounting practice and can bring
doubts as to the status of the derivatives with negative current
values.
What are your views?
Answer:
The CRD does not legally compel credit institutions, investment
firms or supervisory authorities to use a specific accounting
framework. However, clearly the logic underlying the CRD text is
that credit institutions should use the same accounting standard
(e.g., Directive 86/635/EEC or IAS/IFRS) for both sides of the
balance sheet. For each credit institution, this will depend on and
take account of the choices and obligations at national level about
the scope of application of IAS/IFRS for statutory reporting.
However, the question describes a situation that may also be
relevant for minimum own funds requirements for credit risk. A
reading of Article 77 with respect to an accounting framework
other than Directive 86/635/EEC could be interpreted as not
including some risk positions which may determine a riskweighted exposure amount under the CRD provisions.
The main purpose of Article 77 is to make clear that, for
calculating minimum own funds requirements, each position
exposed to credit risk is to be taken into account, independent of
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CRDTG last update 23 February 2009
whether this position is recorded in the balance sheet or is an offbalance sheet item.
With respect to Directive 86/635/EEC this purpose is achieved by
defining a (credit risk) exposure as an asset or off-balance sheet
item. In case of using another accounting framework a credit
institution should consequently read Article 77 with respect to this
purpose, i.e., “asset” meaning all on-balance sheet items exposed
to credit risk.
For example, credit institutions holding a single derivative
contract with a negative market value should calculate the relevant
exposure value for CCR purposes according to Annex III of
2006/48/EC, which may result in a positive exposure value and,
accordingly, a positive risk weighted exposure amount for
purposes of calculating minimum own funds requirements for
credit risk.
The provisions included in the Annexes ensure a correct
calculation of exposure values for purposes of minimum own
funds requirements for credit risk for risk positions having
negative market values (see for example Directive 2006/48/EC,
Annex III, Part 5, point 1 and Part 6, points 5 to 15).
Area:
2006/48/EC, Article 74
Issue:
Valuation of assets
Question number:
319
Date of question:
14 February 2008
Publication of answer:
3 April 2008
Question:
My question refer to how to treat "on balance sheet" investment
holdings, by using a fair value or a combination of fair value plus
a reasonable haircut pending the nature of the investment vehicle:
Governamental & corporate bonds, USA equities (NYSE &
NASDAQ), European equities (the Europe 15) Japanese Equities
Emerging markets in general?
Answer:
Please see Article 74 of 2006/48/EC. The valuation of assets
(including investment holding) shall be effected in accordance
with the accounting framework to which the credit institution is
subject. Trading book items shall be subject to valuation
adjustments in accordance with Directive 2006/49/46, Annex VII,
part B, points 8 to 15.
Area:
Directive 2006/48/EC, Article 74(1)
Issue:
Calculation of exposure values under the Standardised and the
IRB approach
Question number:
161
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Date of question:
24 October 2006
Publication of answer:
8 May 2007
Question:
We question if the exposure values under the Standardized
Approach and the IRB approach could be calculated following:
•
an IFRS book value;
•
a local GAAP book value;
•
the nominal value; and
•
the contractual value;
We also question if this is different on a consolidated level
compared to a social level (institutions use IFRS on consolidated
level and local GAAP on a social level)?
Answer:
For the calculation of the minimum capital requirements
institutions must use the exposure values prescribed in the
respective parts of Directive 2006/48/EC (the Directive). Article
74(1) says that ‘save where otherwise provided, the valuation of
assets and off-balance sheet items shall be effected with the
accounting framework to which the credit institution is subject
under Regulation (EC) No 1606/2002 and Directive 86/635/EEC.
For the Standardised approach Article 78(1) provides that, subject
to certain exceptions specified in paragraphs 2 and 3 '…the
exposure value of an asset item shall be its balance-sheet value…’
and thus implies the use of the carrying amount/book value (IFRS
or local GAAP depending on the framework used in the prudential
context). The text of the Basel Accord (§52) provides that the
balance-sheet value corresponds to the accounting value of the
exposure, net of provisions. While this has not been made explicit
in the Directive, the same concept is nevertheless implicitly
introduced by Article 78, given that the balance sheet value is to
be understood as net of impairment (i.e. net of specific provisions
and partial write-off/collective impairment).
The response is less straightforward in the case of the IRB
approaches. According to Annex VII, Part 3, points 12 and 13, the
exposure value for equity exposures and for other non-credit
obligation assets shall be the value presented in the financial
statement. For those exposure classes the same applies as said
above for the Standardised approach.
Unlike this, for exposures to institutions, corporates, central
governments and central banks and retail exposures the following
definition is provided in Annex VII, Part 3, point 1: ‘Unless noted
otherwise the exposure value of on-balance sheet exposures shall
be measured gross of value adjustments.’ The directive goes on to
say that ‘This rule also applies to assets purchased at a price
different than the amount owed. For purchased assets, the
difference between the exposure and the net value recorded on the
balance-sheet of the bank is denoted discount if the exposure is
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CRDTG last update 23 February 2009
larger, and premium if the exposure is smaller’.
Bearing in mind Article 74, this should be read to mean that for
the computation of risk-weighted exposure and expected loss
amounts, the exposure value of on-balance sheet exposures should,
in principle, and unless otherwise prescribed in the directive, be
based on the value presented in the financial statements, gross of
value adjustments (i.e., impairment or partial write-offs).
Consistent with the guidelines on prudential filters issued by
CEBS and in order to mirror the effects of these guidelines on
regulatory capital, supervisors may also decide that unrealised
accounting gains or losses should only be taken into account in the
exposure values (under standardised or IRB approaches) when
they have been reflected in regulatory capital. In the same way,
supervisors may decide that unrealised gains or losses should not
be taken into account for the calculation of exposure values of
hedged items, provided that the hedging relationship is properly
documented for accounting purposes.
The previous principles apply whether the calculation is being
made at solo or at consolidated level.
Area:
Directive 2006/48/EC, Article 74(2) & Annex X, Part 1, point 3
and Part 2, point 2
Issue:
Reporting and calculation – Basic Indicator Approach and
Standardised Approach
Question number:
269
Date of question:
11 September 2007
Publication of answer:
14 November 2007
Question:
Article 74 (2) states that the calculations to verify the compliance
of credit institutions with the obligation to hold own funds for,
among others, operational risk, shall be carried out no less than
twice each year. Also, credit institutions shall communicate the
results and any component data required to the competent
authorities.
Under the Basic Indicator Approach and the
Standardised Approach, the three year-average is calculated on the
basis of the last twelve-monthly observations at the end of the
financial year. For those Member States whose financial year ends
on December 31, the three-year average determined during the
first quarter of 2008 shall be calculated on the basis of the
observations dated 31.12.2007, 31.12.2006 and 31.12.2005. When
verification of compliance under article 74 (2) is carried out four
times each year, the three-year average determined after the end of
the first quarter of 2008 shall be calculated still on the basis of
observations dated 31.12.2007, 31.12.2006 and 31.12.2005 (i.e.
the observations at the and of the last three financial years), so as
to ensure compliance with the two Annex X provisions already
mentioned, or on the basis of the observations at the end of last
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three twelve-monthly periods/moving windows (i.e. 31.03.2007,
31.03.2006 and 31.03.2005)? We would like to raise the same
question in the context of communication of results and any
component data required to the competent authorities: should the
relevant indicator/ the alternative relevant indicator to be reported
be determined on the basis of the last three-twelve monthly
observations at the end of the financial year or on the basis of the
last twelve-monthly observations at the end of the one year size
moving window?
Answer:
Annex X, Part 1, point 3 and Annex X, Part 2, point 2 refer to
'observations at the end of the financial year'. This means that if
the financial year ends on 31.12., the three-year average that is
reported before the observation per 31.12.2008 becomes available
shall be determined and reported on the basis of observations
dated 31.12.2007, 31.12.2006 and 31.12.2005.
Area:
2006/48/EC, Article 78 and Annex II
Issue:
Credit conversion factors under the IRB Foundation Approach
Question number:
275
Date of question:
5 October 2007
Publication of answer:
5 December 2007
Question:
Under Article 78 of Directive 2006/48, it is stated that the
exposure value of an off-balance sheet listed in Annex II, shall be
determined by applying the credit conversion factors as set out in
that Annex. For example, Note Issuance Facilities and Revolving
Underwriting Facilities receive a 50% credit conversion factor.
Under the IRB Approach however, Note Issuance Facilities and
Revolving Underwriting Facilities receive a 75% credit conversion
factor, as set out in Annex VII, Part 3, Point 9(d). Similarly, under
the Standardised Approach, an undrawn credit facility will receive
a 50% / 20% / 0% credit conversion factor depending of the
maturity of the facility and whether the facility can be cancelled
unconditionally at any time without notice. Under the IRB
Approach, Annex VII, Part 3, Point 9(d) refers to ‘other credit
lines’, which are assigned a 75% credit conversion factor.
Clarification is sought as to why no distinction is made under the
IRB approach for the varying maturities of the facility and whether
the facility can be cancelled. Clarification is also sought as to why
a higher credit conversion factor is applied under the IRB
Approach.
Answer:
A credit conversion factor of 75 % is applied to credit lines, NIFs
and RUFs regardless of the maturity of the underlying facility.
This does not apply to facilities which are uncommitted, that are
unconditionally cancellable or that provide for automatic
cancellation to which a conversion factor of 0% applies subject to
conditions set out in point 9(a). Unless otherwise provided in
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Annex VII, Part 3, point 1 to 9 and with the exception of credit
lines, NIFs and RUFs referred to in point 9(d), risk categories of
Annex II apply.
Area:
2006/48/EC, Article 78(1) and Annex VII, Part 2 point 11
Issue:
Treatment of basket credit derivatives
Question number:
192
Date of question:
16 January 2007
Publication of answer:
26 February 2007
Question:
Does an equivalent treatment exist in the CRD to that in the Basel
II accord for banks providing (selling) credit protection to a first-to
default basket credit derivative or an nth-to-default basket credit
derivative? In the Basel II Accord the treatment for protection
selling banks in basket credit derivatives is set out in Paragraphs
208 and 210. The treatment specifies that, in situations were the
basket product has an external credit assessment from an eligible
credit assessment institution, the risk weight 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 riskweighted asset amount.
Answer:
Article 78(1) and Annex VII, Part 3, point 11, in conjunction with
Annex II, require that credit derivatives in general be treated as
full risk items. The exposure value is, therefore, 100% of the value
of the credit derivative. The applicable risk weights are set out in
Annex VI, Part 1, point 89 for the Standardised approach and in
Annex VII, Part 1, point 9 for the IRB approach.
Area:
Directive 2006/48/EC, Article 78(1) and 106(1)
Issue:
Exposure value
Question number:
174
Date of question:
17 November 2006
Publication of answer:
24 May 2006
Question:
1. According to Article 78(1) the exposure value of an asset item
shall be its balance-sheet value and the exposure value of an offbalance-sheet item listed in Annex II shall be the following
percentage of its value: 100% if it is a full-risk item, 50% if it is a
medium-risk item, 20% if it is a medium/low-risk item, 0% if it is
a low-risk item. Our interpretation of the sentence above is the
following: - the exposure value of an asset item is the fair value or
the historic cost less specific provisions/write-downs/write-offs; the exposure value of an off-balance-sheet item listed in Annex II
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is its nominal value/original value (i.e. value gross of provisions)
multiplied by the following percentage: 100% if it is a full-risk
item, 50% if it is a medium-risk item, 20% if it is a medium/lowrisk item, 0% if it is a low-risk item. Is our interpretation correct?
2. According to Article 106(1) exposure, for the purposes of the
Section 5, shall mean any asset or off-balance-sheet item referred
to in Section 3, Subsection 1, without application of the risk
weights or degrees of risk there provided for. Our interpretation of
the sentence above is the following: - the exposure value of an
asset item is the fair value or the historic cost less specific
provisions/write-downs/write-offs; - the exposure value of an offbalance-sheet item listed in Annex II is its nominal value/original
value (i.e., value gross of provisions). Is our interpretation correct?
Answer:
According to Article 74(1) the valuation of assets and off-balance
sheet items is determined by the accounting framework to which a
credit institution is subject, save where otherwise provided.
Neither Article 78(1) nor Section 5 on Large Exposures contain
provisions diverging from Article 74(1) of Directive 2006/48/EC.
Since the measurement of exposure values of both assets and offbalance sheet items is determined by the specific accounting
framework, it would not be appropriate to address the specific
interpretations in the question, without the context of the
accounting framework being known. However, for this question, a
general answer is possible, independent of the accounting
framework applicable:
For purposes of determining the exposure value in the
Standardised approach (Article 78(1)) or the value of exposures
for Section 5 on Large exposures, an institution that enters into a
credit risk exposure (either on- or off balance) and afterwards
makes provisions dedicated to cover (part of) the credit risk of this
exposure, may take such provisions into account to the extent that
they lead to an appropriate reduction of own funds, since this is
equivalent to a 100% coverage of the credit exposure by own
funds.
Please note that this answer does not prejudge any possible
outcome for the comprehensive review of the Large Exposure
regime that is currently being undertaken.
Area:
2006/48/EC, Article 78(1) and (2) and Annex VIII, Part 3, point 2
Issue:
Capital requirement for credit risk arising from a repurchase
agreement
Question number:
293
Date of question:
18 November 2007
Publication of answer:
20 December 2007
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Question:
In the case of repurchase agreement the securities transferred shall
continue to appear in the institution's balance sheet. If the
securities are included the institution’s trading book the institution
shall calculate the capital requirement for position risk in
accordance with Annex I of Directive 2006/49/EC and the capital
requirement for counterparty credit risk in accordance with Annex
II of Directive 2006/49/EC. If the securities are included the
institution’s banking book the institution that uses the
Standardised Approach shall calculate the capital requirement for
credit risk in accordance with Articles 78 to 83 of Directive
2006/48/EC. To our understanding of paragraphs 1 and 2 of
Article 78 of Directive 2006/48/EC the institution’s capital
requirement for credit risk arising from the repurchase agreement
based on securities included in the banking book is the sum of the
following charges: a) charge 1 = exposure value of securities
determined by Article 78(1) x risk weight assigned to securities in
accordance with Annex VI x 8%; b) charge 2 = exposure value of
repurchase agreement determined by Article 78(2) x risk weight
assigned to transferee in accordance with Annex VI x 8%.
Examples: Example 1 Bank A that uses the Financial Collateral
Simple Method repos out 1,000€ in A-rated government bonds (i.
e. RW 20%) with a remaining maturity of 7 years to BBB-rated
corporate (i. e. RW 100%). It receives as a collateral, 7-year,
BBB-rated government bonds (i. e. RW 50%) denominated in a
foreign currency with a value of 800€. Charge 1 = 1,000€ x 20%
x 8% = 16€ Charge 2 = [(800€ x 50%) + (200€ x 100%)] x 8% =
48€ Capital requirement = 16€ + 48€ = 64€ Example 2 Bank A
that uses the Financial Collateral Comprehensive Method
(supervisory haircuts) repos out 1,000€ in A-rated government
bonds (i. e. RW 20%) with a remaining maturity of 7 years to
BBB-rated corporate (i. e. RW 100%). It receives as a collateral,
7-year, BBB-rated government bonds (i. e. RW 50%) denominated
in a foreign currency with a value of 800€. Charge 1 = 1,000€ x
20% x 8% = 16€ E*= max{0, [1,000€ x (1+0.04) – 800€ x (10.04-0.06))]} = 320€ Charge 2 = (320€ x 100%)] x 8% = 25.6€
Capital requirement = 16€ + 25.6€ = 41.6€ Is our understanding
correct? If not, please explain how capital requirement should be
calculated in Examples 1 and 2?
Answer:
While the concrete risk weights in the examples rest on
assumptions, the correspondent describes the mechanics of the
treatment of Repo transactions correctly: there is a credit risk
capital requirement (or in the case of a trading book security, for
the relevant position risk) for the exposure to the security that is
repoed out and an additional exposure to the counterparty that has
received the security, the latter may be reduced where applicable
taking account of the cash or securities collateral received from the
counterparty.
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Area:
2006/48/EC, Article 78(1) and (2) and Annex VIII, Part 3, point 2
Issue:
Capital requirement for credit risk arising from a repurchase
agreement
Question number:
307
Date of question:
22 December 2007
Publication of answer:
3 April 2008
Question:
We agree with the answer provided to Q293. However, we think
that in accordance with the third sentence of Article 78(1) of
Directive 2006/48/EC the correspondent's calculation of Charge 1
in Example 2 is not correct since the value of an exposure in the
form of the securities that are repoed out is not increased by the
volatility adjustment appropriate to such securities. In our opinion
Charge 1 in Example 2 of Q293 should be calculated as follows:
Charge 1 = 1,000€ x (1+0.04) x 20% x 8% = 16.64€.
Answer:
The calculation of charge 1 in Q293 is correct. Charge 1 relates to
the credit risk exposure from the security that has been repoed out
to default. It remains on the bank's on-balance sheet. The collateral
of the repo transaction does not mitigate the credit risk of the
security which is repoed out.
Area:
2006/48/EC, Article 78(1), Annex VII, Part 3, point 1(9), Annex
VIII, Part 3, points 69 and 88, Annex VIII, Part 3, point 33
Issue:
Conversion Factors and Credit Risk Mitigation
Question category:
208
Date of question:
31 January 2007
Publication of answer:
26 February 2007
Question:
Annex VIII, Part 3, points 69 and 88 stipulate which exposure
amount to use in the calculation of risk-weighted exposure
amounts (RWA) and expected loss amounts (EL) when risk is
mitigated by other eligible collateral and unfunded credit
protection. Here it is said that E for the purpose of these
calculations shall be the exposure value. The exposure value is for
the Standardised approach and the IRB approaches defined in
Article 78(1) and Annex VII, Part 3, point 1(9) respectively. The
exposure value of off-balance sheet items, are in both cases,
defined as the value of the exposure after application of so called
Conversion Factors. The above leads us to the conclusion that it,
for off-balance sheet items, is the exposure value after application
of Conversion Factors, which shall be used when calculating the
credit risk mitigation effects of other eligible collateral and
unfunded credit protection. Is this a correct interpretation?
Example: Credit Line: 100 Conversion Factor (IRB): 75%
Exposure value: 100 x 75% = 75 Guarantee: 75
The Exposure value in this example is fully covered by the
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guarantee of 75. Hence, the RWA and EL for the credit line is
calculated using the PD of the guarantor (IRB-Foundation
treatment). In this example there is no uncovered portion, of the
credit line, for which RWA and EL should be calculated. Annex
VIII, Part 3, point 33 stipulates which exposure amount to use in
the calculation of risk-weighted exposure amounts and expected
loss amounts when the Financial Collateral Comprehensive
Method is used. Here it is said that the exposure value of offbalance sheet items shall be 100 percent of its value, e.g., before
the application of Conversion Factors. What is the rationale behind
using an exposure value of 100 percent, for off-balance sheet
items, in this respect? Further, we have not been able to find a
similar wording in the Basel Accord.
Answer:
The approach to credit risk mitigation techniques and conversion
factors explicitly laid down in the Financial Collateral
Comprehensive Method (e.g., firms apply CRM techniques to the
original exposure before taking into account conversion factors)
applies mutatis mutandis to other type of credit protection and
methods, unless the protection is directly reflected in the exposure
value according to Annex III for counterparty credit risk purposes
or in the case of funded credit protection in the form of master
netting agreement according to Annex VIII, Part 3, points 22 and
23.
During the tripartite negotiations, it was decided to make explicit
amendments to Annex VIII Part 3 points 33 and 60 (Financial
Collateral Comprehensive Methods) clarifying that CRM should
be applied first. Under the Financial Collateral Simple Method
(point 26), reference is made to "exposure" and not to "exposure
value" (after application of credit conversion factor). With respect
to guarantees, points 87, 90 and 91 refer also to "exposure" at odds
with point 88 referring to "exposure values". Although point 69
still refers to "exposure value", point 77 applying to all types of
collateral makes it clear that CRM applies first by referring
explicitly to the calculation made under point 33.
Area:
2006/48/EC, Article 79 (1)
Issue:
Assignment of exposures to exposure classes
Question number:
233
Date of question:
3 May 2007
Publication of answer:
18 June 2007
Question:
How exposures should be assigned to exposure classes according
to article 79 (1) of Directive 2006 /48/EC when according to their
characteristics they could be assigned to more than one of the
exposure classes mentioned in that article? For example we could
think of an item representing a securitisation position which is past
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due. Should it be assigned to the exposure class mentioned in letter
j) or in letter m) of article 79 (1)? Another example, among many
others, that would show an overlap of exposures classes would be
an exposure to a corporate secured by real estate property. In
particular, would you agree on the following assignment
procedure (see the decision tree below) based on the assessment of
the conditions laid down in the Directive 2006/48/EC for an
exposure to fit in a certain exposure class, without prejudice to the
specific risk weight that each exposure should receive? If not,
which procedure should be applied? In order to assign the
exposure to the classes specified in the article 79.1, institutions
shall apply this decision tree: a) Does it fit for being assigned to
the exposure class of article 79 (1) lit. k? If yes, it would be
assigned to the exposure class "Items belonging to regulatory
high-risk categories"; if not, go to question b) b) Does it fit for
being assigned to the exposure class of article 79 (1) lit. m? If yes,
it would be assigned to the exposure class "Securitisation
positions"; if not, go to question c) c) Does it fit for being assigned
to the exposure class of article 79 (1) lit. j? If yes, it would be
assigned to the exposure class "Past due items"; if not, go to
question d) d) Does it fit for being assigned to the exposure classes
of article 79 (1) lit. o or lit. l? If yes, it would be assigned to either
the exposure classes "Claims in the form of collective investment
undertakings" or "Claims in the form of covered bonds" (which
are disjoint among themselves); if not, go to question e) e) Does it
fit for being assigned to the exposure class of article 79 (1) lit. i? If
yes, it would be assigned to the exposure class "Claims or
contingent claims secured on real estate property"; if not, go to
question f) f) Does it fit for being assigned to the exposure class of
article 79 (1) lit. p? If yes, it would be assigned to the exposure
class "Other items"; if not, go to question g) g) Does it fit for being
assigned to the exposure class of article 79 (1) lit. n? If yes, it
would be assigned to the exposure class "Short-term claims on
institutions and corporate"; if not, it would be assigned to one of
the following categories (that are disjoint among themselves): Claims or contingent claims on central governments or central
banks. -Claims or contingent claims on regional governments or
local authorities. -Claims or contingent claims on administrative
bodies and non-commercial undertakings. -Claims or contingent
claims on multilateral development banks. -Claims or contingent
claims on international organisations. -Claims or contingent claims
on institutions. -Claims or contingent claims on corporate. -Retail
claims or contingent retail claims
Answer:
Exposures (or part of one exposure, where appropriate) shall be
assigned only to one of the exposure classes referred to in Article
79 (1). This assignment has to be unambiguous and consistent
through time. Importantly, all 16 exposures classes have to be
considered separately. Institutions have to be able to demonstrate
that exposures are properly assigned to exposure classes in
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accordance with Annex VI, Part 1.
The 'decision tree' set out above is not correct. Institutions have
first to consider whether an exposure is a securitisation position as
defined in Article 4 paragraph 40 and must therefore in any case
be assigned to the exposure class “securitisation positions”. Riskweighted exposure amount will be calculated in accordance with
Articles 94 to 101 as mentioned in Annex VI Part 1 point 72. This
means that the exposure class 'past due items' includes all
exposures that are past due for more than 90 days and above a
threshold defined by the competent authorities except those that
are securitisation positions or those that fall into the 'regulatory
high risk categories'.
As clarified by the answer to Q124, part of an exposure secured by
real estate property which does not meet the loan to value limits
for the 35% or the 50 risk weights may be assigned to the retail
exposure class provided that it meets the retail exposures class
recognition criteria (including the 1 million Euro threshold).
Area:
2006/48/EC, Article 79(1)(f) and Article 86(1)(b)
Issue:
Treatment of branches of third country investment firms
Question number:
290
Date of question:
14 November 2007
Publication of answer:
20 December 2007
Question:
Should exposures to branches of unrecognised third-country
investment firms that operate in a Member State be treated as
exposures to institutions for the purposes of calculation capital
requirements for credit risk under Directive 2006/48/EC (Article
79(1)(f) and Article 86(1)(b)), and for the purposes of calculation
capital requirements for counterparty credit risk under Directive
2006/49/EC?
Answer:
In accordance with Article 40 of 2006/49/EC, for the purposes of
the calculation of minimum capital requirements for counterparty
risk under this Directive, and for the calculation of minimum
capital requirements for credit risk under Directive 2006/48/EC,
only exposures to 'recognised' third-country investment firms
within the meaning of Article 3(1)(d) are treated as exposures to
institutions.
This means that the exposure class 'institutions' referred to in
Article 79(1) and 86(1) of 2006/48/EC does not include exposures
to branches of 'unrecognised' third country firms.
Area:
2006/48/EC, Article 79(1)(f) and Article 86(1)(b)
Issue:
Leasing company – assignment to exposure classes
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Question number:
250
Date of question:
13 July 2007
Publication of answer:
14 November 2007
Question:
Should exposures to leasing companies be assigned to the class of
exposures to institutions or to the class of exposures to corporate?
Are there differences in assignment, when a leasing company is a
controlled undertaking of a credit institution and when the leasing
company doesn't belong to the financial group of a credit
institution?
Answer:
Exposures to leasing companies which are authorised and
supervised as credit institutions or which are subject to supervision
and prudential requirements equivalent to those applied to credit
institutions (in accordance with Annex VI, Part 1, point 24 of
2006/48/EC) may qualify for the exposure class 'institutions'.
Otherwise, exposures to a leasing company shall not be assigned
to the exposure class 'institutions'.
Area:
2006/48/EC, Articles 79 and 86
Issue:
Exposure class for 'insurance companies'
Question number:
242
Date of question:
19 June 2007
Publication of answer:
3 September 2007
Question:
Could exposures to insurance companies be assigned to the
exposure class 'institutions'?
Answer:
Exposures to entities which are not subject to individual or
consolidated supervision in accordance with Directives
2006/48/EC and 2006/49/EC may not be assigned to the exposure
class 'institutions'.
Area:
2006/48/EC, Article 79(2)
Issue:
Retail exposure class
Question number:
180
Date of question:
30 November 2006
Publication of answer:
15 January 2007
Question:
Art. 79.2 (b) states, as one of the conditions that exposures have to
meet to be eligible for the retail exposure class, the following: "b)
the exposure shall be one of a significant number of exposures
with similar characteristics such that the risks associated with such
lending are substantially reduced”. The Art. 79.2 (b) requirement
is rather general and leaves room for interpretation. In our
opinion, there is a need to clarify its meaning. Please confirm that
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in the process of the national implementation more clear wording
could be used.
The modified condition b) would read in the
following way: "the exposure shall be one of a significant number
of exposures with similar characteristics and the risks associated
with such lending are not managed on individual basis ".
Otherwise, exposures which are managed on individual basis (as
opposed to those managed on portfolio basis) like exposures to
corporates, might be assigned to the retail class on the base of the
rather vague wording of the existing condition b) that “the risk
associated with such lending are substantially reduced”. It is not
quite clear, whether the original wording will effectively prevent
from the situation described above. The condition b) rather makes
an assumption that in the case of a significant number of
exposures with similar characteristics, the risks associated with
such lending are substantially reduced. There is no requirement to
check the risk reduction effect.
Answer:
Article 79(2)(b) aims primarily to ensure that the retail portfolio to
which the exposure belongs is adequately diversified (granularity
criteria). Unlike the IRB approach, the Standardised approach does
not explicitly require retail exposures 'not to be managed just as
individually as exposures in the corporate exposure class'. In some
circumstances, there may be cases where retail exposures are
managed individually while complying with the granularity
criterion of Article 79(2)(b). Credit institutions should have
processes and procedures in place making sure that the number of
exposures with similar characteristics is significant enough for the
risks associated with such lending to be substantially reduced.
Area:
Directive 2006/48/EC, Article 79(2)(c)
Issue:
Retail exposure class – EUR 1 million limit
Question number:
218
Date of question:
19 February 2007
Publication of answer:
23 April 2007
Question:
The answer given to Q98 instructs to take into account "only the
drawn amount". We also note the Basel II text paragraph 70 and
footnote 28: It says "..Aggregated exposure means gross amount
of all forms of debt exposures (e.g loans or commitments)..."
The questions are as follows:
i) Has CRD differentiated from Basel II on determining the EUR 1
million exposure in Article 79 (2) (c) and Article 86(4)(a)?
ii) As a running calculation example, how can the exposures of
obligors below be evaluated towards retail-classified claims?
(figures are all nominal, not converted into credit exposure
equivalents)?
ii.1.) Obligor A On balance EUR 900 thousand loan (drawn as
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cash-in balance) and off balance sheet items EUR 500 thousand
guarantee (not having the character of credit substitutes- defined
as medium risk in Annex II) EUR 500 thousand commitment
(original maturity 9 months- - defined as medium/low risk in
Annex II) EUR 500 thousand documentary credit (issued and
confirmed - defined as medium risk in Annex II)
ii.2.) Obligor B On balance EUR 900 thousand loan (drawn as
cash) and off balance sheet items EUR 500 thousand commitment
(original maturity 24 months- medium risk in Annex II) EUR 500
thousand documentary credit (in which underlying shipment acts
as collateral - medium-low risk in Annex II)
ii.3.) Obligor C On balance EUR 900 thousand loan (drawn as
cash) and off balance sheet items EUR 500 thousand guarantee
(having the character of credit substitutes- defined as full risk in
Annex II) EUR 500 thousand documentary credit (in which
underlying shipment acts as collateral - defined as medium-low
risk in Annex II
Answer:
As clarified in the answer to Q98, Article 79(2)(c) refers to
amounts 'owed' to the credit institution, and does not include offbalance sheet items. In all the above examples, only the onbalance sheet EUR 900,000 loan counts towards the EUR 1
million threshold limit.
Area:
2006/48/EC, Article 79(2)(c)
Issue:
Treatment of a loan protected by residential real estate under the
retail exposure class
Question number:
310
Date of question:
15 January 2008
Publication of answer:
13 March 2008
Question:
Article 79(2) of 2006/48/EC says that "the total amount owed to
the credit institution and parent undertakings and its subsidiaries,
including any past due exposure, by the obligor client or group of
connected clients, but excluding claims or contingent claims
secured on residential real estate collateral, shall not, to the
knowledge of the credit institution, exceed EUR 1 million. The
credit institution shall take reasonable steps to acquire this
knowledge." Does this mean that if a bank gives 1.800.000 Euro
to an SME and this loan is collateralised by 900.000 EURO
Residential Real Estate, we have to subtract this amount from
1.800.000 (1.800.000 - 900.000 = 900.000 < 1.000.000) and
decide whether it is CORPORATE SME or RETAIL SME
accordingly? (As you know there is a 1.000.000 EURO limit for
SMEs). If this approach is true, the CRD favours the RREs (as
opposed to cash collateral for example).
Answer:
Please see the answers to Q39 and Q124.
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Area:
2006/48/EC, Article 79(2) & Article 86(4)
Issue:
Retail exposure class limit
Question number:
39
Date of question:
27 February 2006
Publication of answer:
23 May 2006
Question:
According to Article 79(2)(c), claims and contingent claims
secured on residential real estate collateral are excluded from the
total amount owed to the credit institution and parent undertakings
and its subsidiaries by the obligor client or group of connected
clients. The total amount must not, to the knowledge of the credit
institution, exceed EUR 1 million.
We consider the mortgages collateralised by residential real estate
property not meeting the criteria pursuant to Annex VI, Part 1,
paragraph 45 but meeting the criteria pursuant to Article 79(2)(a)
and (b). We would like to know how to interpret the exclusion of
the claims and contingent claims secured on residential real estate
collateral and treat the mortgages meeting only the criteria
pursuant Article 79(2)(a) and (b). Does Article 79(2)(c) mean that
the aforementioned mortgages are included in the exposure class
of retail claims or contingent retail claims (representing
application of a risk weight of 75%) but they are only excluded
from a limit of EUR 1 million? In other words, can the limit of
EUR 1 million be exceeded by an amount of these mortgages?
Similarly, does Article 86(4)(a) mean that the aforementioned
types of mortgages are included in other retail exposure risk
weight function (but excluded from retail mortgage risk weight
function)? Put in other words, are risk weight exposures for these
mortgages above EUR 1 mil calculated according to other retail
risk weight function?
Answer:
In relation to the limits set out in Articles 79(2)(c) and 86(4)(a),
claims or contingent claims secured on real estate collateral do not
count towards the EUR 1 million limit.
This exclusion covers all such secured claims and contingent
claims, and not just those meeting the conditions for the mortgage
treatment set out in Annex VI, Part 1, point 45.
This, however, does not say anything about the risk weighting of
these exposures. The exclusion is only for the purposes of
assessing whether the EUR 1 million limit is exceeded.
So the claims and contingent claims secured on real estate
collateral should be risk-weighted according to their
characteristics, in the normal way.
The answer to Q124 clarifies the risk weighting of exposures
secured on residential real estate property.
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Area:
Directive 2006/48/EC, Article 79(2)
Issue:
Eligibility criteria of retail exposures
Question number:
71
Date of question:
2 May 2006
Publication of answer:
20 June 2006
Question:
Eligibility criteria of retail exposures concerning total owed
amount to credit institution is calculated on the group of connected
clients' basis. Similarly, are the figures determining whether the
counterparty is a SME or not to be calculated on a consolidated
basis? Say, a corporate with 100 million € total annual sales and
its participation which is a SME owe less than 1 € million to the
credit institution in total. Can the credit institution classify the
exposures corporate and retail respectively or should it classify
both under corporate (wholesale)?
Answer:
Article 79(2) sets out the eligibility criteria for retail treatment
under the Standardised approach. For this purpose, only the total
amount owed to the credit institution and parent undertakings and
its subsidiaries not exceeding 1 million euro must be considered
on a group-of-connected-clients basis.
As long as this requirement and those in (a) and (b) are met, the
participation held by a corporate in the small or medium sized
entity would not preclude retail eligibility.
Area:
2006/48/EC, Article 79(2)(c)
Issue:
Claims secured by residential real estate collateral
Question number:
156
Date of question:
16 October 2006
Publication of answer:
24 May 2007
Question:
According to art.79, paragraph 2, (c) claims or contingent claims
secured by residential real estate collateral shall be excluded from
the retail exposure class. We consider the exposures secured by
residential real estate not meeting the criteria stated in Annex VI,
Part 1, paragraph 48 but meeting the criteria stated in article 79,
paragraph 2, (a) and (b). As per your answer to question no. 39,
claims and contingent claims secured on real estate collateral
should be risk-weighted according to their characteristics, in the
normal way. Therefore, we understand that, the above
circumstance, despite the fact that these exposures fulfil the
requirements provided by article 79, paragraph 2, for the retail
class to be risk weighted with 75%, will attract in fact the 100 %
risk weight, which is appropriate, according to Annex VI, Part 1,
paragraph 44, for exposures secured by residential real estate not
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meeting the criteria for assigning the 35 % risk weight. Our
concern is on the reason of assigning, in this particular case, the
risk-weight appropriate to the quality of the collateral (100%)
instead of assigning the exposure to the retail class to which
belongs (by fulfilling the criteria stated in article 79, paragraph 2,
(a) and (b)) and treat it accordingly (75%).
Answer:
This question is addressed in the answer to Q124.
Area:
Directive 2006/48/EC, Article 79(2)(c)
Issue:
Retail threshold in IRB
Question number:
118
Date of question:
7 July 2006
Publication of answer:
8 August 2006
Question:
Article 79(2)(c) excludes real estate collaterals from the 1 million
threshold (in order to assignment into the retail category) within
the Standardised approach. My question is: how is this criterion
handled in the advanced IRB approach?
Answer:
The treatment of this issue in the IRB approach is set out in Article
86(4)(a) of Directive 2006/48/EC. See also the answer to Q39
published on 23 May 2006.
Area:
2006/48/EC, Article 79(2)(c)
Issue:
Meaning of 'past due'
Question number:
143
Date of question:
14 August 2006
Publication of answer:
12 October 2006
Question:
According to Article 79(2)(c): "the total amount owed....,
including any past due exposure...".
We would like to know if must be respected a limit time in order
to consider past due (in other words, in this case, past due is
considered from the first day after contractual expiration)?
Answer:
In this context, the mention of past due exposures is meant to
clarify that, when considering if the total amount owed exceeds 1
million euro, past due exposures cannot be excluded. This is in
any case independent of how long the exposure has been past due.
Area:
Directive 2000/12/EC, Article 79(2)(c)
Issue:
Calculation of the retail limit
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Question number:
98
Date of question:
9 June 2006
Publication of answer:
26 October 2006
Question:
According to Article 79(2)(c), claims and contingent claims
secured on residential real estate collateral are excluded from the
total amount owed to the credit institution and parent undertakings
and its subsidiaries by the obligor client or group of connected
clients. The total amount must not, to the knowledge of the credit
institution, exceed EUR 1 million.
To our understanding, there are three possibilities to determine the
1.000.000 EUR exposure:
a) By considering drawn amounts only;
b) By considering drawn amounts plus off-balance sheet items
multiplied by conversion factors (say % 100 if it is a full-risk item
or 20% it if it is a medium-low risk item); or
c) By considering drawn amounts plus gross values of off-balance
sheet items.
Which option is enforced by the CRD text?
Answer:
Article 79(2)(c) refers to amounts 'owed' to the credit institution.
Therefore, in the case of a line of credit, only the drawn amount
needs to be considered when checking if the 1 million limit is
complied with.
Note that provided all conditions of Article 79(2) are met, the
exposure as a whole including its undrawn part qualifies as retail.
In addition, this consideration also applies when checking if the 1
million limit in Article 86(4)(a) (first of 4 conditions for the retail
exposure class under IRB) is complied with.
Area:
Directive 2006/48/EC, Article 79(2)(c) and 86(4)(a)
Issue:
Retail exposure threshold
Question number:
167
Date of question:
10 November 2006
Publication of answer:
15 December 2006
Question:
Are supervisory authorities allowed to set the lower threshold than
EUR 1 million for determining which corporate exposures are to
be treated as retail? For example Bank of Lithuania, ignoring
banks’ opinion, set this threshold to LTL 1 million which
corresponds to less then EUR 300 000. Doesn't that mean that
Directive requirements were transposed into national law
incorrectly?
Answer:
In order to qualify for the retail exposure class, all the relevant
criteria in Article 79(2) – for the Standardised approach – or in
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Article 86(4) – for the IRB approaches –need to be met.
If a lower limit than the 1 million euro is introduced because
beyond this limit the possibility to fulfil all other retail criteria can
be excluded by objective reasons with respect to the concrete
national circumstances, then this may be reasonable.
Area:
2006/48/EC, Articles 79(2) and 86(4)
Issue:
Definition of retail exposures – IRB approach and Standardised
approach
Question number:
296
Date of question:
7 December 2007
Publication of answer:
8 February 2008
Question:
There’s inconsistency between definition of retail exposures
provided in Article 79(2) and in Article 86 (4) of the Directive
2006/48/EC. In accordance with Article 79(2), exposure to
individual person exceeding the limit mentioned in sub-item (c)
would not be assigned to the class of retail exposures. However, in
accordance with Article 86(4) the above-mentioned limit is not
applicable to exposures to individual persons. Do institutions have
to treat exposures to individual person exceeding this limit
differently in the case of Standardised approach and in the case of
Internal ratings-based approach? Can supervisory authorities allow
institutions to apply united definition of retail exposure choosing
the one provided for Internal ratings-based approach?
Answer:
1. Yes, institutions have to treat retail exposures differently in
accordance with Article 79(2) and 86(4).
2. No, competent authorities cannot allow institutions to apply a
single definition of retail exposures for regulatory purposes in case
of permanent partial use or during a roll-out period. This is only
possible for reporting purposes (see answer to Q288).
Area:
2006/48/EC, Article 80(3)
Issue:
Treatment of exposures to institutions under the Standardised
approach
Question number:
132
Date of question:
4 August 2006
Publication of answer:
28 November 2006
Question:
Article 80(3) states that the Member States may decide "to adopt
the method based on the credit quality of the central government
of the jurisdiction in which the institution is incorporated”.
In this context what is the meaning of the term “incorporated”?
For subsidiaries, does “incorporated” refer to the country (central
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government) where the EU parent institution is authorised or the
country (central government) where the subsidiary is authorised?
Answer:
Under the Standardised approach, Central government risk weight
based method, institutions which are subsidiaries will be risk
weighted with the credit quality step of the central government of
the country where the subsidiary is authorised. Branches will be
risk weighted with the credit quality step of the central
government of the country where the credit institution of which
the branch is a part is authorised.
Area:
2006/48/EC, Article 80(7)
Issue:
0% risk weight for intra group exposures – direct exposures
Question number:
261
Date of question:
30 July 2007
Publication of answer:
14 November 2007
Question:
According to Article 80(7), "exposures of a credit institution to a
counterparty which is its parent undertaking, its subsidiary, a
subsidiary of its parent undertaking or an undertaking linked by a
relationship within the meaning of Article 12(1) of Directive
83/349/EEC "may be assigned a risk weight of 0% provided that
some conditions are met. In this context, does the word
"exposures" mean direct exposures only, or can this rule be
applied also on the guaranteed part of an exposure otherwise
ineligible for the treatment defined in Article 80 (7), provided that
the guarantor fulfils the conditions there described.
Answer:
The exposure to or guaranteed by a counterparty that fulfils the
Article 80(7) requirements can benefit from a 0% risk-weight.
At the consolidated level, there remains an exposure subject to the
risk weight of the group external borrower regardless of the groupinternal guarantee.
Area:
2006/48/EC, Article 80(7)
Issue:
0% risk weight for intra group exposures
Question number:
314
Date of question:
24 January 2008
Publication of answer:
3 April 2008
Question:
According to Article 80(7), “With the exception of exposures
giving rise to liabilities in the form of the items referred to in
paragraphs (a) to (h) of Article 57, competent authorities may
exempt from the requirements of paragraph 1 of this Article…”. If
we are considering the requirements of the parent credit institution
of a financial group, the participations, accounted at cost value,
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that the parent has in subsidiaries credit institutions that met the
conditions a) to d) of Article 80(7), don’t give rise to liabilities so
they are not included in the exception. Consequently, they can be
exempted from own funds requirements. Is this interpretation
correct?
Answer:
No
Area:
2006/48/EC, Article 80(8)
Issue:
Institutional protection scheme – eligibility criteria
Question number:
336
Date of question:
23 May 2008
Publication of answer:
23 February 2009
Question:
According to Article 80(8), a risk weight of 0% may be applied to
exposures amongst banks that have entered into a contractual or
statutory liability arrangement that protects those institutions and
in particular ensures their liquidity and solvency to avoid
bankruptcy in case it becomes necessary (institutional protection
scheme), provided that the conditions laid down in the same article
are met. In connection with such provision – which has already
been implemented in our jurisdiction since January 1st, 2007 – an
institutional protection scheme would be set up by a large number
of small cooperative banks (operating mainly with their
shareholders and within geographical restrictions) and their central
credit institutions (which are incorporated as stock companies, are
owned by the cooperative banks and act as central depository of
the same). Each bank is obliged to provide the institutional
protection schemes with the funds that are necessary in order to
protect each member from illiquidity or insolvency risks. In order
to prevent moral hazard and the risk of instability of the system as
a whole, such obligation would be restricted to a percentage of
banks’ own funds, linked to the estimated probability of
intervention by the protection scheme. As relevant for the
abovementioned provision, the question is whether the 0% weight
may be applied given that the scheme, according to contractual
and by-laws arrangements, would not guarantee the liabilities of
the cooperative banks to each other and to external credit
institutions (which are not member of the scheme), while deposits
and other liabilities to retail customers, as well as the central credit
institutions’ liabilities to cooperative banks and to external
entities, would be fully protected. The rationale of such exclusion
from the scope of the guarantee would be to support the
development of a liquidity management system within the
cooperative banks’ network as a whole.
Answer:
The requirement is not about certain guarantees to be in place, but
that the contractual or statutory arrangements provide for the
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credit institutions to put each other into a situation where
illiquidity and solvency is assured so that bankruptcy of individual
members to these arrangements is avoided. It is not excluded that
these arrangements also provide guarantees for individual claims
on the credit institutions as long as the objective of ensuring
liquidity and solvency is attained. The existence of an additional
guarantee which excludes certain creditors' claim does not seem to
prevent competent authorities from granting the 0% risk-weight
provided that the contractual arrangements meet the requirements
of Article 80(8). In particular, each bank shall be obliged to
provide the institutional protection schemes with the funds that are
necessary in order to protect each member from illiquidity or
insolvency risks. In that respect, the provision of a cap to the
amount of contributions shall not be a fixed and irrevocable
limitation to banks' commitments. The institutional scheme shall
have adequate resources at any point in time to fulfil its statutory
objective of 'protecting institutions' and 'ensuring their liquidity
and insolvency to avoid bankruptcy in case it becomes necessary'.
Area:
Directive 2006/48/EC, Article 81
Issue:
Recognition of ECAIs
Question number:
177
Date of question:
27 November 2006
Publication of answer:
4. January 2007
Question:
Where there are separate competent authorities in a Member State
for supervising credit institutions on the one hand and investment
firms on the other hand, if an ECAI has been recognised as
eligible by the competent authority which supervises credit
institutions, may the competent authority which supervises
investment firms recognise, according to Article 81, this ECAI as
eligible without carrying out its own evaluation process?
Answer:
Yes
Area:
2006/48/EC, Article 81 and Annex VI, Part 2, point 9 (d)
Issue:
Recognition of ECAI
Question number:
228
Date of question:
20 March 2007
Publication of answer:
8 May 2007
Question:
Accordingly to Article 81 "an external credit assessment may be
used to determine the risk weight of an exposure (...) only if the
ECAI which provides it has been recognised as eligible for those
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purposes by the competent authorities".
For the purpose of ECAI recognition, CEBS issued on 20 January
2006 guidelines which intend "to provide the basis for consistent
decision making across jurisdictions, enhance the single market
level playing field, and reduce administrative burdens for all
participants, including potentially eligible ECAIs, institutions, and
supervisory authorities" (§5). These guidelines include: "where
recognition is sought in more than one Member State, competent
authorities will cooperate in a joint assessment process" (§8); in
cases where ECAIs apply for recognition in more than one
Member State "competent authorities will adopt a single joint
approach to the assessment of such applications" (§17).
Taking into consideration §14 of the CEBS guidelines what is the
adequate interpretation:
- a competent authority should request proof (in the form of a
letter) that at least one institution in each Member-State intends to
use the ECAI's credit assessments for risk-weighting purposes, or
- should proof be requested that at least one institution within its
jurisdiction intents to use the ECAI's credit assessment for riskweighting purposes (§14 of the guidelines) before initiating a
single joint approach to the assessment of an ECAI for the 27
Member States?
Please note that, in our view, the first interpretation effectively
restricts the achievement of the internal market from the point of
view of both the freedom of establishment and the freedom to
provide (...) services for which Directive 2006/48/EC constitutes
an essential instrument, and does not reduce any administrative
burden for the supervisory authorities, as the burden is
substantially the same for a recognition for 1, for 2 or for 27
Member States.
Answer:
Directive 2006/48/EC does not set out specific procedures for the
application process. They are dealt with by CEBS's guidelines
which recommend that at least one institution intends to use an
ECAI's credit assessment for capital requirements purposes.
Annex VI, Part 2 sets out the relevant recognition requirements. In
terms of assessing whether credit assessments are accepted in the
market, Annex VI, Part 2, point 9(e) requires competent
authorities to verify that an ECAI's individual credit assessment
are recognised in the market as credible by assessing that "at least
two credit institutions use the ECAI's individual credit assessment
for bond issuing and/or assessing credit risks".
It must be noted that assessing whether institutions use credit
assessments for bond issuing and/or credit risks does not
necessarily mean that at least one credit institution in each
jurisdiction plans to use the assessments of this ECAI for the
purposes of Annex VI.
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Article 81(3) allows competent authorities to rely on the
recognition decision of another competent authority without
carrying out their own evaluation process. This means that an
ECAI might not be required to provide evidence of its use in each
Member State.
Area:
Directive 2006/48/EC, Article 83(2)
Issue:
Unsolicited ratings for capital adequacy calculation purposes
Question number:
344
Date of question:
11 July 2008
Publication of answer:
7 October 2008
Question:
In Article 83(2) of the Directive 2006/48/EC it is indicated that
"Credit institutions shall use solicited credit assessments.
However, with the permission of the relevant competent authority,
they may use unsolicited assessment".
Can the provision of the second question be treated as national
discretion of Member States' competent authorities? Do we have a
right not to allow application of unsolicited ratings completely in
any case?
Answer:
Article 83(2) is not a national discretion, but relates to a
supervisory decision. Nevertheless, the CRD does not prevent
competent authorities from excluding the use of unsolicited credit
assessments.
Area:
2006/48/EC, Article 84
Issue:
Experience test requirements for all parameters
Question number:
256
Date of question:
23 July 2007
Publication of answer:
5 December 2007
Question:
If an institution applies obligor (exposure) assignment models and
PD and LGD quantification models for at least one year prior to its
authorisation to use the IRB approach, but does not apply CF
(conversion factor) quantification models and CF estimates for at
least one year, is it possible to be considered as compliant with the
experience test requirement?
Answer:
According to Article 154(3), for credit institutions applying for the
use of own estimates of LGDs and/or conversion factors, the three
year use requirement prescribed in Article 84(4) may be reduced
to two years until 31 December 2008. This 'use requirement'
applies to both own-conversion factor and LGD estimates and is
limited to the exposure classes central governments and central
banks, institutions and corporate. If the exposures in the above
example were assigned to one of these exposures classes, the bank
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would not be compliant with the experience test both for own
LGD estimates and for own-conversion factor estimates.
According to Article 154(2), for credit institutions applying for the
use of the IRB approach before 2010, the three year use
requirement prescribed in Article 84(3) may be reduced to a period
no shorter than one year until 31 December 2009. If i) the
institution would apply for the use of the IRB approach before
2010 ii) the exposures in the above example were assigned to the
retail exposure class and iii) the use of own-conversion factor
estimates would be possible for these exposures according to
Annex VII Part 3 point 9 lit. e, this institution would not be
compliant with the experience test requirement referred to in
Article 154(2). This is so because it would fulfil this experience
test only for assignment of obligors to an obligor grade or pool and
quantification of PD estimates and for assignment of exposures to
a facility grade or pool and quantification of LGD estimates, but
not for assignment of exposures to a facility grade or pool and
quantification of own-conversion factor estimates.
Area:
2006/48/EC, Articles 84(3) and (4), 154(2) and (3) and Annex VII,
Part 4, point 66
Issue:
Use requirement for the IRB approach
Question number:
137
Date of question:
4 August 2006
Publication of answer:
28 November 2006
Question:
Concerning the use requirement for IRB and the length of
historical time series for PD/LGD/CCF, let’s suppose the
minimum length of PD data is set to two years (in compliance with
Annex VII, Part 4, point 66) and the IRB use requirement is set to
one year (in compliance with Articles 84(3), 154(2) and (3)).
Does it mean that the institution must have two years of PD data at
the moment of implementing the IRB approach? Or, perhaps, the
institution needs 3 years of data in total (2 years of data is
obligatory at the moment of implementing the IRB approach)?
Answer:
The use and historical data requirements are not cumulative. In the
above example two years of PD data would meet the CRD
requirements in this regard.
Area:
2006/48/EC, Article 85 and Annex VII, Part 4, point 66
Issue:
Waivers for data requirements during the roll-out period of Article
85
Question number:
32
Date of question:
20 February 2006
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Publication of answer:
1 June 2006
Question:
According to Article 85, implementation of IRB approaches may
be carried out sequentially, while data requirements may be
reduced to 2 years (FIRB) and 5 years (AIRB) when “banks
implement the IRB approach”. The issue is raised as to whether
Article 85 makes it possible for a bank to apply this waiver in the
course of its roll-out plan. Put it another way, is a FIRB bank
authorised in 2007 required to have 5 years of data in 2010 when
applying the IRB to a business unit subject to roll-out for which a
specific model is developed? Or could the bank make use of the
paragraph 66 waiver (2 years of data instead of 5 years) for the
purposes of implementing the IRB approach to this specific
business unit?
Answer:
The rollout rules for IRB already provide a good deal of flexibility
for supervisors and credit institutions to enable IRB
implementation to take place in a sensible way. The data waiver
applies at the time the credit institution implements the IRB
approach for the different exposure classes, as defined by Article
86, according to the conditions and the timeframe approved by
national supervisors as set out in Article 85(1) and (2).
In particular, in order to avoid cherry picking by credit institutions
and to ensure compliance with strict conditions determined by the
competent authorities as set out in Article 85(2):
(i) the data waiver should be applied on an exposure class basis as
defined by Article 86; and
(ii) roll-out plans approved by competent authorities should
explicitly indicate the relevant portfolio and how the waiver is
being applied.
Area:
Directive 2006/48/EC, Article 86(1)
Issue:
Treatment of cash item in the process of collection under the IRB
approach
Question number:
306
Date of question:
20 December 2007
Publication of answer:
25 July 2008
Question:
Under the Standardised Approach, cash items in transit / process
of collection receive a 20% risk-weighting under the 'Other Items'
category (Annex VI, Part 2, point 84). How are these items
categorised under the IRB Approach?
Answer:
Cash items in the process of collection should be assigned to
exposure classes according to the following risks:
•
the risk of default of the party which is the signee of the cash
item (e.g. where the cash item is payable in cash upon
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presentation but subject to that the signee, which might e.g. be
a corporate, has not exceeded its limits). In this specific case,
the cash item in the process of collection should be allocated
to the exposure class 'corporate'
•
the risk of default of the institution to which the cash item is
to be presented (e.g. where this institution is unconditionally
obliged to pay in cash upon presentation of the cash item; or
e.g. where a risk exists that the cash item will not be paid in
case of default of this institution although the signee has not
exceeded its limits). In this case, the cash item in the process
of collection should be allocated to the exposure class
'institutions'.
Credit institutions should develop a consistent approach to the
assignment of exposures resulting from comparable cash items in
the process of collection.
Where cash items in the process of collection form a homogeneous
group of exposures which is not significant for the institution, the
Standardised approach could be applied in accordance with Article
89(1)(c) of 2006/48/EC as clarified by CEBS guidelines n° 10
(paragraph 118), subject to the approval of the competent
authorities. In this case, exposures resulting from these cash items
will be assigned to the exposure class "other items" under the
Standardised approach and will receive a 20% risk weight
according to point 84 of Annex VI, Part 1 of Directive
2006/48/EC.
Area:
2006/48/EC, Article 86(1)(d)
Issue:
Roll-out period - Retail exposure class subject to different
definitions
Question number:
288
Date of question:
12 November 2007
Publication of answer:
8 February 2008
Question:
According to the roll out principle, a bank can use both the IRB
approach and the Standardized approach for credit risk. For
example, the bank may use for sovereigns, institutions and equities
the IRB approach and for the rest of its exposures the Standardized
approach. For instance, in case of retail exposures it may apply for
capital requirements purposes the Standardized approach. COREP
principles ask for reporting purposes to use the segmentation given
by the IRB requirements. In case of retail, the definition used
under the Standardised approach is different from that used under
the IRB. A bank that begins an IRB implementation roll-out plan
must use IRB for all exposures after a certain number of years.
During this roll-out period, the bank must use the definition in a
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continuous and conservative manner. In case of capital
requirements calculations for retail exposures (where the bank
shall apply the Standardised approach) what kind of definition of
retail shall we use during the roll-out period? Given that we are
starting the IRB implementation for certain exposure can we use
for retail exposure the definition used under the IRB even though
the capital requirement is done according to the Standardised
approach?
Answer:
Institutions shall assign exposures to one of the exposure classes
referred to in Article 79(1) when applying the Standardised
approach and to one of the exposure class referred to in Article
86(1) when applying the IRB approach, and apply the relevant
prudential treatment (IRB or Standardised approach) to which
each exposure class pertains. This also holds true during a roll-out
plan.
For reporting purposes, supervisors may ask institutions to use the
same exposure class, but this does not mean that institutions may
use treatments which depart from the CRD.
As long as the retail exposure class is still exempted from the IRB
approach, the exposures of this exposure class are treated
according to the Standardised approach. The 75% risk weight will
for these purposes only apply to those exposures that meet the
criteria in Article 79(2).
Area:
2006/48/EC, Article 86(4)
Issue:
Definition of retail exposures under the IRB approach
Question number:
136
Date of question:
4 August 2006
Publication of answer:
15 January 2007
Question:
Are the requirements in Article 86(4) cumulative, i.e., could a
borrower whose liabilities to the group were not higher than EUR
1 million qualify for the retail exposure class even if other
requirements of this Article were not met?
Answer:
The requirements in Article 86(4) are cumulative. Given the
drafting of the question we assume that the borrower in the
example above is an SME. Even if the borrower's liabilities to the
credit institution group did not exceed EUR 1 million, the
exposures would still have to be assigned to the corporate
portfolio, because the other requirements are not met.
Area:
Directive 2006/48/EC, Article 86(4)(a), Annex VI, Part 1, point 45
& Annex VIII, Part 1, point 13
Issue:
Treatment of personal investment companies
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Question number:
108
Date of question:
26 June 2006
Publication of answer:
12 October 2006
Question:
For private banking purposes, it is not unusual that investors
establish a personal investment company. Such private banking
exposures, which essentially are capital market-driven
transactions, can be quite large and exceed the € 1 million
threshold for exposures to SMEs treated as Retail exposures, cf
Article 86(4)(a) of the CRD. Nevertheless many credit institutions
manage such private banking exposures as Retail exposures and
do not conduct an individual rating of the counterparty on the
same level of detail that is required for Corporate counterparties
under the IRB approach.
Some institutions argue that exposures to such personal investment
companies, which specifically are set up for investment purposes
for individual persons, should be eligible to be treated as
exposures to individual persons and thereby not being subject to
the SME exposure limit of € 1 million. In support of this argument
attention can be drawn to the CEBS' guidelines on Validation (CP
10), paragraph 157, which states: "To comply with Article
86(4)(a) of the CRD, institutions should have internal criteria for
distinguishing individual persons from SMEs. If an entity is
separately incorporated, this should be seen as strong evidence that
the entity is to be regarded as an SME". According to this
quotation it seems that the CEBS guidelines do not exclude the
possibility of "separately incorporated" entities to be categorised
as "individuals".
The concept of personal investment companies is used in Annex
VI, Part 1, point 45 and Annex VIII, Part 1, point 13, relating to
exposures secured by residential real estate property. When the
debtor is a personal investment company, the bank may consider
that it is sufficient that the residential property is occupied by the
beneficial owner of the company in order to qualify for the 35%
risk weight.
In its answer to Q35 concerning the interpretation of this
paragraph the CRDTG has stated that "Personal investment
companies are usually established by individuals as a tax-efficient
way of holding some of their assets, including residential property.
The beneficial owner of the personal investment company is
usually the individual themselves". This may support the argument
that private banking exposures to personal investment companies
could be treated in the same manner as exposures to individuals.
To sum up, the question is if private banking exposures to personal
investment companies may be treated as exposures to individuals
and thus not be subject to the € 1 million threshold that applies to
SME-retail exposures.
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Answer:
Exposures to personal investment companies (PICs) should not be
treated as exposures to individuals. The consequence of this is
that, under either the Standardised or IRB approach, the €1 million
threshold would apply to PIC exposures if an institution wished to
treat them as retail exposures.
There are two points to note here:
- amendments were put forward during the CRD negotiations
which would have made it clear that all exposures to PICs should
be treated as exposures to individuals. These amendments were
rejected;
- in relation to exposures secured by residential real estate
property, the addition of PICs to the text in Annex VI, Part 1, point
45 and Annex VIII, Part 1, point 13 (which was accepted during
the negotiations) does not change the substance of those
provisions. As the published answer to Q48 makes clear,
exposures to enterprises (including PICs) secured by residential
real estate can be eligible for the 35% risk weight, provided that
they meet the other conditions.
Area:
Directive 2006/48/EC, Article 86(5)
Issue:
Scope of the equity portfolio – holdings in “institutional” bodies
Question number:
120
Date of question:
17 July 2006
Publication of answer:
12 October 2006
Question:
Holding in “institutional bodies” like clearing houses and stock
exchanges may be compulsory for banks engaged in securities
market and does not seem to reflect the economic substance of
equity. Such holding are more similar to “ancillary services
undertakings”, which are likely to be treated as “other non-credit
obligation assets, although they do not fit precisely with this
definition. Moreover, Basel specifies that equity exposures are
defined on the basis of the economic substance of the instrument.
Two treatments might be considered:
- treating such exposures as equity as underpinned by a strict
reading of the Directive;
- applying a 100% risk weight to these exposures as other non
credit-obligations assets.
Does the CRD require a specific treatment for such “holding” in
institutional bodies?
Answer:
Article 4(21) defines an ancillary services undertaking as an
undertaking that principally owns or manages property or manages
data-processing services or performs any other similar activity
ancillary to the principal activity of one or more credit institutions.
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If an equity exposure is to an ancillary service undertaking, it
receives a 100% risk weight according to Annex VII, Part 1, point
27, in connection with point 18. It will have to be assessed on a
case by case basis if an individual equity exposure meets these
characteristics of an ancillary service undertaking or constitutes
rather an ordinary equity exposure.
To this end, it needs to be tested if the equity exposure is held by
the institution in order to benefit from the activities of the
undertaking in question, which are enabling or facilitating for
some or all of its banking business and does neither merely nor
mainly do so in order to receive returns in the form of value gains
or dividends.
Further, it should be expected that the default risk is mitigated
compared to an ordinary equity exposure, for instance because the
institution can to a certain extent control the demand for the
undertaking's products or services and the way it performs its
activities or because the undertaking provides infrastructure to a
number of market participants which are likely to be implicitly
committed to a joint support for the undertaking.
Area:
Directive 2006/48/EC, Article 86(5)
Issue:
Scope of the equity portfolio – debt instruments
Question number:
119
Date of question:
17 July 2006
Publication of answer:
26 October 2006
Question:
According to Article 86(5), non-debt exposures conveying a
subordinated, residual claim on the assets or income of the issuer
and debt exposures the economic substance of which is similar to
the exposures specified in point (a) shall be classed as equity
exposures. This definition might be interpreted broadly as
including all subordinated debt if not deducted from own funds
while paragraphs 235 and 236 of the Basel framework are more
limited in scope. Basel makes clear that an instrument with the
same structure as those permitted as Tier 1 capital for banking
organisations should be included, but provides additional
conditions to be met by any instrument that embodies an
obligation on the part of the issuer. Having said that, the first
condition “the issuer may defer indefinitely the settlement of the
obligation” would result in including upper tier 2 in the equity
portfolio, but instruments classified as lower tier 2 for capital
purposes do not necessarily meet any of those conditions.
The issue is raised as to whether debt instruments might be
classified as a claim provided that they do not meet any of the
conditions referred to in Basel paragraph 236. Where appropriate,
such loans would be considered as subordinated exposures, to
which a 75% LGD would be assigned as laid down in Annex VII,
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Part 2, point 8.
Is Article 86(6) to be construed in conjunction with Basel
paragraphs 235 and 236 as allowing specific debt instruments not
to be classified as equity provided that the conditions provided for
by paragraph 235 and 236 are met?
Answer:
Article 86(5) does not require all subordinated debt (where not
deducted from own funds) to be treated as equity. Paragraph (a) of
the provision explicitly refers to non-debt exposures which are not
only subordinated, but which are also residual claims. Only where
(subordinated) debt is similar in economic substance to such
residual claims should it be treated as equity according to
paragraph (b). There is useful guidance in CEBS' GL10 on the
categorisation of debt as equity exposures.
Area:
Directive 2006/48/EC, Article 87(11)
Issue:
Treatment of CIU
Question number:
173
Date of question:
17 November 2006
Publication of answer:
2 April 2007
Question:
Under the IRB framework, firms are allowed to use a look through
approach for Collective Investment Units (CIU) where the
appropriate criteria are met.
Despite using the look through
approach, "Where the credit institution does not meet the
conditions for using the methods set out ..." states that the firm
must apply the simplified risk weights for equity exposures /
standardised risk weights for non-equity exposures if the firm does
not meet requirements for IRB calculation. Question - If the
underlying assets are known, but a minority of these assets are not
internally graded by the firm, which set of risk weights should be
employed? Is it possible to adopt the IRB risk weights for those
graded assets, and the simplified/standardised risk weights for the
non-graded assets? It seems inappropriate to disregard any internal
ratings and employ the simplified/standardised risk weights due to
a few unrated assets.
Answer:
Article 87 (11) allows for a look through approach, when certain
qualifying criteria are met. Under the look through approach risk
weights must be calculated according to the underlying exposures.
Effectively, this means treating the underlying exposures as direct
exposures of the institution.
If underlying exposures belong to a type of exposures for which
the institution has approval to apply the IRB approach by using an
internal rating system, the first part of Article 87(11) requires the
application of the internal rating system for those underlying
exposures. Underlying exposures that belong to the type of
exposures for which the institution, as part of its approved IRB
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approach, is allowed to use the Standardised approach (according
to Article 85 ‘roll out’ and 89 ‘partial use’) are risk-weighted
according to the Standardised approach. However, it should be
noted that in such situations, these underlying exposures must also
be taken into account when assessing compliance with the ‘partial
use’ and/or ‘roll out’ limits.
If underlying exposures are not treated under any partial use or roll
out exemption, but the institution is unable to assign an internal
rating to the exposure because the conditions to use the internal
rating system are not met (for example due to a lack of
information on the relevant risk drivers of the underlying
exposures) Article 87(11), second sub-paragraph shall apply.
Area:
2006/48/EC, Article 87(11) and Article 79
Issue:
'Partial' investment in CIUs
Question number:
284
Date of question:
5 November 2007
Publication of answer:
20 December 2007
Question:
Article 87(11) enables credit institutions to apply the so-called
“look through approach” for their exposures in CIUs meeting the
criteria set out in Annex VI, Part 1, points 77 and 78 and the
condition that the credit institution is aware of all of the
underlying exposures of the CIU. Effectively, this means treating
the underlying exposures as direct exposures of the institution. The
Directive is, however, silent whether 100 % of the underlying
exposures value of the CIU should be risk-weighted in case the
credit institution holds in CIU less than 100 % (e.g. 80 %). Should
rather in this case a principle of the proportional method be
applied and the exposures should be included according to the
credit institution’s percentage share of the CIU’s net assets (e.g. in
order to calculate the relevant risk-weighted exposure amounts,
risk weights shall be applied to 80 % of the underlying exposures
value) no matter whether the credit institution controls the CIU?
The issue might also be relevant to application of the Standardised
Approach.
Answer:
Only banks' investment in a CIU (and not all the exposures of a
CIU) shall be subject to capital requirements. The calculation of
risk weighted exposures is explained in details in answers to
CRDTG Q29, Q30 and Q173.
Area:
2006/48/EC, Article 87(12)
Issue:
CIU treatment under Article 87(12)
Question number:
29
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Date of question:
20 February 2006
Publication of answer:
1 June 2006
Question:
Par. 12 states that “non equity exposures are assigned to one of the
classes (private equity, exchanged traded equity or other equity”
set out in Annex VII, Part 1, point 17. How to map non-equity
exposures into equity exposures, and in particular for government
bonds? How to articulate and think through this treatment in
connection with the alternative method set out in the second subparagraph of par. 12 (“alternatively to the method described
above, credit institutions may calculate themselves”)?
Answer:
The specific question raised on can be split into two parts:
a) how does the approach in the first part of §12 relate to the
alternative provided in the second part of §12?
b) How to map non-equity exposures into equity exposures, and
in particular for government bonds?
a) When the requirements in Article 87(11) are not met, credit
institutions must apply Article 87(12) to their exposures in the
form of a CIU. Paragraph 12 comprises two methods. The first
part of §12 describes a ‘fall back’ treatment, to be used when there
is insufficient information available with regard to the underlying
exposures held by the CIU. The second part of §12 describes an
alternative to this ‘fall back’ treatment, in which the credit
institution uses the average risk weighted exposure amount of the
underlying exposures held by the CIU (See Q30 for elucidation of
this alternative treatment). One aim of this alternative treatment is
to encourage institutions to obtain adequate information on the
actual underlying exposures of the CIUs they invest in.
b) The ‘fall back’ treatment described in the first part of §12 will
apply when the credit institution is not able to use the alternative
treatment described in the second part of §12 (either because it has
insufficient information or when it can not adequately ensure the
correctness of the calculations). Basically, the ‘fall back’ treatment
requires a credit institution to apply the simple risk weight
approach to the underlying exposures of the CIU. Based on the
(limited) information a credit institution has on the underlying
exposures, it must allocate equity exposures to one of the three
classes of equity under the simple risk weight approach. If the
information provided (e.g., in the mandate) is not detailed enough
to distinguish between the three types of equity exposures, the
exposures should be assigned to ‘other equity’.
This same concept applies for non-equity exposures (for example
government bonds, money market instruments or any other type of
exposure). When the alternative treatment can not be applied,
these exposures also have to be allocated to one of the equity
classes mentioned. The CRD does not stipulate how this is done.
Ideally institutions should look at the risk profile of the underlying
exposures, but given the assumption that there is little information
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available to the credit institution with respect to the details of
those exposures (otherwise an institution would have been able to
use the less penal alternative method) in practice this mapping
should be relatively straightforward. If the underlying exposures
are exchange traded, the risk weight of ‘exchange traded equity’
will apply, if they are not exchange traded or the underlying
exposures are unknown, the risk weight of ‘other equity’ will
apply. Supervisors would not expect to observe non-equity
exposures under this approach to be mapped to the "diversified
private equity" risk weight, as that risk weight was explicitly
inserted into the CRD to be assigned to equity exposures that
where part of a diversified portfolio of private equity holdings.
Area:
2006/48/EC, Article 87(12)
Issue:
Alternative approach to CIU treatment
Question number:
30
Date of question:
20 February 2006
Publication of answer:
23 May 2006
Question:
1. According to Paragraph 12 of Article 87, “credit institutions
may calculate themselves or may rely on a third party to calculate
and report the average risk weighted exposures […] in accordance
with an adjusted SA approach (SA risk weights plus one notch),
when the credit institution is not aware of all of the underlying
exposures. The directive is silent on how banks concretely may
calculate themselves risk-weighted exposures. In that respect, it
must be noted that SA banks according to Annex VI, Part 1, point
80 shall make the assumption that the CIU first invests, to the
maximum extent allowed under its mandate, in the exposure
classes attracting the highest capital requirement and then
continues making investments in descending order until the
maximum total investment limit is reached. Does the “may
calculate themselves” referred to in Article 87(12) relate to the
“mandate methodology” laid down in Annex VI for SA banks?
2. Would it be possible to get concrete examples of “third parties”
on which banks may rely for calculating risk-weighted amounts?
Answer:
1. Based on article 87(12) second part, a credit institution may
treat CIUs by using the average risk weight of the underlying
exposures of the CIU.
This calculation can be performed by a third party or by the credit
institution themselves. In the latter case, the credit institutions may
use the investment mandates, in a manner analogous to the
approach laid down in Annex VI, Part 1, point 80 for the
Standardised approach, to calculate the average risk weighted
exposure amounts based on the CIU’s underlying exposures. The
credit institution makes an assumption on the underlying
exposures according to the investment mandate in the most
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conservative manner. This means assuming that the composition
of the underlying exposures is such that the sum of risk weighted
exposure amounts of those exposures is the highest possible
according to the investment mandate of the CIU, if calculated
according to the alternative method in second sub-paragraph of
Article 87(12). To perform this calculation, the investment
mandate shall be clear, up-to-date, and accurate to ensure the
correctness of the calculation. The prospectus or similar
documents of the CIU should typically include the information
required in Annex VI, Part 1, point 77(b) for using the mandate of
a CIU under the Standardised approach.
When the investment mandate doesn’t provide sufficient
information, credit institutions could use other available
information on the composition of the CIU’s portfolio (i.e.,
information provided by the fund manager), insofar as this
information meets the same conditions as mentioned for the
mandate.
However, if there is insufficient information available on the
composition of the portfolio to correctly calculate the average risk
weight, a credit institution should use the methodology referred to
in the first subparagraph of paragraph 12, i.e., use of simple risk
weight approach based on breakdown of exposures into the equity
sub-classes, on a best effort basis.
2. A ‘third party’ should possess the necessary competence and
expertise to guarantee the correctness of the calculation. In
practice, this third party may be any party that knows the specific
substance of the portfolio. Examples of third parties in this respect
are the custodian of the CIU or the CIU manager.
Whether the credit institution calculates the average risk weight
themselves or relies on a third party to perform that calculation,
the CRD clearly stipulates that this alternative to the ‘fall back’
treatment is only allowed when the correctness of the calculation
is adequately ensured. This requirement is essential and
supervisors must be convinced that the credit institution has
procedures in place to verify the correctness of its calculations or
the correctness of the figures reported by a third party.
Area:
2006/48/EC, Article 89(1)(b)
Issue:
Partial use for exposures to institutions
Question number:
3
Date of question:
9 December 2005
Publication of answer:
12 April 2006
Question:
Is it possible that some exposures (or rather exposure types)
assigned to the exposure class “claims or contingent claims on
institutions” can be exempted from the IRB Approach on the basis
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of the conditions listed in point (b), while other exposures in the
same exposure class are covered by the IRB? Is the number of
material counterparties determined on an exposure class basis
(regardless of the exposure type)?
To our understanding, the following exposures belong to the
exposure class referred to in point (b) of Article 86 (1):
- exposures to credit institutions and investment firms;
- exposures to regional governments and local authorities which
are not treated as exposures to central governments under
Subsection 1;
- exposures to Public Sector Entities which are treated as
exposures to institutions under Subsection 1;
- exposures to Multilateral Development Banks which do not
attract a 0% risk weight under Subsection 1;
and additionally (although the directive does not list these
exposures here, but they are also to be treated as exposures to
institutions in Subsection 1):
- exposures to churches and religious communities which are
treated as exposures to regional governments and local authorities
under Subsection 1,
-exposures to financial institutions which are treated as exposures
to institutions under the Subsection 1.
Answer:
The crucial issue behind Article 89(1)(b) is to prevent credit
institutions from facing an unduly burdensome process while
implementing a rating system. The Article is also clear in referring
to the "exposure class" as a whole in order to avoid cherry picking
by credit institutions.
However, the exposure class as a whole is not necessarily
homogeneous, because it can also include some exposures that can
be treated as "institutions. Therefore, reference should be made to
the underlying risk component.
The burden is on credit institutions to demonstrate, subject to
supervisor’s approval, that they include exposures that share the
same risk characteristics and can properly be assessed by using a
common risk methodology.
Furthermore, CEBS' "Guidelines on the implementation,
validation and assessment of AMA and IRB approaches" (CP 10)
provide helpful clarification on the materiality calculation in
relation to Article 89(1)(c) (http://www.c-ebs.org/).
Area:
2006/48/EC, Article 89(1)(d)
Issue:
Exposures to central governments, regional governments, local
authorities and administrative bodies
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Question number:
146
Date of question:
28 August 2006
Publication of answer:
8 May 2007
Question:
A competent authority it can allow the institutions under its
supervision to exempt from IRB exposures to central governments
of the home Member State, and to their regional governments
local authorities and administrative bodies. These exposures will
then be treated under the SA, where they receive a 0% RW.
Applied on a consolidated basis this exemption seems to have an
inconsistent result, as is shown by the following example:
- On solo level, institution A in country A is allowed the
exemption for government in country A
- Institution B in country B is a subsidiary of institution A
- On solo level in country B, institution B is also allowed the
exemption, but for government in country B
- On a consolidated level, institution A is allowed the exemption,
however restricted to government in country A.
The exposures to government in country B can not be exempted
by the competent authority in Member State A, and these
exposures will have to be treated under IRB. In this example, the
exposures for governments in country B must be run through an
IRB-system for consolidating purposes only. Furthermore, it could
very well be that the resulting risk weight under IRB for country B
is 0% (given the conditions mentioned in Article 89(1)(d)). This is
hard to justify, both from a risk-based angle and from an
administrative burden point of view. It seems more logical to
apply the exemption not only to the home Member State, but also
to other Member States, provided that these other Member States
have chosen to apply the exemption itself.
Our questions:
1) Is there a possibility in the CRD to also allow the exemption of
Article 89(1)(d) for exposures to governments of Member States,
other then the home Member State?
2) If not, what reasoning lays behind this decision?
Answer:
The CRD TG has agreed that Article 89(1)(d) may be applied as
follows.
When considering the consolidated situation of A (to use the
example in the question), Article 89 (1) (d) should cover the
exposures of the parent in jurisdiction A (i.e. exposures of the
parent to entities located in jurisdiction A), the exposures of the
subsidiary in jurisdiction B (i.e. exposures of the subsidiary
established in country B to entities located in jurisdiction B) as
well as the exposures of the parent and/or of credit institutions
located in jurisdiction A to entities located in jurisdiction B.
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In other words, the competent authorities of jurisdiction A may
authorise parent companies and/or credit institutions located in the
same jurisdiction A to apply the relevant treatment set out under
the Standardised approach by the competent authority of
jurisdiction B to both its direct exposures referred to in Article 89
(1) (d) and those held by its subsidiary in jurisdiction B.
Area:
2006/48/EC, Article 92, Annex VIII, Part 2, point 6(a), point 9
(b)(iii), point 22(j)
Issue:
Credit risk mitigation – requirements in terms of 'correlation'
Question number:
209
Date of question:
2 February 2007
Publication of answer:
24 May 2007
Question:
The Directive regarding minimum requirements for the credit
protection refers to the correlation between the value of the
protection and the creditworthiness of the obligor, for example:
Article 92: "The degree of correlation between the value of the
asset relied upon for protection and the credit quality of the
obligor shall not be undue Annex VIII, Part 2, point 6 (a): the
credit quality of the obligor and the value of the collateral must not
have a material positive correlation point 9 (b)(iii): The
receivables pledged by a borrower shall be diversified and not be
unduly correlated with the borrower point 22, (j): Credit
institution shall have a process in place to detect excessive
correlation between the creditworthiness of a protection provider
and the obligor of the underlying exposure due to their
performance being dependent on common factors beyond the
systematic risk factor. We would like to know, whether statistical
methods for defining calculation of the correlation are meant
under the requirements stated in the above mentioned parts of the
Directive or other less exact (qualitative) ways are considered
sufficient. In general, how should the correlation be detected to
comply with the minimum requirements?
Answer:
As no quantitative specification is offered for either the term
'materially' or ‘undue’, it is left to the institution to demonstrate to
supervisors that they have taken action to comply with this
requirement using either qualitative or quantitative techniques. In
line with the principle-based nature of the CRD, there is no
detailed requirement on how to assess these elements.
Institutions and competent authorities should bear in mind that the
intention of this requirement is to ensure that collateral
arrangements will be effective upon default; i.e. to mitigate the
risk that the value of the collateral included in the calculation of
RWEAs is not compatible with the collateral value that is likely to
occur upon default of the counterparty. This is a risk that can be
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managed in many ways – some of which are already enshrined
within the Directive (e.g. limiting eligible collateral; taking
haircuts to collateral values) – but an institution should
demonstrate how it manages this risk properly. An institution may
have internal policies about the types of collateral taken (or on the
collateral that is allowed to reduce capital requirements), or it may
undertake a quantitative analysis on collateral taken, but each
institution should be able to justify the approach it has taken.
In practice, many institutions use the former approach with both
qualitative and quantitative techniques used to determine the
policies in the first place.
Area:
2006/48/EC, Article 94
Issue:
Securitisation: pools containing exposures under both the
Standardised and IRB approaches
Question number:
57
Date of question:
17 March 2006
Publication of answer:
7 July 2006
Question:
What approach (SA or IRB) must credit institutions use for the
calculation of risk-weighted exposure amounts of securitisation
exposures if the securitised pool has some exposures for which the
bank uses the IRB approach and others for which the bank uses the
standardised approach?
If the phrase “in all other cases” of Article 94 implies that
securitisation IRB approach must be used in the previous case,
how can KIRB be computed (as the supervisory formula may
require) for a portfolio treated under the standardised approach
(KIRB being defined as the capital charge computed under IRB
rules, plus EL)?
Answer:
The CRD is silent on the first part of the question, but it would
make sense to follow the guidance given in the Basel text.
Paragraph 607 states that credit institutions “...should generally
use the approach corresponding to the predominant share of
exposures within the pool.” When the previous principle is not
easily applicable, credit institutions should consult with their
competent authorities on which approach to apply to their
securitisation exposures. As usual, credit institutions will need to
be able to justify to competent authorities the choices they have
made regarding securitisation exposures.
As regards the second part of the question, KIRB is defined in
Annex IX, Part 1 as 8% of the risk-weighted exposure amounts
that would be calculated in respect of the securitised exposures
had they not been securitised plus the amount of expected losses
associated with those exposures calculated under the IRB
approach.
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The same principle applies to the weighted average risk weight in
case of unrated positions in the Standardised approach in the
context of Annex IX, Part 4, points 9 and 10. In such a case the
underlying IRB exposures in the mixed pool would have to be
treated as they were exposures under the Standardised approach.
By contrast, for the purpose of calculating the maximum riskweighted exposure amount regarding to Annex IX, Part 4, point 8
or point 45 it might be necessary to calculate the risk-weighted
exposure amounts as a sum of the risk-weighted exposure amounts
in the Standardised approach and the AIRB according to the
respective rules. Hence, it could be necessary to calculate the riskweighted exposure amount and expected loss amount as maximum
requirement that would be calculated in respect of the securitised
exposures had they not been securitised.
If the IRB approach corresponds to the predominant share of
exposures within the pool, credit institutions cannot calculate KIRB
for the remaining portion of the portfolio for which the
Standardised approach is being used. For example, credit
institutions would either not be able to estimate the relevant risk
parameters (PD, LGD, exposure value) to calculate it properly or,
even if they could carry out the calculation, their methodology
would not have been validated as being compliant with the
qualifying requirements set by national competent authorities. In
either case, they should apply the relevant approach to the
underlying exposures (both the IRB and the Standardised
approaches as the case may be) in order to determine the "KIRB" of
the portfolio, which would equal the sum of the capital charges
calculated according to the two approaches. Needless to say, the
EL amount in respect of the underlying exposures to which the
Standardised approach is applied would be zero.
However, according to the general principle underlying the IRB
approach for securitisation positions set out in Annex IX, Part 3,
the above calculation of KIRB would only be needed if the
Supervisory Formula Method shall apply.
Area:
2006/48/EC, Article 94
Issue:
Scope of the RWA cap
Question number:
327
Date of question:
3 March 2008
Publication of answer:
14 May 2008
Question:
Article 94 states that if a credit institution applies the standardised
approach to calculate the RWA on exposures then the standardised
asset securitisation treatment must follow. In applying the RWA
cap the credit institution can follow the normal standardised
calculation for the exposures if the result is better than when
following the standardised asset securitisation treatment. The
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question is then: does this rule only apply when the credit
institution is the originator or can it also be followed when the
credit institution is the sponsor considering availability of the
external ratings of the positions.
Answer:
Under the Standardised approach, the CRD allows banks to apply
a 1250% risk weight in an alternative to deduction, with a cap for
originator and sponsor banks. No cap applies to the investor.
Please see Annex IX, Part 4, point 8, and for the deduction
mechanism, Annex IX, Part 4, point 36.
Area:
2006/48/EC, Articles 94 to 101, Annex IX, Part 4
Issue:
Prudential treatment for a 'rated' single tranche
Question number:
248
Date of question:
12 July 2007
Publication of answer:
8 October 2007
Question:
Can a bank investing (selling protection) in a plain vanilla credit
linked note (i.e., single tranche only) issued by an SPV, which is
externally rated by an eligible ECAI, treat the exposure using the
rules set out in Articles 94-101 and Annex IX for securitisation
exposures?
Answer:
The different structures that exist in the market make it difficult to
generalise on this issue. The question notes that there is a 'single
tranche' issued by a SPV, but this does not mean that there has not
been tranching of credit risk and as such that the securitisation
framework would not apply.
Such products might not give rise to a securitisation position (i.e.,
in accordance with Article 4(36), the credit risk associated with
this exposure is not tranched) and would then not be assigned to
the securitisation exposure class. In this case, the appropriate
exposure class for these securities should be determined with
reference to the underlying exposures. However, in the case of e.g.
a single tranched CDO, where only a single tranche is issued to the
market, but economically a second tranche exists, there would be a
tranching. In this case, the position would be a securitisation
position.
Where the reference asset which is protected by the credit linked
note is a securitisation position (e.g., in case of a repackaging), the
providers of the credit protection shall be considered to hold a
position in the securitisation in accordance with Article 96(2).
Area:
Directive 2006/48/EC, Article 95(2)
Issue:
Securitisation
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Question number:
90
Date of question:
31 May 2006
Publication of answer:
8 August 2006
Question:
Article 95 gives the possibility for originating credit institution, in
the case of traditional securitisation, to exclude from its
calculation of risk-weighted exposure amount the underlying
exposures and, in the case of synthetic securitisation, to calculate
risk-weighted exposure amounts of underlying exposures in
accordance with Annex IX, Part 2. Where the originator institution
fails to transfer significant credit risk, it need not calculate riskweighted exposure amounts for any positions it may have in the
securitisation in question.
Will the originator credit institution need to calculate riskweighted exposure amounts for securitisation positions, if it
transfers significant credit risk of underlying exposures, but
doesn’t apply the discretions, in the case of traditional
securitisation, to exclude from its calculation of risk-weighted
exposure amount these underlying exposures or, in the case of
synthetic securitization, to calculate risk-weighted exposure
amounts of these underlying exposures in accordance with Annex
IX, Part 2?
Answer:
The general principle is that an institution does not need to
calculate risk weighted exposure amounts on both the underlying
securitised exposures and the securitisation positions. Therefore,
an institution that transfers significant risk but does not, in the case
of traditional securitisation, exclude securitised exposures from the
calculation of risk-weighted exposure amounts or, in the case of
synthetic securitisation, calculate risk-weighted exposure amounts
under Annex IX, is not required to calculate risk weighted
exposure amounts on the securitisation positions. That institution
will already be calculating risk-weighted exposure amounts on the
securitised exposures.
Area:
Directive 2006/48/EC, Article 110(2)
Issue:
Exceptions to large exposure reporting
Question number:
345
Date of question:
15 July 2008
Publication of answer:
7 October 2008
Question:
We would like to ask, whether the provision given in Article
110(2), first subparagraph, can be treated as national discretion of
competent authorities. Can all exposures, which are not included
into the calculation of large exposure value, be exempted from
large exposures reporting? Or maybe all exposures, which are not
included into the calculation of large exposure value, have to be
reported to supervisors compulsory (excluding only those
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exempted under Article 113 (3) (a) to (d) and (f) to (h) )? Our
central bank requires the reporting of only those exposures, which
are included into calculation of large exposure value. All
exposures, which in accordance with Article 113(3) are excluded
from this calculation, are exempted from reporting because
initially on CEBS level the option provided in Article 110(2), first
subparagraph, was treated as national discretion. However, in the
final text of Article 110(2), first subparagraph , there are no such
words as "subject to discretion of national authorities..." ,
"Member States may require..." and so on.
Answer:
According to Article 110(2), the CRD does require exposures
exempted under Article 113(3)(a) to (d) and (f) to (h) to be
reported. This is not a national discretion.
Area:
2006/48/EC, Article 111
Issue:
Connected clients – credit derivatives
Question number:
247
Date of question:
12 July 2007
Publication of answer:
12 October 2007
Question:
Article 111 of Directive 2006/48/EC advises that: A credit
institution may not incur an exposure to a client or group of
connected clients the value of which exceed 25% of its own funds.
1) Therefore in a situation where a bank invests (i.e. it sells
protection) in a credit-linked note issued by an SPV, does the
exposure to the underlying reference asset and the credit derivative
counterparty need to be aggregated for large exposures purposes?
2) For investors (i.e. protection sellers) in Basket Credit Derivative
Products, which result in exposures to more than one reference
asset, do the exposures of the reference assets in the basket also
need to be aggregated together for large exposures purposes?
Answer:
1) Both the exposure to the issuer of the note and to the obligor of
the protected reference exposure have to be counted towards the
limits for the respective "client or group of connected clients".
Both constitute separate exposures as a default of either entity can
trigger losses for the credit institution.
2) The nominal amount of a basket derivative is added once to the
exposure of each client or group of connected clients for which a
reference obligation is contained in the basket (and added to all
other exposures towards each client or group of connected clients
that a bank holds). For large exposure purposes, banks shall
consider that the n defaults of a nth-to-default basket credit
derivative may occur at the same time.
Area:
2006/48/EC, Article 111(1)
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Issue:
Large exposure – calculation of exposure value
Question number:
331
Date of question:
19 March 2008
Publication of answer:
29 May 2008
Question:
Recital (50) : "In order to limit the maximum loss that a credit
institution may incur through any single client or group of
connected clients it is appropriate to adopt rules for the
determination of large exposures which take account of the
nominal value of the exposure without applying weightings or
degrees of risk".
Article 78(1) : The exposure value of an asset item shall be its
balance-sheet value and the exposure value of an off-balance sheet
item.
Article 111(1) : A credit institution may not incur an exposure to a
client or group of connected clients the value of which exceed 25
% of its own funds.
For instance, nominal large exposure is 100 (no allowances), net
large exposure is 70 (allowances are 30). Limit of bank in the first
case is 27 % of its own funds; limit of bank in the second case is
23 % of its own funds. When bank create allowances, limit of
large exposures is decreasing, when bank reversed allowances,
limit of large exposures is rising. This is not good, because target
of large exposures (as matter fact) is reducing concentration risk
(by geography areas, by types of subjects etc.), not to manipulate
with allowances. Large exposures which take account of the
nominal value are better than large exposures which take account
of the net value.
Questions : What are your opinions ? Must balance sheet value be
in net value (with allowances) or in nominal value (without
allowances) of large exposures?
Answer:
For the purpose of defining 'exposures', Article 106(1) refers to
Section 3, Subsection 1. Article 78(1) requires that "the exposure
value of an asset item shall be its balance-sheet value…". The
balance-sheet value means a value net of value adjustments and
provisions. It must be noted that any value adjustments and
provisions reduce own funds and the large exposures limits thus
become effectively more 'biting'.
Area:
2006/48/EC, Title V, Chapter 2, Section 4
Issue:
Operational risk/environmental risk
Question number:
18
Date of question:
6 February 2006
Publication of answer:
12 April 2006
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Question:
Are environmental risks considered operational risks for the
purpose of the CRD, and what methodologies are acceptable for
the assessment of environmental risks?
Answer:
Operational risk is defined in Article 4(22) and comprises "the risk
of loss resulting from inadequate or failed internal processes,
people and systems or from external events and includes legal
risk".
Environmental risks that the credit institution faces can fall within
the above definition (e.g., as a subset of legal risk) and are clearly
part of the operational risk that credit institutions face. Certain
events resulting from environmental risk can directly affect the
performance of particular business lines, or indeed the entire credit
institution. As such, operational events can be identified and
reflected for prudential purposes using the three operational risk
methodologies outlined in the CRD.
Area:
2006/48/EC, Article 117
Issue:
Large exposure - guarantee by third party
Question number:
335
Date of question:
19 May 2008
Publication of answer:
25 July 2008
Question:
Article 117 of Directive 2006/48 states that: 1. Where an exposure
to a client is guaranteed by a third party, or by collateral in the
form of securities issued by a third party under the conditions laid
down in Article 113(3)(o), Member States may: (a) treat the
exposure as having been incurred to the guarantor rather than to
the client; or (b) treat the exposure as having been incurred to the
third party rather than to the client, if the exposure defined in
Article 113(3)(o) is guaranteed by collateral under the conditions
there laid down. In the context of 1(a) of this provision, does the
term ‘third party’ include guarantees provided from the parent
undertaking, other subsidiaries of the parent undertaking or a
credit institution’s own subsidiaries?
Answer:
The term 'third party' may include the parent undertaking, other
subsidiaries of that parent undertaking or own subsidiaries of the
respective credit institution. Therefore, the guarantees provided by
these parties may be used for the purposes of Article 117(1)(a).
This is in line with Article 112(2) that refers to the list of parties
that may be recognised as eligible providers of unfunded credit
protection in Annex VIII, which explicitly includes parent,
subsidiary and affiliate corporate entities of the credit institution
that meet the conditions stipulated in point 26(g) in Part 1 of this
Annex.
Nevertheless, as emphasised in recital 52, when a credit institution
incurs an exposure to the above parties, particular prudence is
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necessary in cases where the respective entities are not covered by
the supervision of the credit institution on a consolidated basis.
It must be noted that at consolidated level the credit protection
cannot be taken into account unless the affiliate is excluded from
the scope of consolidation.
Area:
2006/48/EC, Article 123 and Annex V
Issue:
Stress testing
Question number:
225
Date of question:
12 March 2007
Publication of answer:
23 April 2007
Question:
Is paragraph 726 of the Basel II accord, specifying the method (i.e
stress testing) to be applied to take macro economic effects into
account through ICAAP, translated in the CRD? If so where?
Answer:
According to Annex V, point 2, the management body shall
approve and periodically review the strategies and policies for
taking up, managing, monitoring and mitigating the risks the credit
institution is or might be exposed to, including those posed by the
macroeconomic environment in which it operates, in relation to
the status of the business cycle.
It must be noted that 2006/48/EC does not specify specific
methodologies but requires institutions to apply their strategies
and policies according to the proportionality principle laid down in
Article 123. For further guidance, see CEBS guidelines on stress
testing under the Supervisory Review Process.
Area:
2006/48/EC, Article 124(4)
Issue:
Frequency of ICAAP
Question number:
276
Date of question:
12 October 2007
Publication of answer:
29 May 2008
Question:
Article 124(4) allows competent authorities to establish the
frequency and intensity of the Supervisory Review and Evaluation
Process (SREP) and specifies that “the review and evaluation shall
be updated at least on an annual basis”. We find the expression ‘at
least’ in this context misleading as the institution’s Internal Capital
Adequacy Assessment Process (ICAAP) will typically be carried
out on an annual basis, but not more often than this, and it would
not make sense that the SREP be carried out more often than the
ICAAP. We would therefore ask the CRDTG to confirm that, with
the exception of emergency situations, the SREP be carried out at
the maximum in the same frequency as the ICAAP.
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Answer:
Regarding the relationship between ICAAP and SREP, according
to Article 124(1) and 124(2) of 2006/48/EC, the scope of the
SREP is broader than the ICAAP as it notably refers to the
requirements of the Directive. Furthermore, Article 124(4) states
that the frequency and intensity of the SREP is subject to the
principle of proportionality. The frequency is therefore not
intended to be uniform across banks nor is it static over time.
For these reasons, it cannot be confirmed that “with the exception
of emergency situations, the SREP should be carried out at the
maximum in the same frequency as the ICAAP.”
CEBS “Guidelines on the Application of the Supervisory Review
Process under Pillar 2”, detail the elements or factors that
supervisors should take into consideration and that should result in
a new SREP. In the absence of emergency situations or material
business changes, those member countries which prescribe a
specific ICAAP reporting date and frequency normally conduct
the SREP in the same interval.
In particular, please see ICAAP guideline n°5:
“(a) The ICAAP should be reviewed by the institution as often as
is deemed necessary to ensure that risks are covered adequately
and that capital coverage reflects the actual risk profile of the
institution. This review should take place at least annually.”
“(c) Any changes in the institution's strategic focus, business plan,
operating environment or other factors that materially affect
assumptions or methodologies used in the ICAAP should initiate
appropriate adjustments to the ICAAP. New risks that occur in the
business of the institution should be identified and incorporated
into the ICAAP.”
Area:
2006/48/EC, Article 124(5)
Issue:
Supervisory review
Question number:
21
Date of question:
14 February 2006
Publication of answer:
12 April 2006
Question:
Article 124(5), second sentence seems to allow more than one
interpretation. Our question is whether the phrase “the size of
which shall be prescribed by the competent authorities and shall
not differ between credit institutions” refers to “Measures” at the
beginning of the sentence or to “change in interest rates”. The first
interpretation would imply that the measures prescribed by the
competent authorities should be the same regardless which credit
institution. The second interpretation would imply that a “trigger”
size of the interest rate change shall be prescribed by the
competent authorities and that this size shall not differ between
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credit institutions.
Answer:
The second interpretation is correct.
Area:
Directive 2006/48/EC, Article 129(2)
Issue:
Validation framework in relation to third countries competent
authorities
Question number:
176
Date of question:
20 November 2006
Publication of answer:
4. January 2007
Question:
The question refers to the situation of a third country, which is
preparing for accession to the EU and has started a continuous
cooperation with the home supervisors regarding IRB
implementation in EU banking groups (to which the largest banks
in the country belong): We plan to have national legislation in line
with the CRD by the year 2009. One of our banks (a subsidiary of
a European bank) intends to start using the IRB Approach for the
calculation of capital requirements starting form 2008 which
means that their parent bank will send an application on their
behalf to the home supervisor in 2007. We were informed that,
due to the fact that we are not yet a part of the EU and have no
national legislation in line with the CRD, we can't formally be a
part of the approval process. Therefore, our role in the approval
process remains unclear. When the home supervisor decides on the
application that was submitted by the Parent Bank, would this
decision be binding for us at the time we enter EU and/or have the
legislation in line with the CRD even though we didn't formally
participate in the approval process? In our view this shouldn't be
the case. If this decision wouldn't be binding, should we then,
jointly with the home supervisor, conduct a separate approval
process and draft a separate decision (e.g. an annex to the first
decision by the home supervisor) at the moment when our national
legislation is in line with the CRD or should it take place only
after we become a Member State? Furthermore, does the Article
129 (2) allow a case where both home and host supervisor would
be a Member State and a subsidiary would use (at the same time)
the IRB Approach for the calculation of capital requirements on a
consolidated basis and the Standardised Approach for the
calculation of capital requirements on individual basis (e.g. home
supervisor thinks that the internal rating system is adequate, host
supervisor disagrees and this subsidiary is significant for the host's
banking sector?
Answer:
While third country supervisors are involved in validation process
in the context of bilateral contacts between the consolidating
supervisor and third country supervisors, Article 129(2) deals with
the approval process between EU competent authorities.
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Nevertheless, in principle, subject to the agreement of all
stakeholders, third country authorities could take part in the joint
approval process under Article 129(2) if the third country has
legislation in place that renders an approval performed in the
context of Article 129(2) legally binding for its competent
authorities. If under such arrangements, an approval extends to an
EU group's subsidiary in that third country, and the third country
joins the EU at a later point in time, the approval decision would
remain binding after the accession for the competent authorities of
the third country.
If, prior to accession, the subsidiary in the third country did not
receive approval for an IRB approach, there would be a new
application necessary if the group wished to extend its group-wide
IRB approach to the individual capital requirements for the
subsidiary, or if the subsidiary wanted otherwise to use an IRB for
its individual capital requirements.
Under Article 129(2), the approval decision is binding for the use
of the IRB as set out in the decision. Therefore, once the group has
received approval for the use of an IRB approach that extends to
the individual capital requirements of a subsidiary, it may use it
accordingly regardless of the subsidiary's significance.
Area:
2006/48/EC, Article 129 (2)
Issue:
Use of the IRB approach on a consolidated basis and the
Standardised approach on a solo basis
Question number:
226
Date of question:
16 March 2007
Publication of answer:
18 June 2007
Question:
In our view, the submitted Application to use the IRB Approach
should be submitted both for consolidated and solo capital
requirements. If a subsidiary satisfies the requirements by the
consolidating supervisor, but doesn't satisfy the requirements
(national regulation) of the competent authority where it is
situated, e.g.:
a) the experience requirement, length of the data series (if the
national discretions were exercised differently by the mentioned
competent authorities)
b) the centrally developed model is not suitable for the subsidiary's
local market,
can the "Joint Decision" state that the subsidiary may use the IRB
approach for the consolidated requirements and the Standardised
approach for the solo requirements?
Could the point of the Article 129 (where it says that, if the
competent authorities can not agree, the consolidating competent
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authority can decide) be applied in the above mentioned case, i.e.,
the subsidiary doesn't fulfil local requirements to use the IRB
approach, but the consolidating supervisor "insists" that it use the
IRB approach also for the solo requirements?
Answer:
Under Article 129 (2), the agreed decision may apply any blend of
home and host discretions, e.g. application of the home national
discretions in a host country (where the subsidiary is located) or
vice versa. In assessing the relevant rule to be applied, the
consolidating supervisor has the last say in case of disagreement.
Nevertheless, it must be noted that Article 129(2) requires that the
decision takes into account the views and reservations of all
competent authorities expressed during the 6 months period,
including whether minimum requirements of Annex VII, Part 4
may be met by the parent and its subsidiaries considered together
in accordance with Article 84(2).
This means that - subject to the validation process referred to in
Article 129 (2) - a host supervisor cannot prevent the use of the
group-wide IRB approach for the purposes of calculating the
subsidiary's solo capital requirements where the subsidiary, on the
one hand, does not comply with the host national discretions, but,
on the other hand, according to the consolidating supervisor,
complies – jointly with the parent – with all the minimum
requirements set out in Annex VII of 2006/48/EC.
Article 129(2) gives rise to only one decision. This means that
competent authorities can not require a group's entity supervised
on a solo basis to comply with models-related requirements,
including national discretions laid down in national legislation,
where this is not part of the decision referred to in Article 129 (2).
Area:
Directive 2006/48/EC, Article 146(3)
Issue:
Disclosure requirements
Question number:
63
Date of question:
5 April 2006
Publication of answer:
12 May 2006
Question:
The article refers to the information classified as secret or
confidential according to criteria set out in Annex XII, Part 1,
points 2 and 3 while criteria set out in Annex XII, Part 1, point 2
define information classified as proprietary.
The question is whether the exception provided in Article 146(3)
refers to the information classified as secret and confidential, or
proprietary and confidential.
Answer:
During the negotiations on the CRD the amendment “except where
these are to be classified as secret or confidential under the
criteria set out in Annex XII, Part 1, points 2 and 3” was added at
the end of Article 146(3).
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The problem highlighted in the question arises from a translation
error. The original English text "proprietary and confidential" in
146(2) was translated into German as "secret and confidential".
The above amendment was written in German, so used the same
language as in the German version of 146(2). When the
amendment was translated back into English, it was translated as
"secret and confidential".
It is clear, therefore, that "secret and confidential" in Article
146(3) should be read as "proprietary and confidential".
This translation error will be corrected during the work of the
lawyer/linguists to finalise the CRD text.
Area:
2006/48/EC, Article 152(1) to Article 152(7)
Issue:
Scope of application – 'Basel 1 floors'
Question number:
292
Date of question:
16 November 2007
Publication of answer:
8 February 2008
Question:
According to Article 152(1) to Article 152(6) of the CRD during
the first three years of application of the new framework banks
adopting the advanced methods (IRB and AMA) shall provide
own funds which are more than or equal to certain percentages of
the capital requirements calculated according to Basel I (floors).
According to a strict reading of the provisions of the Directive, the
floors shall be applied both at solo and consolidated level (Art.
152(7), which refers to articles 68 to 73 concerning the scope of
application). However, from a practical perspective, in the case of
institutions subject to consolidated supervision the application of
floors also at solo level gives rise to implementation problems,
especially with regard to operational risk. First of all such an
approach might not be consistent with the internal practices:
especially the operational risk requirement is usually determined
on a consolidated basis by business lines and not by legal entity.
For this reason the application of the floor at solo level could be
inconsistent. Moreover, the approach above mentioned may lead
to an allocation of regulatory capital within the group which is not
consistent with the actual distribution of risks. Is a more flexible
interpretation of the above mentioned provisions consistent with
the directive, allowing for the calculation of floors only at
consolidated and national sub-consolidated level in the case of
banks included in the consolidated supervision?
Answer:
Provided that the conditions of Article 69 are met, the competent
authorities may waive the application of Article 152(2) for
domestic subsidiaries of domestic parent credit institutions
(Article 69(1)) or domestic parent holding companies (Article
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69(2)) as well as for domestic parent credit institutions (Article
69(3)). These waivers are available for requirements on an
individual basis according to Article 68(1), but are not available in
the context of Article 71 and 72 for consolidation purposes.
Area:
2006/48/EC, Article 152(8)
Issue:
Application of Basel I or II in 2007
Question number:
5
Date of question:
9 December 2005
Publication of answer:
27 January 2006
Question:
Application of Basel I or II in 2007
Answer:
Article 152(8) leaves it to the discretion of the credit institution
whether it wants in 2007 to apply Standardised approach
according to the "old rules" (Basel I, with small modifications
enumerated in Article 152(9) to (14)) or according to the "new
rules" (Basel II Standardised approach).
The choice made determines applicable rules for all exposures to
be treated under the Standardised approach. On the other hand,
availability of the IRB approach as applicable in 2007 (i.e.,
without use of own estimates of LGD and conversion factors for
exposure classes other than retail) is not impacted by this choice.
According to Article 152(14), Pillar II and III will not apply to
those exposures to which the Basel I approach is applied.
Area:
Directive 2006/48/EC, Article 152(8) to (14) and Directive
2006/49/EC, Article 50
Issue:
Transitional provisions in 2007
Question number:
123
Date of question:
18 July 2006
Publication of answer:
12 October 2006
Question:
Article 152, paragraphs 8 to 14 of Directive 2006/48/EC permit
institutions to disapply certain provisions of this Directive until 1
January 2008. Is it required that institutions apply the entire
provisions of Directive 2006/49/EC from 1 January 2007?
Answer:
No, this is not the case.
Directive 2006/49/EC does not contain a similar option in its own
right. Note, however, that Article 50 of that Directive also allows
the application of Article 152(8) to (14) of Directive 2006/48/EC
mutatis mutandis for the purposes of Directive 2006/49/EC. This
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implies that investment firms can use the for their counterparty
credit risk exposures Articles 42 to 46 of Directive 2000/12/EC as
that Directive stood prior to January 1, 2007.
Note that Article 50(1)(a) and (b) of Directive 2006/49/EC contain
further qualifications regarding the application of Directive
2006/49/EC for those cases where the option in Article 152(8) is
applied (see also Q65).
Area:
Directive 2006/48/EC, Article 152 (11)
Issue:
Operational risk for firms using Basel 1 in 2007
Question number:
212
Date of question:
12 February 2007
Publication of answer:
2 April 2007
Question:
Article 152 (11) seems to read that when an institution is
calculating own funds during 2007, the institution can reduce the
operational risk capital element by the value of the following ratio:
Credit RWA (Basel1)/Total Exposures. Therefore, in order to be
able to calculate the value of the deduction, the institution will
need to be able to calculate regulatory capital for operational risk
according to the Standardised Approach from January 2007. Is
this the correct interpretation?
Answer:
If an institution applies Article 42 - 46 of 2000/12/EC to all its
exposures in 2007 by exercising the discretion of Article 152(8),
the application of the calculation referred to in Article 152(11) will
result in no capital requirements for operational risk being
required. Where an institution implements Article 152 (8) for a
portion of its credit risk exposures (e.g. during a roll-out period
starting in 2007), the institution shall calculate the operational risk
for all its business lines under the BIA or the TSA without any
exceptions. In such cases, the institution may reduce its
operational risk capital requirements by a percentage which is
calculated as the ratio of the value of the credit institution's
exposures for which risk-weighted exposure amounts are
calculated in accordance with the discretion referred to in Article
152(8) and the total value of the institution's exposures.
Area:
2006/48/EC, Articles 84(3) and (4), 154(2) and (3) and Annex VII,
Part 4, point 66
Issue:
Use requirement for the IRB approach
Question number:
137
Date of question:
4 August 2006
Publication of answer:
28.11.2006
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Question:
Concerning the use requirement for IRB and the length of
historical time series for PD/LGD/CCF, let’s suppose the
minimum length of PD data is set to two years (in compliance with
Annex VII, Part 4, point 66) and the IRB use requirement is set to
one year (in compliance with Articles 84(3), 154(2) and (3)).
Does it mean that the institution must have two years of PD data at
the moment of implementing the IRB approach? Or, perhaps, the
institution needs 3 years of data in total (2 years of data is
obligatory at the moment of implementing the IRB approach)?
Answer:
The use and historical data requirements are not cumulative.
Therefore in the above example two years of PD data would meet
the CRD-requirements in this regard.
Area:
2006/48/EC, Article 152(1)
Issue:
Transitional floors – Starting date
Question number:
278
Date of question:
17 October 2007
Publication of answer:
5 December 2007
Question:
Point 1 of Article 152 refers to three twelve-month periods after
31.12.2006 when credit institutions calculating risk-weighted
exposure amounts in accordance with Articles 84 to 89 shall
provide own funds which are at least equal to 95%, 90% and 80%
(respectively in the first, second and third twelve-month period) of
the total minimum amount of own funds that would be required to
be held during that period by the credit institution under Article 4
of Council Directive 93/6/EEC of 15 March 1993 on the capital
adequacy of investment firms and credit institutions as that
Directive and Directive 2000/12/EC stood prior to 1 January 2007.
The wording of this provision suggests that these three months
periods are not defined in terms of fixed timetable (2007, 2008,
2009) but rather in terms of relative three year periods applicable
on individual basis to any banks where starting date is individually
determined and thus variable. Such interpretation however would
be at variance with the item 46 (Transitional arrangements, page
13) of the "International Convergence of Capital Measurement
and Capital Standards" published by the Basle Committee of
Banking Supervision in June 2006. Does the above mentioned
provision of Directive 2006/48/EC imply that these periods are respectively - the years 2007, 2008 and 2009 or alternatively, the
starting point of the first twelve-month period is determined
individually by the moment of implementation of the IRB
Approach in a given bank (what in fact implies that the first,
second and third twelve-month period are observed starting from
the date of implementation)?
Answer:
Article 152(1) refers to the 'first, second and third twelve month
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periods after 31 December 2006'.
This means that the transitional floor is 95% until 31 December
2007, 90% until 31 December 2008, and 80% until 31 December
2009 irrespective of the implementation date.
Area:
2006/48/EC, Article 154(3)
Issue:
Scope of the grandfathering for equity exposures
Question number:
26
Date of question:
20 February 2006
Publication of answer:
12 April 2006
Question:
Article 154(3) states that “the competent authorities of the
Member States may exempt from the IRB treatment certain equity
exposures held by credit institutions and EU subsidiaries of credit
institutions in that Member State at 31 December 2007”.
Views are sought on the following interpretations:
1. “EU subsidiaries of credit institutions in that Member State”
means subsidiaries of other EEA countries’ credit institutions
which are authorised and supervised by the competent authorities
of the Member States granting the grandfathering. Nevertheless, it
must be noted that according to European law such subsidiaries
are treated on the same footing as other credit institutions. Hence,
this provision “and EU subsidiaries of credit institutions in that
Member State” does not add much. By definition, for the purposes
of individual capital requirements, EU subsidiaries benefit from
the same treatment as other credit institutions in the same Member
State. For parent credit institutions in a Member state, the
grandfathering provisions decided upon by the home competent
authorities may apply for consolidation purposes to all equity
exposures, regardless of “host” treatments.
2. The reference to “EU subsidiaries of credit institutions in that
Member States” means that the scope of equity exposures is
limited to the counterparts located in the country of the
consolidating supervisor. Put it another way, when performing
consolidation, a parent credit institution would aggregate equity
exposures of the consolidating banks held in corporate entities
incorporated in its jurisdiction and exposures held by its EU
subsidiary authorised in other Member State in corporate entities
incorporated in the consolidating bank’s jurisdiction. It must be
noted that this interpretation runs counter to the Basel framework
which does not contain any restriction in terms of scope.
3. This provision could be construed as follows: i) for the
consolidating credit institution, the grandfathering is not limited in
scope: wherever the counterpart giving rise to the equity exposures
is located, banks may apply the grandfathering; ii) when
consolidating the equity exposures of EU subsidiaries, the
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consolidating bank may take into consideration the exposures held
by its subsidiary in the territory of the consolidating bank’s
country of incorporation. For other exposures, the aggregation of
equity exposures on a consolidated basis, subject to different
national law, is not permitted.
4. This provision can be construed as drawing up a mutual
recognition clause. Subject to national discretion (“competent
authorities may exempt”), consolidating supervisors may
recognise the grandfathering treatment decided by the “host”
country (the supervisor of the EEA subsidiary) and accordingly,
consolidating banks would aggregate possible diverging
“grandfathering treatments” (treatment applied to subsidiaries and
treatment applied to the consolidating credit institution), at a
consolidated level. This interpretation does not preclude
competent authorities to apply the “home treatment” to all
exposures (cf. point 1).
Answer:
The scope and intention of the grandfathering provision is clear:
(i) a competent authority can allow grandfathering of the relevant
equity exposures for either all or none of the credit institutions
within its jurisdiction (the "in that Member State" part of the text);
(ii) there is no geographical restriction on the location of the
equity exposures (including outside the EU);
(iii) for an EU parent credit institution, or for a parent credit
institution in a Member State, this means that if its consolidating
supervisor allows grandfathering of the equity exposures, this can
apply to all such exposures held by the parent and subsidiaries
wherever located for the purposes of consolidation.
The interpretation set out in part 1 of the question is correct. The
interpretation set out in part 2 of the question is incorrect.
Area:
2006/48/EC, Article 158(2) with regards to Directive 2000/46/EC,
Articles 2(1) and (2)
Issue:
Application of new provisions in Directive 2006/48 to e-money
institutions
Question number:
17
Date of question:
7 February 2006
Publication of answer:
1 June 2006
Question:
Are provisions of Directive 2006/48/EC that, according to the
correlation table in Annex XIV, do not succeed (change) any
provision of current Directive 2000/12/EC (i.e., they present brand
new rules for credit institutions), for instance Articles 123, 124,
144 and 145, also applicable to electronic money institutions
according to Article 2(1) and (2) of Directive 2000/46/EC?
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Answer:
Directive 2000/46/EC (the E-Money Directive) is currently under
review. Part of the review will be to consider which of the new
provisions which have been introduced into Directive 2006/48/EC
should apply to electronic money institutions (ELMIs). Until the
revision has been finalised, the provisions which do not replace
provisions of current Directive 2000/12/EC do not apply:
examples of the new provisions which do not apply are Articles
123 and 124.
Where Directive 2000/46/EC refers to provisions of current
Directive 2000/12/EC that have not been replaced, the provisions
of current 2000/12/EC continue to apply. For example, the
investment restrictions for ELMIs (Article 5 of 2000/46/EC)
remain unchanged, because there is no direct replacement of
Article 43 of current Directive 2000/12/EC, to which Article 5
refers.
It should be noted that where an ELMI is part of a credit
institution group, then the provisions of Directive 2006/48/EC will
apply to that group on a consolidated basis, including the ELMI.
The provisions will not apply to that ELMI on a stand-alone (solo)
basis.
The Correlation Table in Annex XIV of 2006/48/EC makes clear
which provisions replace the provisions of current 2000/12/EC.
Area:
Directive 2006/48/EC, Article 152 (8)
Issue:
Operational risk for firms using 'Basel 1' in 2007
Question number:
193
Date of question:
16 January 2006
Publication of answer:
2 April 2007
Question:
In article 152(8) of the Directive 2006/48 the discretion is given to
credit institutions to use the risk weightings of the Directive
2000/12 instead of the standardised approach, till the 1st January
2008. In paragraph 11 of the same article is written that in this
case the capital requirement for operational risk shall be reduced
by the percentage representing the ratio of the value of the credit
institution's exposures for which risk weighted exposure amounts
are calculated in accordance with the discretion referred to in
paragraph 8 to the total value of its exposures. Our question is
whether the total value of exposures includes the securities held in
the trading book for which specific risk capital charge is
calculated, or the total value of exposures should be calculated
only for the non-trading book items.
Answer:
Article 152(11) refers to the value of the credit institution's
exposures for which risk-weighted exposure amounts are
calculated in accordance with Article 152(8). This means that the
above mentioned ratio includes risk-weighted exposure amounts
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referred to in Article 75(a) for credit risk and dilution risk with the
exception of the trading book business and illiquid assets if
deducted from owns funds and risk-weighted exposure amounts
arising from Article 75(b) for counter-party credit risk in respect
of their trading book business.
Area:
2006/48/EC, Annex II and Annex VII part 3 points 9(d) and 11
Issue:
Treatment of undrawn credit lines under the IRB approach and the
Standardised approach
Question number:
299
Date of question:
11 December 2007
Publication of answer:
13 March 2008
Question:
With regard to the response provided to Q275, we remain unclear
as to why are there such differences in terms of the CCFs to apply
under between the Standardised and F-IRB approaches. To
illustrate; Under the Standardised Approach , Note Issuance
Facilities and Revolving Underwriting Facilities receive a 50%
credit conversion factor (Annex II). Under the F-IRB Approach
however, Note Issuance Facilities and Revolving Underwriting
Facilities receive a 75% credit conversion factor (Annex VII, Part
3, point 9(d)). Under the Standardised Approach, an undrawn
credit facility that can be cancelled unconditionally at any time
without notice will receive a credit conversion factor of 20% if the
original maturity is less than one year and 50% if the original
maturity is greater than one year (Annex II). Under the F-IRB
Approach, credit lines which are uncommitted and can be
cancelled unconditionally at any time without notice receive a 0%
CCF (Annex VII, Part 3, Point 9(a)). If the facility is not
unconditional and cannot be cancelled at any time without notice,
a CCF of 50% applies under the Standardised Approach and a
CCF of 75% applies under the F-IRB Approach (Annex VII, Part
3, point 9(d)).
Answer:
Differences between the Standardised approach and the IRB
approach reflect the overall calibration of the Basel framework
(see Basel paragraph 311).
Area:
2006/48/EC, Annex II and Annex VII part 3 points 9(d) and 11
Issue:
Treatment of undrawn credit lines under the IRB approach and the
Standardised approach.
Question number:
301
Date of question:
17 December 2007
Publication of answer:
13 March 2008
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Question:
This is to follow up question 275. Clarification is sought for
paradox that according to the rules specified, Irrevocable Standby
Letter of Credit is weighted with 50% but an un-utilized
committed credit line is weighted with a conversion factor of 75%.
We argue that it correct as an irrevocable Letter of Credit can’t be
withdrawn or cancel, so this is real exposure, though utilization of
a committed credit line can be prevented under certain
circumstances. We see inconsistency between Standardized
Approach and IBR Approach in treating un-utilized committed
credit lines. Standardized Approach considers un-utilized credit
facilities for less then 1 year as Low Risk, giving them 20% CCF
and for over 1 year as Medium Risk with CCF of 50%. Your
answer to question 275 specifies that under IRB approach all unutilized credit lines have CCF as 75%. The logic behind credit
conversion factors is that CCF gives a value to a product risk.
Clarification is sought for giving different value to the same
product risk under Standardized Approach and IBR Approach.
Answer:
See answer to CRDTG Q299
Area:
2006/48/EC, Annex II and Annex VII, Part 3, points 9 to 11
Issue:
Treatment of off-balance sheet items under the Standardised
approach and the IRB approach
Question number:
337
Date of question:
26 May 2008
Publication of answer:
25 July 2008
Question:
Could you please make a distinction between CCF (credit
conversion factor) for off balance sheet items under the
Standardised approach and under the IRB approach?
Answer:
See answer to Q275
In addition, institutions which meet the requirements laid down in
Annex VII, Part 4, section 2.2.3 may be allowed to use own
estimates of conversion factors in accordance with Annex VII,
Part 3, point 9(e)
Area:
2006/48/EC, Annex III
Issue:
Calculation of exposures for long settlement transactions
Question number:
291
Date of question:
15 November 2007
Publication of answer:
20 December 2007
Question:
Which methods are used for calculation of exposure arising from
long settlement transactions?
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Answer:
In accordance with Annex III, Part 2, point 7 of 2006/48/EC,
exposures arising from long settlement transactions can be
determined using any of the methods set out in Part 3 to 6 (i.e.
Mark-to-Market method, Original Exposure Method, Standardised
Method, Internal Model Method).
Area:
2006/46/EC, Annex III
Issue:
Treatment of exposures to clearing house for counterparty credit
risk purposes
Question number:
308
Date of question:
15 January 2008
Publication of answer:
13 March 2008
Question:
Do we have to calculate capital requirement on the membership
deposit given to a clearing house for affiliation even if the clearing
house processes to everyday margin calls?
Answer:
Not knowing the precise purpose and nature of such a membership
deposit, we assume that it does not fall within the scope of
exposures exempted from CCR capital requirements under point 6
of part 2 in Annex III.
For holding in “institutional bodies”, see answer to CRDTG Q120.
Area:
2006/48/EC, Annex III, Part 1, point 3 and Annex IV
Issue:
Scope of the CCR treatment
Question number:
168
Date of question:
10 November 2006
Publication of answer:
15 January
Question:
The definition of “long settlement transactions” refers to
transactions with a settlement or delivery date that is contractually
specified as more than the lower of the market standard for this
particular transaction and five business days after the date on
which the credit institution enters into the transaction. Such
transactions are subject to the CCR discipline. Our question
regards the treatment of transactions negotiated today but with a
settlement or delivery date lower than the limits set by the above
described definition. Does the treatment depend on the accounting
approach (e.g., under IAS/IFRS if this transactions are considered
derivatives or not)? If not, are these transactions also subject to
CCR? According to a possible interpretation of Annex IV of the
CRD they might be included in the definition of derivatives, in
particular according to the provision of Annex IV, point 1 (f) and
point 2 (f).
Answer:
Does the treatment depend on the accounting approach (e.g.,
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under IAS/IFRS if this transactions are considered derivatives or
not)?
The prudential treatment of transactions with settlement or
delivery periods shorter than the limits set out in Annex III, Part 1,
point 3 of Directive 2006/48/EC is not influenced by the relevant
accounting approach but depends on the transaction type.
If not, are these transactions also subject to CCR? According to a
possible interpretation of Annex IV of the CRD they might be
included in the definition of derivatives, in particular according to
the provision of Annex IV, point 1 (f) and point 2 (f).
Only contracts listed in Annex II, Point 5 of Directive 2006/49/EC
are subject to a capital charge for counterparty risk as set out in
Article 75(b) of Directive 2006/48/EC.
If a transaction constitutes a derivative in this context depends
only on whether or not it is covered by the list of items in Annex
IV of Directive 2006/48/EC, based on the economic substance of
the transaction. Accordingly, a transaction that is not a long
settlement transaction is not automatically a derivative.
Moreover, note that according to Article 75(b) of 2006/48/EC,
derivatives and long settlement transactions related to trading book
business in which debt instruments, equities, foreign currencies
and commodities (excluding repurchase and reverse repurchase
agreements and securities or commodities lending and securities or
commodities borrowing transaction) are unsettled after their due
delivery dates are also subject to capital requirements for
settlement risk as determined in Annex II of 2006/49/EC.
Area:
Directive 2006/48/EC, Annex III, Part 1, point 22
Issue:
Calculation of the EPE – netting set
Question number:
194
Date of question:
16 January 2007
Publication of answer:
7 October 2008
Question:
According to Annex I, part 1, point 22 of Directive 2006/48/EC
EPE is calculated with regard to the netting set. However, for
collateralised counterparties, ISDA Master Agreements are
typically signed at counterparty level. Therefore, when a
counterparty has more than one netting set, there is no clear way to
ascribe collateral to specific netting sets and hence calculate EPE
at the netting set level as required by the CRD. Similarly, it is not
always the case that collateral will be sufficient to cover losses at
default for each individual netting set. For uncollateralized
counterparties, most large sophisticated banks calculate EPE at
counterparty level, respecting netting rights across the portfolio.
The calculations are complicated further by the need under CRD
to calculate “Effective EPE” as the level of EAD used in the
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capital calculation. Given the portfolio nature of the relationship
with a counterparty Effective EPE at netting set level is not a
meaningful number used by banks and to calculate it would
require significant additional investment in system changes to
produce results that would not be used by the banks. Would it,
therefore, be compliant with the CRD to calculate EPE a) for
collateralised counterparties by counterparty and applying a
reasonable allocation approach down to netting set level, and b)
for uncollateralized counterparties by counterparty respecting
netting and allocate to netting sets in a reasonable manner?
Answer:
As a follow-up to this question, on 1st October 2008, the
Commission has adopted a proposal amending Annex III, Part 1,
point 5 as follows: "Under the method set out in Part 6 of this
Annex (IMM), all netting sets with a single counterparty may be
treated as single netting set if negative simulated market values of
the individual netting sets are set to 0 in the estimation of expected
exposure (EE)."
Area:
2006/48/EC, Annex III, Part 3 Mark to Market Method
Issue:
Mark to Market Method
Question number:
205
Date of question:
26 January 2007
Publication of answer:
26 February 2007
Question:
Which are the requirements to use residual maturity for add-ons in
derivatives?
Answer:
The requirement is that all contracts treated under the Mark-toMarket method be mapped to the rows in Tables 1 and 2 based on
their residual maturities.
Area:
2006/48/EC, Annex VIII, Part 3
Issue:
Substitution approach for guarantees of credit institutions during
IRB roll-out
Question number:
249
Date of question:
12 July 2007
Publication of answer:
8 February 2008
Question:
The question addresses the situation where a standardised
approach exposure is covered by a guarantee provider that would
normally be classified into an IRB portfolio. For instance let's
assume we had a corporate exposure of 100 covered by a banking
guarantee of 80 in value. According to the substitution principle
applying to guarantees (Annex VIII Part 3 point 88) the risk
weight applying to the credit protection provider shall be used for
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the covered portion (i.e., 80). Let's also assume that the bank is
applying the IRB approach gradually across its portfolios starting
with the banking portfolio. Thus the corporate portfolio is
weighted according to the Standardised Approach (art 78 to 83)
while the banking portfolio is computed capital charge against
using the IRB methodology (art 84 to 89). Shall the bank risk
weight the covered part by the guarantee according to the
approach specific to the exposure (Standardised Approach) or that
specific to the guarantor asset class (i.e., IRB)?
Answer:
As part of a roll-out plan, both approaches described above are
possible provided that they are permitted by the competent
authorities. This flexibility shall not be used selectively with the
purpose of achieving reduced minimum capital requirements in
accordance with Article 85(2). In considering this flexibility (use
of the IRB approach for an exposure class which has not been
authorised yet by the competent authority), particular attention
would have to be paid to the length of the roll-out plan.
Area:
2006/48/EC, Annex III, Part 3
Issue:
Residual maturity of OTC-derivatives in add-on calculations
Question number:
304
Date of question:
18 December 2007
Publication of answer:
13 March 2008
Question:
Can the add-on's for OTC-derivatives contracts having for
example remaining maturity for 6 years be calculated using the
shortest residual maturity class (i.e. one year or less) if the Bank is
giving / receiving daily margin collaterals under ISDA Credit
Support Annex (CSA) with counterparty? We have interpreted that
the margin collateral does not affect the residual maturity in addon calculation. However we have been informed that the
interpretation might not be the same in the all member counties.
We are also asking if ISDA CSA or equivalent agreements with
daily collateral adjustment can be equated in economical manner
to the contracts where the market value is periodically reset to zero
as described in footnote 3 in Part 3 and where the residual maturity
would be shorter than the remaining maturity of the contract in the
add-on calculation.
Answer:
It is correct that the residual maturity referred to in Table 1 (Part 3
of Annex III) is that of the contract in question and is not affected
by the frequency of collateral remargining. The treatment in
footnote 3 to this table requires actual payments settling the
outstanding exposures with the counterparty following specified
payment dates and where the terms are reset such that the market
value of the contract is zero on these specified dates, and not
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merely the providing of collateral.
Area:
2006/48/EC, Annex VIII, Part 3, point 24
Issue:
Combined use of the Financial Collateral Simple Method and the
Financial Collateral Comprehensive Method in case of partial use
Question number:
265
Date of question:
27 August 2008
Publication of answer:
7 October 2008
Question:
Point 24 of Part 3 of Annex VIII defines that a credit institution
shall not use both the Financial Collateral Simple Method and the
Financial Collateral Comprehensive method. Does this mean that
if a credit institution uses the IRB Approach and some exposure
classes/exposures are excluded from IRB according to Article 89
(the use of standardised approach), the comprehensive method,
which is compulsory for IRB banks, must be used for these
excluded exposures as well? Or can the simple method be used for
excluded exposures, which means that both methods would be
used - comprehensive plus simple for excluded exposures under
article 89?
Answer:
As a follow-up to this question, on 24 September 2008, the
European Banking Committee has approved the draft Comitology
Directive amending Annex VIII, Part 3, point 24 as follows: "The
Financial Collateral Simple Method shall be available only where
risk-weighted exposure amounts are calculated under Articles 78
to 83. A credit institution shall not use both the Financial
Collateral Simple Method and the Financial Collateral
Comprehensive Method, unless for the purposes of Articles 85(1)
and 89(1). Credit institutions shall demonstrate to the competent
authorities that this exceptional application of both methods is not
used selectively with the purpose of achieving reduced minimum
capital requirements and does not lead to regulatory arbitrage."
Area:
2006/48/EC, Annex III, Part 5, point 1
Issue:
Eligible collateral for counterparty credit risk
Question number:
170
Date of question:
10 November 2006
Publication of answer:
15 January 2006
Question:
First question:
According to the directive (Annex III, Part 5, point 1) eligible
collaterals for standardised method are:
1) collateral that is eligible under point 11 of Part I of Annex VIII
of 2006/48/EC (id est all financial instrument eligible for
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comprehensive method of CRM);
2) collateral that is eligible under point 9 of Annex II of
2006/49/EC. The same provision is established for IMM (see
Annex III, Part 6, point 6). We don’t read analogue rule for Markto Market Method (see Annex III, Part 3). At the same time, we
know that Basel Accord defines the same eligible collateral for all
three methods. (See: 1) IMM, Annex 4, para. V; 2) STA method,
Annex 4, para. VI; 3) Mark-to Market Method (CEM), Annex 4,
para. VII).
We think that “eligible collaterals” have to be the same for all
three methodologies also in the European directives. Is our
interpretation correct?
Second question:
Above we have just seen that eligible collateral for counterparty
risk includes items referred to in point 9 of Annex II of
2006/49/EC. This rule establishes: “For the purposes of point 6 , in
the case of repurchase transactions and securities or commodities
lending or borrowing transactions booked in the trading book, all
financial instruments and commodities that are eligible to be
included in the trading book may be recognised as eligible
collateral. For exposures due to OTC derivative instruments
booked in the trading book, commodities that are eligible to be
included in the trading book may also be recognised as eligible
collateral…..”. We would interpret this rule in the sense that “all
financial instruments and commodities that are eligible to be
included in the trading book can be used as eligible collateral to
reduce the counterparty risk in the Annex III of 2006/48/EC”. This
approach is compliant with the provision established by paragraph
703 of the Basel Accord.
What is your opinion?
Answer:
Firms applying the Mark-to-Market method, the Standardised
method and the Internal Model method may use the same types of
eligible collateral as listed in Annex VIII of Directive 2006/48/EC
and in Annex II, point 9 of Directive 2006/49/EC according to the
relevant methodology provided for in the CRD. Depending on the
method, recognition of collateral is a two-step process:
•
First step, when calculating the exposure value according to
one of the methods provided for in Annex III of Directive
2006/48/EC – however, no collateral can be recognised in this
step when using the Mark-to-Market method.
•
Second step, when adjusting the exposure value or (via
calculating an adjusted exposure value) the LGD according to
one of the methods provided for in Annex VIII of Directive
2006/48/EC – however, collateral cannot be recognised in this
step if it was recognised already in the first step.
It must be noted that not all financial instruments and commodities
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that are eligible to be included in the trading book can be used as
eligible collateral for all transactions. Only in the case of
repurchase transactions and securities or commodities lending or
borrowing transactions booked in the trading book, all financial
instruments and commodities that are eligible to be included in the
trading book may be recognised as eligible collateral. For
exposures due to OTC derivative instruments booked in the
trading book, only commodities that are eligible to be included in
the trading book may also be recognised as eligible collateral in
addition to the eligible collateral under Annex VIII of Directive
2006/48/EC.
Area:
Directive 2006/48/EC, Annex III, Part 5, point 15
Issue:
Counterparty credit risk – Standardised method
Question number:
169
Date of question:
10 November 2006
Deadline for answer:
8 May 2007
Question:
The directive does not explicitly mention the treatment for basket
CDSs “nth to default”. It’s possible to individuate the only generic
reference in the standardised method which states that "one
hedging set for each issuer of a reference debt instrument that
underlies a credit default swap" is required.
Our institution is considering the introduction of a specific
treatment for CDSs “nth to default” similar to the one provided for
in the discipline for the current exposure method (ref. Annex II,
par. 7 dir. 2006/49 CAD).
The provision for the protection seller might be the following:
“In case of CDS “first to default”, one hedging set is required in
relation to the reference obligation with the highest specific risk;
in case of CDS “nth to default” one hedging set is required in
relation to the reference obligation having the nth highest specific
risk. The amount of the exposure is equal to the notional amount
multiplied by the remaining maturity of the CDS.
What is your opinion?
Answer:
The Directive does not set out a specific treatment for 'nth to
default' basket credit default swaps. Because of the underlying
economic substance of these instruments, it is also not possible to
derive a general treatment from the rules for single name credit
default swaps. The CRDTG has agreed that an economically
appropriate approach that is in line with the objectives and the
functioning of the Standardised Method, is derived from the
general approach for treating underlying debt instruments as set
out in point 6 of Annex III, Part 5.
1. The size of a risk position in a reference debt instrument in a
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basket underlying an 'nth to default' credit default swap is
the "effective notional value" of the reference debt instrument,
multiplied by the delta of the value of the 'nth to default' derivative
with respect to a change in the credit spread of the reference debt
instrument.
2. There is one hedging set for each reference debt instrument in a
basket underlying a given 'nth to default' credit default swap. Risk
positions from different 'nth to default' credit default swaps shall
not be included in the same hedging set.
3. The CCR multiplier applicable to each hedging set created by
one of the reference debt instruments of an 'nth to default'
derivative is 0.3% for investment grade and 0.6% for noninvestment grade debt instruments.
Area:
Directive 2006/48/EC, Annex III, Part 7
Issue:
Recognition of cross-product netting agreements between two
members of a banking group
Question number:
105
Date of question:
19 June 2006
Publication of answer:
11 September 2006
Question:
Annex III, Part 7, in the list of “Types of netting that competent
authorities may recognise” indicates the following point:
“(iia) contractual cross product netting agreements for credit
institutions that have received approval by their competent
authorities to use the method set out in Part 6, for transactions
falling under the scope of that method. Netting across transactions
entered by members of a group is not recognised for the purposes
of calculating capital requirements.”
This rule can be interpreted in the sense that bilateral crossproduct netting between two members of the same banking group
cannot be recognised by the competent authorities.
In this interpretation it is not clear why the limitation applies only
to intra-group cross-product netting agreements and not to intragroup netting agreements of OTC derivatives, the recognition of
which is already regulated by the previous version of Directive
2000/12/EC.
“The Application of Basel II to Trading Activities and the
Treatment of Double Default Effects” (“Trading Book Review”)
establishes at point 24 that:
“(…) The Cross-Product Netting Rules address bilateral CrossProduct Netting Arrangements. Netting other than on a bilateral
basis, such as netting across transactions entered by affiliates,
including the regulated entity (known as cross-affiliate netting), is
not recognised for the purposes of calculating capital
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requirements.”
This rule excludes netting agreements in which more than two
legal entities are involved. The reference to cross-affiliate netting
is only a specification.
An example for a cross-affiliate netting provision can be found in
the ISDA Master Agreement 2002 where the two parties have the
possibilities to choose the “Multibranch Clause”. This clause
provides that “(…) each party that enters into a Transaction
through an office other than its head or home office represents to
and agrees with the other party that, notwithstanding the place of
booking or its jurisdiction of incorporation or organisation, its
obligations are the same in terms of recourse against it as if it had
entered into the Transaction through it head or home office (…)”.
One of the consequences of this provision is the extension of the
close-out netting provision also to transactions entered by those
affiliates that the parties indicate as “Offices”.
Shall the recast Directive 2000/12/EC be interpreted in the sense
of excluding bilateral cross-product netting agreements between
two members of the same banking group or shall it be interpreted
in the sense of excluding netting other than on a bilateral basis, of
which cross-affiliate cross-product netting arrangements are only a
specification?
Answer:
Annex III, Part 7 of Directive 2006/48/EC should be interpreted in
the sense that netting other than on a bilateral basis is not
recognised for prudential purposes.
The exclusion of "netting across transactions entered by members
of a group" should be understood as a clarification that members
of a group must be considered separate parties when
distinguishing bilateral from multilateral netting, of which only the
first can be recognised for regulatory capital purposes.
Area:
2006/48/EC, Annex III, Part 7, paragraph a)
Issue:
Application of contractual netting to long settlement transactions
Question number:
341
Date of question:
13 June 2008
Publication of answer:
12 September 2008
Question:
Annex III, Part 7, paragraph a), for the purposes of cross-product
netting, establishes the following different product categories: 1)
SFTs; 2) margin lending transactions; 3) contracts listed in Annex
IV (derivatives). Long settlement transactions are not referred to
explicitly. On the other hand Annex III, part 2, point 7, for the
purposes of the choice of the method to calculate CCR exposures,
seems to consider long settlement transactions as a separate
category in that it states that exposures arising from long
settlement transactions can be determined using any of the
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methods set out in Parts 3 to 6, regardless of the methods chosen
for treating OTC derivatives, SFTs or margin lending transactions.
Moreover long settlement transactions may be exempted
permanently from IRB irrespective of their materiality. The above
mentioned provisions give rise to some uncertainties with regard
to the application of contractual netting to long settlement
transactions as defined by Annex III, part 1, point 3 of the CRD.
In particular we shall distinguish between: a) “single product
bilateral agreements”: are long settlement transactions eligible for
netting; and in the affirmative shall they be considered a category
apart, meaning that they can be netted only with transactions
meeting the definition of part 1, point 3, and not together with
derivatives contracts?; b) cross product netting: are long settlement
transactions eligible for cross product netting? If yes, do they need
to be included into the category 3 (derivatives)?
Answer:
For purposes of bilateral contractual netting as set out in Part VII
of annex III, long settlement transactions shall be considered part
of the product category of "contracts listed in Annex IV" as they
are not listed as a separate product category and their risk profile
resembles that of OTC derivatives. Accordingly, in the absence of
recognised contractual cross-product netting, netting is prohibited
with contracts falling into the two other product categories. Note
that by contrast, part 2 refers to long settlement transactions as a
separate category for purposes of the choice of method for CCR
calculations.
Area:
Directive 2006/48/EC, Annex VI, Part 1
Issue:
Standardised approach risk weights
Question number:
96
Date of question:
6 June 2006
Publication of answer:
8 August 2006
Question:
In various parts of the CRD, credit quality steps are quoted. Can
you specify the credit quality steps by the notation used by, say,
Standard & Poor's or Moody's? For example is the mapping below
for credit institutions correct?
AAA to AAA+ to ABBB+ to BBBBB+ to BBB+ to BCCC+ and below
Answer:
1
2
3
4
5
6
Article 82(1) requires competent authorities to carry
mapping of credit assessments of an eligible external
assessment institution to the credit quality assessment
Alternatively, they may recognise the mapping carried out
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out a
credit
steps.
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competent authorities of another Member State. The Committee of
European Banking Supervisors has published guidelines on the
recognition process which include the criteria for mapping
external credit assessments to the CRD risk weights (see
http://www.c-ebs.org/pdfs/GL07.pdf).
Area:
2006/48/EC, Annex VI, Part 1, points 4, 5, 37 & 38; Annex VIII,
Part 3, point 89
Issue:
Same-currency funding of exposures
Question number:
36
Date of question:
22 February 2006
Publication of answer:
20 June 2006
Question:
Some exposures denominated in a domestic currency shall be
assigned e.g. a preferential risk weight of 0 % according to Annex
VI, Part 1, points 4 and 5, provided that they are funded in the
same currency. Preferential treatment is also granted to guaranteed
exposures where the guarantee is denominated in the domestic
currency of the borrower and the exposure is funded in that
currency. We would like to know how the aforementioned funding
should be handled and assessed. Directive 2006/48/EC doesn't
explain the term funding.
In the Basel document, paragraph 54, footnote 19, the word
funded is explained in the following way: "This is to say that the
bank would also have corresponding liabilities denominated in the
domestic currency." In our opinion, the following procedure could
be applied when assessing the requirement of funding:
1. A direct claim on, e.g., a central government to which a
preferential 0 % risk weight is applicable. It is necessary to assess
whether a bank has on-balance-sheet liabilities denominated in the
domestic currency of the central government. The assessment
would represent the consideration of the whole amount of onbalance-sheet assets and the whole amount of on-balance-sheet
liabilities of the bank denominated in the given currency.
2. An indirect claim on, e.g., a central government to which a
preferential 0 % risk weight is applicable. If a claim on a client
denominated, e.g., in USD is guaranteed by a recognised third
party, e.g., a central government to which a preferential 0 % risk
weight is applicable, then the whole amount of off-balance-sheet
assets and the whole amount of off-balance-sheet liabilities of the
bank denominated in the domestic currency of the central
government should be considered.
Moreover, taking into account Article 153, third sub-paragraph,
the same procedure could be applied, if the central government
guarantee is denominated in the domestic currency of any Member
State. The whole amount of, e.g., on-balance-sheet assets and the
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whole amount of on-balance-sheet liabilities of the bank
denominated in the domestic currency of the any Member State
could be considered. An additional question could be what the
rationale is behind the requirement of funding.
Answer:
The lower risk weight for exposures to central governments that
are funded in the domestic currency is justified by the fact that,
under that condition, the risk of the exposure to that specific
central government is reduced as a currency mismatch is avoided.
So, to be able to use the lower risk weight for exposures to a
central government, it should be warranted that the institution has
corresponding liabilities denominated in the domestic currency of
that specific central government. There are no provisions in the
CRD on how credit institutions should demonstrate compliance
with this specific requirement. In general terms it is left to credit
institutions to demonstrate that the lower risk weight is justified,
i.e., that the funding requirement in §4 (and §5) is met.
The examples mentioned represent a possible way to demonstrate
compliance in the specific situations mentioned. However, there
are also other ways to demonstrate compliance. A credit institution
could match on-balance sheet exposures with off-balance sheet
liabilities or vice versa. Or it could demonstrate to its supervisor
that a specific exposure is matched by a specific liability.
Ultimately, it is for credit institutions to decide in which way to
demonstrate to the supervisor that the requirement in §4 is met.
Area:
2006/48/EC, Annex VI, Part 1, point 5
Issue:
List of "third countries" applying supervisory and regulatory
arrangements equivalent to those applied in the Community
Question number:
246
Date of question:
11 July 2007
Publication of answer:
13 March 2008
Question:
In Annex VI, Part 1, point 5 of Directive 2006/48/EC it is said
that: "When the competent authorities of a third country which
apply supervisory and regulatory arrangements at least equivalent
to those applied in the Community assign a risk weight which is
lower than that indicated in point 1 to 2 to exposures to their
central government and central bank denominated and funded in
the domestic currency, Member States may allow their credit
institutions to risk weight such exposures in the same manner."
Does a list exist that gives an overview of those "third countries"
which apply supervisory and regulatory arrangements equivalent
to those applied in the Community? Or how can you find out what
countries outside the EU fulfil the "European criteria".
Answer:
At the moment there is no EU-wide list that provides an overview
of those “third countries” whose supervision and regulatory
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arrangements is labelled as “equivalent” to EU-arrangements.
However, the supervisory disclosure framework on the CEBS
website shows that most Member States apply this national
discretion. Information on which specific “third countries” meet
the requirements in Annex VI, Part 1, point 5 can be obtained from
the competent authorities in each Member State.
Area:
Directive 2006/48/EC, Annex VI, Part 1, point 6 & Annex VI, Part
2
Issue:
Recognition of credit assessments of Export Credit Agencies
Question number:
87
Date of question:
31 May 2006
Publication of answer:
8 August 2006
Question:
Which eligibility criteria should Export Credit Agencies satisfy in
order to recognize their credit assessments for capital adequacy
purposes? All criteria that are applied for ECAIs and additionally
specific requirements laid down in Annex VI, Part 1, point 6, or
only the specific requirements laid down in Annex VI, Part 1,
point 6?
In other words, whether ECAs shall comply with all ECAI
eligibility criteria laid down in Annex VI, Part 2 (Recognition of
ECAIs and mapping of their credit assessments) and shall be
subject to all procedures defined in CEBS Guidelines on the
Recognition of External Credit Assessment Institutions, including
requirements for application procedures? If "Yes", with which
exceptions (if any)?
Answer:
The recognition of Export Credit Agency (ECA) credit
assessments is exclusively subject to the conditions in Annex VI,
Part 1, point 6.
According to Article 80(1), third sentence, Articles 81 to 82 apply
only to the determination of credit quality by reference to the
credit assessments by External Credit Assessment Institutions
(ECAIs).
Area:
2006/48/EC, Annex VI, Part 1, point 8
Issue:
Risk-weighting of regional government or local authorities
Question number:
157
Date of question:
16 October 2006
Publication of answer:
8 May 2007
Question:
According to Annex VI, Part 1, point 8, without prejudice to
points 9 to 11, exposures to regional governments or local
authorities shall be risk weighted as exposures to institutions. We
would like to know what would be the correct implementation of
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point 8, with regard to the exposures to regional governments or
local authorities situated in another Member State and for which
the competent authorities from that Member State chose a
different treatment. We consider the case where the competent
authorities of a Member State chose option 2 from the credit
institution treatment to be applied to exposures to regional
governments or local authorities. What would be the correct
approach/implementation in that Member State if a credit
institution from its jurisdiction would incur exposures to regional
governments or local authorities situated in another Member State
that chose option 1 for implementing point 8. Is it compulsory to
recognise in this particular case the treatment chosen by another
Member State, or there should be applied the treatment of the
Member State in which the credit institution is established.
Answer:
Which of the two methods described in Art. 80(3) is applied at
consolidated level to exposures to regional governments or local
authorities should depend on the decision of the Member State in
which the regional government or local authority in question is
located. It is not mandatory that the competent authority at
consolidated level accepts the treatment under Annex VI, part 1
point 8 chosen by the competent authority in the Member State
where the respective regional governments or local authorities is
located. However, doing so would follow the spirit of the
treatment of point 9 which requires that that exposures to regional
government or local authority also in another Member State be
treated as exposures to the local central government if the
competent authority of the Member State where the regional
government or local authority placed the regional government or
local authority on the list referred in the second subparagraph of
point 9.
Area:
2006/48/EC, Annex VI, Part 1, point 9
Issue:
Exposures to regional governments or local authorities
Question number:
147
Date of question:
31 August 2006
Publication of answer:
14 February 2007
Question:
In order to correctly identify the regional governments and local
authorities which are eligible for the treatment specified in point 9,
we would like to know what the specific institutional arrangements
are, the effect of which is to reduce the risk of default.
Answer:
The goal of the specific institutional arrangements mentioned is to
reduce the risk of default of the regional governments and local
authorities to the same level as that of the central government. The
form of these arrangements will be different from Member State to
Member State, depending on the institutional setting. However,
these arrangements must result in some form of explicit support
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measures from the central government to the regional governments
or local authorities, which have the effect of reducing the risk of
default of the entity in question to the extent that there is no
difference in risk between the entity and the central government.
This might, for example, be reflected in legislation concerning the
financing of regional governments or local authorities.
Area:
Directive 2006/48/EC, Annex VI, Part I, points 9 and 14
Issue:
Exposure to central government
Question number:
348
Date of question:
18 July 2008
Publication of answer:
23 February 2009
Question:
Points 9 and 14 of Annex VI, Part I provide the possibility for
national supervisors to treat some exposures as exposures to
central governments. Do these exposures, in accordance with
points 9 and 14 treated as exposures to central governments, have
to be assigned to the class of exposures to central governments and
central banks for the purposes of COREP reporting? Or maybe
these exposures for COREP reporting purposes have to be left
assigned to the class of exposures to regional governments and
local authorities or to the class of exposures to administrative
bodies and non-commercial undertakings, respectively?
Answer:
The exposures to regional governments and local authorities which
are treated as exposures to the central government according to
Annex VI, Part 1, point 9 of Directive 2006/48/EC should in
principle be reported in the CR SA template of exposure class
"regional governments and local authorities", because Annex VI
Part I only assigns risk weights to exposures in order to calculate
the risk-weighted exposure amount. It does not determine or
change the assignment of exposures to exposure classes. In any
case, the consistency with the regulatory exposure classes should
be sought.
Analogous treatment will be provided to the reporting of
exposures to public sector entities which are treated as exposures
to central governments according to Annex VI, Part 1, point 15 of
Directive 2006/48/EC. This means that these exposures are
reported in the CR SA template of exposure class "exposures to
administrative bodies and non-commercial undertakings"..
Area:
Directive 2006/48/EC, Annex VI, Part 1, point 10
Issue:
Exposures to churches and religious communities
Question number:
111
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Date of question:
3 July 2006
Publication of answer:
8 August 2006
Question:
According to point 10, exposures to churches and religious
communities constituted in the form of a legal person under public
law shall, in so far as they raise taxes in accordance with
legislation conferring on them the right to do so, be treated as
exposures to regional governments and local authorities, except
that point 9 shall not apply.
In this context, shouldn’t it be appropriate that, beside point 9, to
exclude from applying as well paragraph 11, since it refers to the
same treatment as that provided by point 9, but for exposures to
such entities from third countries?
Answer:
Point 11 gives discretion to Member States to allow credit
institutions to risk weight exposures to third country regional
governments and local authorities as exposures to the third country
central government. This discretion is available if:
• the third country has supervisory and regulatory arrangements
at least equivalent to those in the EU; and
• the third country must allow its own credit institutions to risk
weight exposures to the regional governments and local
authorities as exposures to the central government in question.
The discretion applies to third country regional governments and
local authorities only, and not to any other type of entity that a
third country may treat as a regional government or local
authority. So it is not necessary to specify in point 10 that point 11
does not apply.
Area:
2006/48/EC, Annex VI, Part 1, points 14 & 15
Issue:
PSE risk weightings – Standardised approach
Question number:
40
Date of question:
27 February 2006
Publication of answer:
7 July 2006
Question:
According to Annex VI, Part 1, point 13, without prejudice to
points 14 to 17, exposures to PSEs receive a 100% risk weight.
Based on point 14 competent authorities may allow their credit
institutions to risk-weight exposures to PSEs in the same manner
as exposures to institutions.
We would like to know what the proper implementation of the
point 13 and 14 is. We consider the two approaches:
1. A competent authority will permit one procedure, i.e., the
procedure based either on point 13 or 14. This means that only one
procedure will be implemented in national regulations;
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2. A competent authority will implement both available treatments
of the exposures, i.e., according to point 13 and point 14 as well,
in national regulations and allow its institutions to choose their
own procedure. Application of a procedure selected by an
institution would have to be continuous and consistent over time.
In our opinion, the second approach could be more favourable for
any institution that does not have a large amount of the exposures.
It could only apply a 100% risk weight without creating a system
for gathering information about credit assessments, their changes,
etc. Moreover, the approach would also allow any credit
institution that has a significant portfolio of the exposures to apply
risk weights based on credit assessments of PSEs. We are not sure
whether the abovementioned issue might be also considered with
regard to any other exposures specified in Annex VI, Part 1, e.g.,
churches and religious communities, see (old) point 13 applied to
administrative bodies and non-commercial undertakings.
Answer:
The treatment set out in Annex VI, Part 1, point 13 is the general
rule. Points 14 and 15 provide exceptions to this general rule.
Competent authorities have the discretion to determine criteria to
decide whether exposures to PSEs can be treated as set out in
points 14 and 15 (taking into account the condition in paragraph
15). If no such criteria are determined, then all PSE exposures will
be treated as set out in point 13.
For each individual PSE, a single treatment must be
unambiguously defined so that all credit institutions have to apply
the same treatment and would have no discretion individually to
choose between treatments.
Note that Annex VI, Part 1, points 13 to 15 do not apply to
exposures to churches and religious communities constituted in the
form of a legal person under public law who raise taxes in
accordance with legislation conferring on them the right to do so. ,
Those exposures are to be treated as exposures to regional
governments and local authorities (Annex VI, Part 1, point 10).
Area:
2006/48/EC, Annex VI, Part 1, point 19
Issue:
Treatment of multilateral banks under the central government risk
based method
Question number:
303
Date of question:
18 December 2007
Publication of answer:
29 May 2008
Question:
1. Annex VI, Part 1, point 19 states that multilateral development
banks are treated as institutions in accordance with points 29 to 32
i.e. applying the credit assessment method. Does this hold true
even if a competent authority chooses to adopt the Central
Government risk weight based method for institutions?
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2. According to the same point, the preferential treatment for short
term exposures specified in points 31, 32 and 37, does not apply to
multilateral development banks. Can it then be deduced that if a
credit assessment for a short term exposure to a multilateral
development bank is available then this exposure will be treated in
accordance with Part 1, point 73 and Part 3, points 12-15,
otherwise the exposure will be treated in the same way as long
term exposures in accordance with points 29-30?
Answer:
1. Yes, the credit assessment method shall be used unless a
multilateral bank is referred to in points 20 and 21.
2. Yes, this interpretation is correct. Point 73 applies to exposures
for which a short term credit assessment is available (but not to
short term exposures for which no short term credit assessment
exists).
Area:
Directive 2006/48/EC, Annex VI, Part 1, points 19 to 21
Issue:
Treatment of exposures to MDBs
Question number:
67
Date of question:
25 April 2006
Publication of answer:
1 June 2006
Question:
What is the treatment for an exposure to a multilateral
development bank that is not listed in point 20?
Why some multilateral development banks are listed in point 18
and not others?
Answer:
Point 19 sets out the general rule that exposures to all MDBs are
treated as exposures to institutions, as set out in points 29 to 32.
All exposures to MDBs should be treated in this way, with the
exception of the twelve entities listed in point 20, where a 0% risk
weight is assigned to exposures. Point 21 provides a further
exception, in relation to unpaid capital subscribed to the EIF.
The reference in point 18 to the Inter-American Investment
Corporation is needed because, technically, it is not a MDB as
normally understood.
The references in point 18 to the Black Sea Trade and
Development Bank and the Central American Bank for Economic
Integration are – in substance – not necessary; both are MDBs and
so are covered anyway by the general rule in point 19. These
references were included during the CRD negotiations for political
reasons.
Area:
Directive 2006/48/EC, Annex VI, Part 1, point 23
Issue:
Risk weight for exposures to institutions
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Question number:
347
Date of question:
18 July 2008
Publication of answer:
7 October 2008
Question:
Annex VI, Part 1, point 23 provides that in determining the risk
weights for exposures to institutions one of the two methods shall
apply (i.e. Central governments risk weight based method and
Credit assessment based method). Is it possible for supervisory
authorities to treat this provision as national discretion? Can
supervisors allow the institutions under their supervision to apply
only one of these approaches? Or maybe this provision is related
to the choice of institutions themselves?
Answer:
Article 80(3) is explicit in requiring Member States to decide
'whether to adopt the method based on the credit quality of the
central government (…) or the method based on the credit quality
of the counterparty institution'. This national option shall be
reflected in the transposition of Directive 2006/48/EC, and applies
to all institutions.
Area:
2006/48/EC, Annex VI, Part 1, points 28 to 32
Issue:
Residual maturity/original effective maturity for short term
exposure to institutions
Question number:
264
Date of question:
9 August 2007
Publication of answer:
8 October 2007
Question:
Can the term 'original effective maturity' be interpreted as the
actual duration of an exposure between the start date and the
maturity date were the exposure may not be rolled over?
Answer:
See answer to Q262
Area:
2006/48/EC, Annex VI, Part 1, points 29 to 32; 33 to 36; and 73
Issue:
Short-term exposures and short-term credit assessments
Question number:
149
Date of question:
31 August 2006
Publication of answer:
28 November 2006
Question:
When determining the risk weights for exposures to institutions
under standardised approach according to the credit assessment
based method (Annex VI, Part 1, points 29 to 32) the Directive
stipulates certain rules for “short-term credit assessments” and
“short-term exposures” in Annex VI, Part 1, points 33 to 36, 73
and Part 3, points 12 to 15. However, the Directive does not define
what is meant by a short-term credit assessment and a short-term
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exposure. The Directive uses explicitly other terms describing
exposures to institutions, i.e., exposures with an original effective
maturity of three months or less (Annex VI, Part 1, points 31 to
32) and exposures of up to three months of residual maturity
(Annex VI, Part 1, point 34, 37 to 38), which are self-explanatory.
The lack of definitions of a short-term exposure and a short-term
credit assessment in the Directive or their interrelation with other
terms used in Annex VI of the Directive (mentioned above) is
confusing and may lead to various interpretations. The Basel text
is more transparent and consistent in this area as it uses only the
term short-term claims on banks, which it defines as claims on
banks having an original maturity of three months or less, except
those which are expected to be rolled over (paragraphs 62 and 63
of the Basel Accord).
1. Is the term short-term exposures to institutions equivalent to the
term exposures to institutions with an original effective maturity
of three months or less according to the Directive? If not, what is
the interrelation between those two terms used in the Directive?
2. What is the definition of a short-term credit assessment? How
does it relate to a short-term exposure to an institution?
3. It is unclear whether in Table 4 and 5 (Annex VI, Part 1, points
29 and 31 respectively), the credit assessment refers to an
assessment of a given exposure (assigned considering points 8 to
11, Part 3) or to an assessment of a given institution. If this is the
assessment of the exposure, how one should read points 30 and 32
(Annex VI, Part 1)? If this is the assessment of the institution,
according to what table should issue-specific assessments be
translated to risk-weights and should such issue-specific
assessments be taken into consideration at all?
Answer:
1. Is the term short-term exposures to institutions equivalent to the
term exposures to institutions with an original effective maturity of
three months or less according to the Directive? If not, what is the
interrelation between those two terms used in the Directive?
No, the terms are not synonymous. Short term exposures to
institutions and corporates - as referred to in point 73 of Annex VI,
Part 1 - are those exposures for which a specific short term credit
assessment by a nominated ECAI is available. Note that the
assumption is that where an ECAI issues short term credit
assessments, these are always exposure specific. In the context of
exposures to institutions, points 33 to 36 set out how the risk
weights interact with the risk weights for exposures of a residual
maturity of three months or less as set out in point 31 (referred to
as "the general preferential treatment for short term exposures")
where the credit assessment based method is used.
2. What is the definition of a short-term credit assessment? How
does it relate to a short-term exposure to an institution?
See answer to 1.
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3. It is unclear whether in Table 4 and 5 (Annex VI, Part 1, points
29 and 31 respectively), the credit assessment refers to an
assessment of a given exposure (assigned considering points 8 to
11, Part 3) or to an assessment of a given institution. If this is the
assessment of the exposure, how one should read points 30 and 32
(Annex VI, Part 1)? If this is the assessment of the institution,
according to what table should issue-specific assessments be
translated to risk-weights and should such issue-specific
assessments be taken into consideration at all?
The risk weights in Table 4 and 5 apply both to assessments of
specific exposures and of institutions, unless points 35 and 36
prescribe the use of a specific short term credit assessment. Points
8 to 11 in Annex VI, Part 3 set out how exposure-specific and
issuer assessments are applied to individual exposures. Points 30
and 32 in Annex VI, Part 1 set out the treatment for unrated
institutions but apply only if no exposure-specific or issuer
assessment applies according to Annex VI, Part 3, points 8 and 9.
Area:
2006/48/EC, Annex VI, Part 1, points 29 to 32, points 33 to 36,
point 73
Issue:
Short term exposures to institutions
Question number:
229
Date of question:
29 March 2007
Publication of answer:
24 May 2007
Question:
Our understanding is that point 73 regarding short term exposures
to institutions is issue specific and not based on the maturity of a
transaction. Where a short term assessment is not available points
29 - 32 and 33 - 36 would then become applicable. Point 31 (the
preferential treatment) applies to exposures to an institution "with
an original effective maturity of three months or less". However
point 34 states "If there is no short-term exposure assessment, the
general preferential treatment for short term exposures as specified
in point 31 shall apply to all exposures to institutions of up to three
months residual maturity." This seems to be in conflict with point
31 as the method of determination used is residual maturity.
Where a short term assessment is not available is the preferential
treatment under point 31 dependent on "original effective
maturity" or "residual maturity"?
Answer:
When an exposure-specific short term assessment is not available,
the preferential treatment under point 31 is dependent on the
residual maturity of the exposure referred to in point 34. See also
answer to Q149.
Area:
2006/48/EC, Annex VI, Part 1, point 31 and 33
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Issue:
Residual maturity/original effective maturity for short term
exposure to institutions
Question number:
262
Date of question:
3 August 2007
Publication of answer:
8 October 2007
Question:
Does the term 'original effective maturity' in reference to the
application of short term credit assessments refer to the 'original
maturity' or the 'residual maturity' of the exposure. The answers
provided to Questions 149 and 229 seem to imply the application
of residual maturity.
Answer:
Yes. The CRDTG agreed that the reference to the 'original
maturity' in point 31 in connection with point 34 of Annex VI, part
1 should be construed as meaning 'residual maturity'.
Area:
2006/48/EC, Annex VI, Part 1, point 42
Issue:
Risk weighting of unrated exposures to corporates under the
Standardised approach
Question number:
133
Date of question:
4 August 2006
Publication of answer:
28 November 2006
Question:
Company XYZ is an unrated corporate that has its head office in
country A, a subsidiary in country B and a branch in country C. To
which central government would you refer when risk-weighting a
loan granted to the subsidiary of XYZ and/or for a loan granted to
the branch of XYZ?
Answer:
In principle, if a credit assessment of a nominated ECAI is not
available, the risk weight of a corporate will depend on whether
this corporate is a branch or a subsidiary. When it is a subsidiary,
the risk weight will be the higher of 100% and the risk weight of
the central government of the country where the subsidiary is
established (so country B in the example above). When the
corporate is a branch, the risk weight will be the higher of 100%
and the risk weight of the central government of the country where
the credit institution of which the branch is part is established
(country A in the example above).
Area:
Directive 2006/48/EC, Annex VI, Part 1, points 43 and 44
Issue:
Retail exposures & real estate property
Question number:
85
Date of question:
31 May 2006
Publication of answer:
8 August 2006
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Question:
How is treated a part of retail exposure that is not fully and
completely secured by real estate property: 75% or 100%?
Answer:
According to Directive 2006/48/EC, Annex VI, Part 1, point 43,
the unsecured part of retail exposures which complies with the
criteria listed in Article 79(2), will be subject to a 75% risk weight
(see also the published answer to Q14). If the exposure does not
comply with the criteria listed in Article 79(2) - and is therefore
not eligible for the retail exposure class - then it would be treated
as an exposure to a corporate and the unsecured part would be risk
weighted according to Annex VI, Part 1, point 42 (risk weight of
100%).
Area:
2006/48/EC, Annex VI, Part 1, points 44 & 45
Issue:
Exposures secured by mortgages on residential property - Scope
Question number:
281
Date of question:
31 October 2007
Publication of answer:
29 May 2008
Question:
According to point 44 of Annex VI, Part 1 of Directive
2006/48/EC, the general rule for exposures fully secured by real
estate property, is to assign a 100% risk weight. However,
according to point 45 of Annex VI, part 1, exposures or part of
exposures fully and completely secured, to the satisfaction of the
competent authorities, by mortgages on residential property which
is or shall be occupied or let by the owner, or the beneficial owner
in the case of personal investment companies, can instead be
assigned a risk weight of 35%. In the exercise of their judgement
competent authorities shall be satisfied that the conditions referred
to in point 48 of the same Annex and part are satisfied. The first
question is, whether, exposures secured by holiday homes not used
as primary residence fall in the exposure class of “exposures
secured by mortgages on residential property”, thus, risk weighted
with 35%? If the answer is affirmative, would the treatment of
such exposures be different if an excessive construction activity
for holiday homes is noted in the local market and/or the
mortgaged holiday homes are acquired for speculative rather than
for residential purposes? The second question is whether the
exposure class “exposures secured by mortgages on residential
property” covers also exposures secured by mortgages on
land/building sites on which residential property may be built in
the future.
Answer:
1. In accordance to Annex VI, Part 1, point 45, exposures secured
by mortgages on residential property may cover both primary and
secondary residence provided that they are or shall be occupied or
let by the owner or the beneficial owner in the case of personal
investment companies. Property held only for speculative purposes
does not qualify for the 35% risk weight when they are not
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occupied or let by the owner. In addition, competent authorities
shall be satisfied that 'the risk of the borrower does not materially
depend upon the performance of the underlying property or
project' in accordance with Annex VI, Part 1, point 48.
2. No, the CRD is explicit in saying that the exposure has to be
secured by a mortgage on residential which 'is or shall be occupied
or let by the owner.' This excludes situations where residential
property 'may' be built in the future (i.e. mortgages on land) but
includes mortgage on building sites on which residential property
will be built for the future owner of the property, or on residential
property under construction, provided in both cases that there is
certainty that the owner will occupy or let the property. The
minimum requirements relating to valuation, documentation, legal
certainty, LTV (based on the current value of the property) shall
be met in accordance with Annex VI, Part 1, point 48, including
point 48 (b) according to which the bank shall carefully assess that
the risk of the borrower does not materially depend upon the
performance of the underlying property or project but rather on the
underlying capacity of the borrower to repay the debt from other
sources.
Area:
2006/48/EC, Annex VI, Part 1, points 44 to 60 and point 66
Issue:
Items belonging to the regulatory high-risk category secured by
mortgages on residential or commercial property
Question number:
234
Date of question:
07 May 2007
Publication of answer:
18 June 2007
Question:
As provided in the answer to question 48, the risk weight of 35%
applies to any claim that satisfies the criteria in points 45 to 60,
irrespective of the fact that the exposure is included in the
corporate or retail class. We understand that the same applies also
for the 50% risk weight to be applied to exposures on commercial
property, when all the relevant conditions are fulfilled. However,
what if an exposure which, if not secured, should be included in
the regulated high risk category (e.g: exposures to entities for
which a rating is not available for the time being, but to which a
risk weight of 150% was assigned, due to a prior poor rating), is
secured by real estate property which do not fulfil the criteria for
35% or 50% risk weight. Having in mind the abovementioned
solutions, what is the correct approach: 1. Apply 100% risk weight
to the exposure, due to the provisions of para. 44 from Annex VI
(Without prejudice to points 45 to 60, exposures fully secured by
real estate property shall be assigned a risk weight of 100%); or 2.
Apply the 150% risk weight to the item belonging to regulatory
high-risk categories and consider the effect of real estate secure
within the CRM Framework.
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Answer:
As clarified by the answer to Q124, to benefit from the 35% risk
weight, an exposure (or part of an exposure) secured by mortgages
on residential property shall meet the requirements of points 45 to
50.
For institutions applying the Standardised approach, the credit
protection effect of real estate is embedded in specific risk weights
and is not dealt with within the CRM framework.
In accordance with Annex VI, point 66, competent authorities
have the discretion to specify which exposures should be included
in the 'regulatory high risk categories' based on their assessment of
the level of risk associated to these exposures. If such exposures
are fully secured by real estate property it remains at competent
authorities' discretion to decide whether they should still be treated
as part of "regulatory high risk categories" or whether a 100% risk
weight should be allowed in accordance with point 44 of Annex
VI Part 1.
Area:
2006/48/EC, Annex VI, Part 1, point 45
Issue:
Exposures secured by mortgages on residential property
Question number:
48
Date of question:
8 March 2006
Publication of answer:
1 June 2006
Question:
Exposures or any part of an exposure fully and completely
secured, to the satisfaction of the competent authorities, by
mortgages on residential property which is or shall be occupied or
let by the owner or the beneficial owner in the case of personal
investment companies shall be assigned a risk weight of 35%. The
provision does not specify whether the owner must be a natural
person or it can also be an enterprise or a company.
Our regulation, consistently with the text of the 1988 Basel
Accord, requires that the obligor is a natural person who is not
acting in the exercise of an entrepreneurial activity; for enterprises
a lower risk weight is admitted only with reference to loans
secured by non residential real estate.
Our question regards the effective possibility to apply the better
RW of 35% to RRE when the obligor is an enterprise.
Preliminarily it must be acknowledged that it might prove difficult
for an enterprise to comply with the requirements under Annex VI,
Part 1, points 48a) and b). In any case the risk profile of a loan to
an enterprise secured by RRE would be significantly different
from that of a RRE loan to a natural person.
All this notwithstanding, in our view the text of the Directive must
be interpreted in the sense that RRE treatment (RW 35%) is
allowed also for loans to enterprises if all the conditions are met
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by the obligor (including letters a) and b)).
Answer:
The interpretation in the last paragraph of the question is correct.
The CRD concentrates more on requirements that should be met in
relation to the collateral (e.g., the quality of the collateral) and the
operational requirements that the credit institution must fulfil.
Area:
Directive 2006/48/EC, Annex VI, Part 1, point 45
Issue:
Application of the mortgage risk weight
Question number:
93
Date of question:
1 June 2006
Publication of answer:
8 August 2006
Question:
Point 45 states that “Exposures or any part of an exposure fully
and completely secured, to the satisfaction of the competent
authorities, by mortgages on residential property which is or shall
be occupied or let by the owner or the beneficial owner in the case
of personal investment companies shall be assigned a risk weight
of 35%”. This provision is complemented by provisions in Annex
VIII, Part 2, point 8 and Part 3, points 62 to 65.
It is asked if these provisions concern only mortgages or if other
mechanisms are allowable. In particular, some banks do not ask
directly a mortgage but only the right to get a mortgage upon
request. This right is properly documented and filed. It should be
however noted that the debtor may have written other such rights
or mortgages on the same asset, and that these rights do not have
any ranking order (first come first served basis). The bank will
thus have effective collateral only when the transformation of right
into mortgage is asked, and will know at that time the rank of its
claim on the collateral.
Is the 35% weighting allowed for claims secured by this kind of
rights?
Answer:
The treatment in Annex VI, Part 1, point 45 is limited to
mortgages and is not available for claims secured by the kind of
right described in the question.
Area:
2006/48/EC, Annex VI, Part 1, point 45
Issue:
Definition of residential real estate
Question number:
181
Date of question:
30 November 2006
Publication of answer:
15 January 2007
Question:
There are two definitions of residential real estate:
Art. 113, par. 3 „For the purposes of point (p), the value of the
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property shall be calculated, to the satisfaction of the competent
authorities, on the basis of strict valuation standards laid down by
law, regulation or administrative provisions. Valuation shall be
carried out at least once a year. For the purposes of point (p),
residential property shall mean a residence to be occupied or let by
the borrower.”
Annex VI, Part I, par. 45. Exposures or any part of an exposure
fully and completely secured, to the satisfaction of the competent
authorities, by mortgages on residential property which is or shall
be occupied or let by the owner, or the beneficial owner in the case
of personal investment companies, shall be assigned a risk weight
of 35%.
What was the rationale to define residential real estate in two
different ways, i.e. in one by reference to borrower in the other by
reference to owner? In our opinion, the latter definition should be
understood rather as referring to borrower.
Commission opinion:
Of the two provisions quoted in the question above, only Annex
VI, Part 1, point 45 was introduced when the Directive was recast
in 2006. The provision uses the word 'owner' rather than 'borrower'
deliberately. It is not required that the borrower is the person who
lets or occupies the residential property, but the property must be
either let or occupied by the owner who may be a person other
than the borrower.
Area:
Directive 2006/48/EC, Annex VI, Part 1, points 45 to 47
Issue:
35 % risk weight for exposures secured by residential real estate
Question number:
318
Date of question:
14 February 2008
Publication of answer:
3 April 2008
Question:
In points 45 to 47 of Annex VI, Part 1 of Directive 2006/48/EC, a
clear provision for institutions to apply 35 % risk weight under
strict conditions is provided. Provisions such as “subject to the
discretion of the competent authorities” or “Member States may
require” are not referred to in the above-mentioned paragraphs. Is
the use of a 35 % risk weight for exposures secured by residential
real estate in the text of the Directive treated as a national
discretion of Member States’ supervisory authorities?
Answer:
No, the 35% risk weight is not a national discretion. It shall apply
provided that conditions in section 9.1 of Annex VI, Part 1 (i.e. if
the competent authorities are satisfied) are met.
Area:
2006/48/EC, Annex VI, Part 1, points 45 to 50
Issue:
35% risk weight for corporate and SME exposures
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Question number:
315
Date of question:
31 January 2008
Publication of answer:
3 April 2008
Question:
Is the 35% risk weight applicable for exposures originated to
corporate and SMEs if the loan is fully secured with residential
mortgage owned by the company?
Answer:
Yes, the 35% risk weight applies to all or any part of an exposure
fully and completely secured by mortgages on residential property
provided that the conditions laid down in section 9.1 of Annex VI,
Part 1 are met.
Area:
2006/48/EC, Annex VI, Part 1, points 45-50
Issue:
Scope of 'eligible' mortgages
Question number:
321
Date of question:
23 February 2008
Publication of answer:
29 May 2008
Question:
1. If we have more than one mortgage on the same property, e.g. if
we have both first, second and third mortgage on the property (and
there is not a prior claim to another bank) for the same customer,
can we assume that the second and third mortgages have the same
power as the first one (i.e. we control all the claims on the
property which is legally certain as well)?
2. If for customer A, we have an assignment of the contract of sale
(i.e. no title, hence no legal certainty) on a property that is already
mortgaged (legal certainty) in the bank (i.e. the mortgage cannot
be released without the consent of the bank) for customer B, and
given that we do not count it as eligible property for customer B,
then can we assume that the assignment of the contract of sale
means that there is mortgage in the bank? Please note that the bank
has taken all necessary steps to ensure that the mortgage on
customer B will be released only if and when the property is
properly mortgaged on customer A. This case appears in the cases
of developers selling flats etc and there is time lag between the
sale and time the title of the property (flat) come out (in our
example, customer A is the purchaser of the flat and customer B is
the developer).
Answer:
1. Unless there are specific circumstances in local law that imply
that such treatment is not justified, the three liens can be
considered as one if there are no liens for a third party on the
property that rank prior or pari passu to any one of them.
2. When the bank incurs the exposure to customer A, the exposure
could be treated – subject to the conditions of Annex VI, Part 1,
point 45pp – as fully and completely secured already before
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"customer A" receives the title to the property once the applicable
legal framework makes sure that no other person can receive title
to the property and that there will be a mortgage that fully and
completely secures the exposure to customer A without an
opportunity for any other person to receive any prior or pari passu
liens.
As regards "customer B," to be eligible to a 35% risk-weight,
mortgages on residential property shall be occupied or let by the
owner. This is not the case for the developers owning the flats.
Area:
Directive 2006/48/EC, Annex VI Part 1, points 45 to 60
Issue:
Use of the mortgage risk weight
Question number:
99
Date of question:
9 June 2006
Publication of answer:
8 August 2006
Question:
We assume that any claim (secured by a mortgage on a residential
property) that satisfies the criteria in points 45 to 60 can be
assigned a Risk Weight of 35%. Following that the question is
whether counterparties in the corporate exposure class can be
included in 35% risk assignment if the residential property in
question is owned by the corporation/enterprise and let to a person
for residential purposes. What if the counterparty in the corporate
exposure class is a person who is a merchant that secures the claim
by a mortgage on her residential property?
Answer:
Please see the published answer toQ48.
Area:
2006/48/EC, Annex VI, Part 1, points 47 and 53
Issue:
Treatment of leasing on a consolidated basis
Question number:
237
Date of question:
28 May 2007
Publication of answer:
10 July 2007
Question:
In Annex VI, Part 1, points 47 and 53 it is laid down that the lessor
should be a credit institution. We are wondering if the preferential
treatment for risk-weighting could also be used for calculating
capital requirements for credit risk on consolidated basis in case
that the lessor is not a parent bank but it is a non-credit institution
subsidiary which is included in the consolidation on full basis.
Answer:
For purposes of consolidated capital requirements, exposures
under a property leasing transaction have to be treated as if the
credit institutions subject to capital requirements on the basis of its
consolidated financial statement would be the lessor.
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Area:
2006/48/EC, Annex VI, Part 1, point 48(d)
Issue:
Exposures secured by mortgages on residential property
Question number:
148
Date of question:
31 August 2006
Publication of answer:
15 January 2007
Question:
What are the main aspects we must take into consideration when
establishing the substantial margin by which the value of the
residential property should be exceeded, in order to apply the risk
weight of 35 %
Answer:
The goal of the margin is to warrant that, in case of default, the
recovery value of the property is enough to cover the outstanding
exposure, as the exposure should be fully and completely secured
by the property.
The size of the margin differs depending on the circumstances in
each particular local market. This margin is usually determined in
terms of maximum exposure value allowed with respect to value
of the property. Different margins are used across Member States,
ranging from a maximum exposure value of 60% to a maximum
exposure value of 80%, equal to the margin for covered bonds in
Annex VII, Part 1, point 68 (d).
In principle this margin should be based on the volatility of
residential property prices and the time that is needed for
liquidation of the collateral. One could also look at the value of
losses on defaulted loans by different levels of Loan-to-Value
ratio. A lower maximum might be called for if the market is very
volatile, when there is little or no historic loss data available, or
when the liquidation of collateral is a time-consuming process.
Area:
2006/48/EC, Annex VI, Part 1, points 49 and 58, Annex VIII, Part 1,
points 16 and 17 and Part 3, point 73
Issue:
Waiver for mortgage lending: scope
Question number:
134
Date of question:
4 August 2006
Publication of answer:
26 February 2007
Question:
The wording of the Directive suggests that the assessment of market
conditions could be done at the national level for the real estate
market as a whole. However, the real estate market cannot be
considered as homogeneous. Indeed one may observe significant
differences in loss rates regarding the specific markets we
considered. Institutions focus specific segments regarding elements
such as geography or economic sector, which are essential in their
investment decision-making (Institutions are unlikely to be active in
all segments at the same time).
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How should competent authorities apply the criteria given that they
recognise different market segments rather than one homogeneous
market?
Answer:
In applying the waivers, the CRD only explicitly mentions a
distinction between Residential Real Estate and Commercial Real
Estate. There are no indications that a more granular segmentation
was intended when these CRD provisions where drafted. However,
it would not impede a possibility to deal with a market segment if
real market conditions suggest it.
Area:
2006/48/EC, Annex VI, Part 1, point 58; Annex VIII, Part 1, point
17 and Part 3, point 73
Issue:
National discretion relating to commercial real estate: calculation of
loss-rates
Question number:
152
Date of question:
19 September 2006
Publication of answer:
26 February 2007
Question:
How should the loss rates described in these paragraphs be
calculated?
Answer:
The loss rates shall be calculated on the level of the whole
commercial real estate market in a Member State.
The numerator of the 0.3% loss rate shall be calculated on the basis
of losses stemming from lending collateralised by real estate up to
50% of the market value of the whole commercial real estate market
in a Member State (or where applicable and if lower 60 % of the
mortgage lending value). This means that the computation should
focus on the exposure part which benefits from the 50% risk weight.
The numerator of the 0.5% loss rate shall be calculated on the basis
of losses stemming from the full exposures collateralised by
commercial real estate collateral in a Member State.
As required in the above mentioned provisions, for the calculation of
both loss rates the denominator shall be the sum of all the
outstanding loans collateralised by commercial real estate property a
the Member State.
Area:
2006/48/EC, Annex VI, Part 1, point 47
Issue:
Exposures arising from leasing transactions concerning residential
properties
Question number:
294
Date of question:
26 November 2007
Publication of answer:
8 January 2007
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Question:
Regarding the treatment of exposures secured by mortgages on
residential property, the 35% risk weight may be applied also, to
the part of exposure fully and completely secured by mortgages on
residential property, provided that the conditions of paragraphs 45
and 48 of Annex VI, are met. As regards the portion of such an
exposure that does not meet the conditions for applying the 35%
risk weight, it would be assigned to another exposure class, under
article 79 (1), depending on its characteristics. Could you please
tell us if the principle mentioned above is also applicable to the
exposures from leasing transactions concerning residential
properties, as provided for in paragraph 47, Annex VI? We have in
mind the following example: - the value of the residential
property subject to a leasing transaction - 100.000 Euro - exposure
to the tenant – 100.000 Euro. Could we apply the 35% risk weight
to the part of exposure that fulfils the conditions of article 48,
following that the other portion to be assigned to another exposure
class and risk weighted according to its characteristics?
Answer:
Conditions for applying the 35% risk weight only to a part of the
exposures are set out in the answer to CRDTG Q124.
In the above example, a part of the 100.000 Euro exposure will not
be eligible under point 48(d) of Annex VI, Part 1 as the value of
the property must exceed the exposure to the tenant by a
substantial margin. This portion has to be assigned to a different
exposure class as applicable or in accordance with point 44, a
100% risk weight shall apply to it.
Area:
Directive 2006/48/EC, Annex VI, Part 1, point 48 & Article 79 (2)
Issue:
Exposures secured by mortgages on residential property
Question number:
124
Date of question:
19 July 2006
Publication of answer:
24 May 2007
Question:
We would like to point out an issue relating to the concept of the
general rule and exceptions to this general rule (see also the
published answer to Q 40).
We understand that the concept of the general rule has been
introduced in the case of exposures to central governments and
central banks according to Annex VI, Part 1, point 1, exposures to
administrative bodies and non-commercial undertakings, resp.
public sector entities according to Annex VI, Part 1, point 12, resp.
point 13, exposures secured by real estate property according to
Annex VI, Part 1, point 44, exposures in the form of collective
investment undertakings (CIUS) according to Annex VI, Part 1,
point 74. We would like to draw attention to exposures secured by
mortgages on residential property.
Questions: Would the concept of the general rule mean that
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exposures or any part of an exposure fully and completely secured
by mortgages on residential property not authorized for a 35 %
risk weight based on Annex VI, Part 1, point 48 could only be
assigned a 100 % risk weight according to Annex VI, Part 1, point
44? Or is it possible to test the exposures further and determine
whether they meet the conditions stipulated in Article 79(2) (the
definition of the retail exposure class, a 75 % risk weight used
consequently if the conditions are met)?
Considerations: With regard to the published answer to Q 39 we
could understand that claims or contingent claims secured by
residential real estate collateral meeting the criteria pursuant to
Article 79(2) can be assigned a 75% risk weight in spite of the fact
that these claims do not count towards the EUR 1 million limit
pursuant to Article 79(2)c). It implies that a 75% risk weight could
be applied to claims or contingent claims secured by residential
real estate collateral without any limit regarding the amount of
these claims. Moreover, a 100% risk weight according to Annex
VI, Part 1, point 44 would be then applied only to exposures
secured by mortgage on residential property not meeting the
criteria pursuant to Annex VI, Part 1, point 48 and Article 79(2).
In other words, we only point out that it could be considered that
the general rule, i.e. a 100 % risk weight according to Annex VI,
Part 1, point 44, has been weakened in the aforementioned case
because although not meeting the criteria according to Annex VI,
Part 1, point 48 exposures secured by residential property would
be assigned a 75 % risk weight.
Answer:
Further to the answer to Q39, this answer clarifies the risk
weighting of exposures secured on residential real estate property.
Annex VI, Part 1, point 44 requires that exposures that are
assigned to the exposure class "claims or contingent claims
secured on real estate property" according to Article 79(1)(i) have
to be risk weighted at 100% if they do not meet the requirements
for a 35% or 50% risk weight. If, however, such exposures can be
assigned to another exposure class under Article 79(1) because, for
instance, the exposure meets the criteria for the retail exposure
class, the credit institution can choose this different assignment
and avail itself of risk weights other than 100%. This could also be
done for a portion of an exposure that does not meet the loan to
value limits for the 35% or the 50% risk weights, respectively.
However, the assignment to an exposure class has to be
unambiguous. If an exposure secured by real estate is assigned to
the retail exposure class, it cannot be treated as secured on real
estate collateral and exempt from the 1 million Euro threshold at
the same time. Rather, the owed amount of the exposure must not
exceed 1 million Euro in combination with all other owed amounts
of exposures to the obligor or group of connected obligors, but not
taking account of exposures actually treated as secured on real
estate property and assigned to exposure classes accordingly.
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Area:
2006/48/EC, Annex VI, Part 1, point 48(d)
Issue:
Past due figures for non-qualifying parts of mortgage exposures
Question number:
14
Date of question:
9 December 2005
Publication of answer:
9 March 2006
Question:
The understanding amongst mortgage lenders seems to be that if a
mortgage has a high loan to value ratio (LTV), i.e., it doesn't
comply with Annex VI Part 1, point 48(d), the portion of the
mortgage above a specific LTV (for example, 80% in the UK) will
therefore fall into the exposure class of retail claim. If so you
would end up with single exposures, 80% of which become past
due at 90 days, and the residual amount becoming past due at 180
days. How would this be handled?
Answer:
This question only arises if Member States make use of the
transitional discretion in Article 154(1), i.e., if they decide to use a
figure higher than 90 days for retail exposures under the
Standardised approach. An overview of the different national
discretions and choices of Member States will be available later
this year on the CEBS website (http://www.c-ebs.org/) under
"supervisory disclosure".
Where Member States have chosen to apply a higher figure for
retail exposures, the 90 days for mortgages should apply to the
whole mortgage exposure.
Area:
Directive 2006/48/EC, Annex VI, Part 1, point 61
Issue:
Past due items
Question number:
112
Date of question:
3 July 2006
Publication of answer:
8 August 2006
Question:
How should be measured the 90 days threshold for the exposures
that have been restructured? Should we have in mind the initial
maturity or the new maturity resulting from the restructuring
process?
Answer:
The past due treatment under the Standardised approach applies
when the obligor did not meet his obligations within a specified
number of days after the due date. The due date in this context is
the one that is actually currently enforceable under the contractual
agreement between the bank and the obligor and may have
changed due to a restructuring.
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Area:
Directive 2006/48/EC, Annex VI, Part 1, points 61 to 65
Issue:
Definition of past due items
Question number:
72
Date of question:
4 May 2006
Publication of answer:
7 July 2006
Question:
What should we treat as past due item? For example if we have
unsecured credit agreement and some part of it (but not all) is past
due for more than 90 days - shall we treat as past due only this part
or all agreement?
Answer:
Annex VI, Part 1, point 61 states that the competent authorities
should define a threshold (which should reflect a reasonable level
of risk). Above this threshold the treatment set out in point 61 and
in subsequent points 62 to 65 should be applied to the unsecured
portion of any item that is past due for more than 90 days.
If a credit agreement is an unsecured exposure where a part of it is
past due (above the threshold as mentioned above) then the whole
exposure is to be treated as a past due item and to be assigned to
the respective exposure class, not only the part of the exposure
being past due.
Area:
2006/48/EC, Annex VI, Part 1, point 64
Issue:
Treatment of 'past due items' for exposures secured by real estate
property
Question number:
333
Date of question:
1 April 2008
Publication of answer:
25 July 2008
Question:
The question is about the 'adjustment ratio' (provision/EAD) on
the secured part and unsecured part of an exposure secured by a
real estate on residential mortgage in default (past dues > 90 days).
The best option to explain the problem is to take an example:
There is a retail exposure with an outstanding amount of 176 617
Euros and the customer is in default. This exposure is secured by a
residential real estate (RRE) with a market value of 122 000
Euros. The amount of the specific provision assigned to this
exposure is 20 000 Euros.
- EAD (Secured by RRE)=min(122 000, 176 617)=122 000
- Adjt(Secured by RRE)= 20 000/122 000= 0.1639 < 20%
- RW(Secured by RRE)=100% (section 10 point 64)
- EAD(Unsecured)=176 617- 122 000 = 54 617
- Adjt(Unsecured)= 20 000/54 617= 0.366 > 20%
- RW(Unsecured)=100% (section 10 point 61)
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RWA= 122 000 x 100% + (54 617 - 20 000) x 100% =156 617
Euros.
Is the calculation of the RWA correct? On which part do we
remove the provision (covered or uncovered part)?
Answer:
The calculation of the risk-weighted assets is not correct.
We understand from the question that the value of the property
does not exceed the exposures by a substantial margin as required
by Annex VI, Part 1, point 48 (d). This means that the credit
institution cannot make use of the treatments laid down in points
45 to 50 (i.e. 35% risk weight) and in Annex VI, point 64 for past
due items for a part of the exposure corresponding to the full
market value of the RRE. The competent authorities' definition of
completely and fully secured will determine the portion of the loan
that can be treated as residential real estate exposure.
Once the exposure becomes 90 days past due, it should continue to
be treated in two separate parts: secured and unsecured (see Q14
and Q72 as well). The reference to eligible credit risk mitigation
techniques in Annex VI, Part 1, point 62 means that the
requirements in points 45 to 50 still apply when an exposure is
assigned to the exposure class 'past due items'.
For purposes of calculating risk-weighted exposures amounts for
past due items, the CRD is not explicit in prescribing a specific
allocation mechanism for provisions and value adjustments,
provided that they are not used twice, or arbitrarily allocated for
the purpose of minimising capital requirements.
Area:
Directive 2006/48/EC, Annex VI, Part 1, point 66
Issue:
Items belonging to regulatory high-risk categories
Question number:
114
Date of question:
3 July 2006
Publication of answer:
19 September 2006
Question:
According to Annex VI, Part 1, point 66, subject to the discretion
of competent authorities, exposures associated with particularly
high risks such as investments in venture capital firms and private
equity investments shall be assigned a risk weight of 150%.
What is the relevant regulatory framework at the European level
for a correct identification / description of venture capital firms
and private equity investments in order to provide in the
implementation process a correct link with the national regulatory
framework which might not use the same terms or concepts?
Answer:
There is no definition of ‘venture capital firms’ and ‘private equity
investments’ at the EU level. If a competent authority makes use
of this discretion it is its responsibility to decide and to define
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what types of exposures or exposure classes should fall into the
high risk category. Venture capital firms and private equity
investments are just examples of exposures which could fall into
this category.
Area:
2006/48/EC, Annex VI, Part 1, point 68
Issue:
Eligible assets for covered bonds
Question number:
6
Date of question:
9 December 2005
Publication of answer:
27 January 2006
Question:
Several European CB legislations (e.g., France, Ireland) allow the
collateral pool of a covered bond to include ECB Tier 1 assets
(i.e., eligible for repo transactions) as substitute collateral assets.
The definition of ECB Tier 1 assets includes government debt as
well as corporate debt. The CRD does not explicitly mention
corporate debt as a form of eligible asset. Does the CRD allow
including a full range of ECB Tier 1 Assets in the cover pool?
Answer:
The CRD text is clear about what are "eligible assets". These are
enumerated in Annex VI, Part 1, points 68(a) to (e).
Therefore corporate and retail exposures except those explicitly
referred to in Annex VI, Part 1, points 68(d) and (e) don't count as
eligible assets.
Provided that the outstanding amount of covered bonds is 100%
collateralised by eligible assets until their maturity the additional
inclusion of "non-eligible" assets does not change the eligibility
status of the covered bonds.
Area:
Directive 2006/48/EC, Annex VI, Part 1, point 68 a)-f)
Issue:
Covered bonds – eligible assets
Question number:
211
Date of question:
6 February 2007
Publication of answer:
2 April 2007
Question:
As indicated by the name a houseboat can serve as a residence for
the owner or others. Can a houseboat serve as an eligible asset
covered by the items mentioned in annex VI, part 1, point 68 (a)(f) as a residential real estate or as a ship ? Secondly, does
infrastructural elements such as roads, bridges, energy- and power
supply lines and sewers qualify as eligible assets according to
annex VI, part 1, point 68 (e) - commercial real estate ?
Answer:
A boat in itself cannot be considered real estate. Under point 68
(f), loans secured by liens on ships are eligible. If it is possible to
record liens on such boats like liens on ships in an official register,
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a loan secured by such lien could be eligible under point 68 (f).
In order for loans secured by "infrastructure" as described in the
question to qualify under point 68 (e), the "infrastructure" must
qualify as commercial real estate, i.e. the lien securing the loan
must constitute a right over the real estate to which the
"infrastructure" in question is intrinsically tied and the
"infrastructure" must be commercially usable by third parties so
that it constitutes an economic value that can be realised in order
to service the loan.
Area:
Directive 2006/48/EC, Annex VI, Part 1, point 68
Issue:
Covered bonds: eligibility as collateral of loans secured by ships
Question number:
115
Date of question:
3 July 2006
Publication of answer:
8 August 2006
Question:
The last sub-paragraph of point 68 states that until December
2010, the figure of 60% indicated in subpoint (f) can be replaced
with a figure of 70%.
What are the prerequisites for implementing this derogation?
Should it be decided at national level by every competent authority
or should it be applicable on a case by case basis?
Answer:
The derogation is meant to be an option for Member States and is
not subject to any additional requirements.
Area:
2006/48/EC, Annex VI, Part 1, point 68 (c)
Issue:
Covered bonds – scope of the 15% limit for exposures to
institutions
Question number:
223
Date of question:
8 March 2007
Publication of answer:
24 May 2007
Question:
Are exposures resulting from financial instruments used for risk
hedging with credit institutions as counterparty to be included
within the 15 % limit in Annex VI, Part 1, point 68 (c)?
Answer:
It is assumed that the question refers to exposures arising from the
counterparty credit risk on derivative transactions (such as interest
rate or foreign exchange hedges) that are used to meet the
collateralisation requirement of point 68 in Annex VI, Part 1. Such
exposures must qualify for one of the eligible asset categories in
point 68 and would count towards the 15% limit in point (c) if
they fell into this asset category.
If the derivatives constitute additional collateral for the bond
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holders over and above the collateral required under point 68
(which represents some type of over collateralisation), they do not
count towards the 15% limit.
Area:
Directive 2006/48/EC, Annex VI, Part 1, point 68
Issue:
Covered bonds: eligibility as collateral of assets from certain
securitisations
Question number:
116
Date of question:
3 July 2006
Publication of answer:
11 September 2006
Question:
What is the meaning of exposures caused by transmission and
management of payments of the obligors of, or liquidation
proceeds in respect of, loans secured by pledged properties?
Are these exposures referring to different expenses/fees related to
granting/managing/liquidation of such loans?
Answer:
The securitisation entity may hold assets resulting from the receipt
and management of payments from the obligors or from
liquidations which are not taken into consideration when testing if
the 90 % limit is complied with. Expenses and fees do not
constitute assets but either cost or income, depending on the
perspective.
The meaning of "exposures caused by transmission and
management of payments of the obligors of, or liquidation
proceeds in respect of, loans secured by pledged properties" is
claims or other assets which do not qualify as those mortgage
loans which must constitute 90% of the assets of the securitisation
entity but which result from the causes specified in the Directive.
This could be liquidation proceeds held as deposits with a credit
institution. If, as the correspondent proposes, claims resulting from
fees payable to the entity meet this description, they can be
excluded when testing if the 90% requirement is complied with.
Area:
Directive 2006/48/EC, Annex VI, Part 1, point 68(d) & (e)
Issue:
Eligible assets for covered bonds
Question number:
62
Date of question:
4 April 2006
Publication of answer:
20 June 2006
Question:
Point 68(d) states that eligible assets are “loans secured by RRE
(…) up to the lesser of the principal amount of the liens that are
combined with any prior liens and 80% of the pledged of the
properties.” [Similar provision under point 68(e) for CRE].
Our question is whether this requirement should be interpreted as
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applying to each loan, so that only those individual loans that fulfil
the LTV<= 80% requirement are eligible. Or, alternatively, this
rule could also be interpreted as applying to the total of the loans
that the credit institution wants to consider as eligible, i.e., the
loans taken as a whole.
Example
Two loans: - Loan A: amount of the loan 750; collateral value:
1.000 – Loan B: amount of the loan 850; collateral value: 1.000.
Under the first interpretation, loan B would not meet the 80% LTV
requirement and, consequently, this loan is NOT eligible. Under
the second interpretation, the two loans taken together would meet
the 80% LTV requirement and, consequently, both loan A and B
would be eligible.
Answer:
The requirement applies to each loan.
This is consistent with the wording used elsewhere in the
Standardised approach and in the IRB approach, where the
requirements on the degree of collateralisation of mortgage loans
are to be applied on a single loan basis, rather than a portfolio
basis.
Area:
2006/48/EC, Annex VI, Part 1, point 68(d) & (e)
Issue:
Joint and several liability for covered bonds
Question number:
138
Date of question:
9 August 2006
Publication of answer:
12 October 2006
Question:
Point 68(d) states that eligible assets are "loans secured by
residential real estate… up to the lesser of the principal amount of
the liens that are combined with any prior liens and 80 % of the
value of the pledged properties". [Similar provision for
commercial real estate in point 68(e)].
The previous answer to Q62 states that the requirements in point
68(d) and (e) applies to each loan, rather than on a portfolio basis.
Our question is whether joint and several liability between the
borrowers would mean that the requirements in point 68(d) and (e)
can be regarded on a portfolio basis?
To illustrate this imagine a situation after a fall in the property
prices, where the LTV for 2 borrowers is respectively 85 and 65,
cf. Table 1 below. If these borrowers are not liable jointly and
severally the LTV requirements have to be fulfilled on a single
loan basis and the loan to borrower A will therefore no longer
meet the requirements. If the borrowers on the other hand are
liable jointly and severally will the requirements in the directive
then be fulfilled since the total LTV of the two borrowers remains
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below 80%?
Table 1 - Example of LT
Borrower
Loan Size
Value of
mortgage
LTV
A
85
100
85
B
65
100
65
A+B
150
200
75
It is worth noticing that previously - for a transitional period - joint
and several liability has been accepted between the borrowers to
form part of credit institutions' capital basis. This rule was in force
in another context according to the own funds directive and was
finally abolished by the end of 2000.
Answer:
The requirements in point 68(d) and (e) seek to achieve that each
mortgage loan in the collateral pool of a covered bond is supported
by an adequate excess margin of collateral value. The
correspondent asks if an insufficient collateralisation of some
loans in the pool can be accepted on the basis that the other loans
in the pool are correspondingly over collateralised and the
obligations of the borrowers in the pool are joint and several.
It must however be noted that the Directive does not under any
circumstances allow for exception from the adequate
collateralisation of each individual loan.
Area:
2006/48/EC, Annex VI, Part 1, points 68 (d) and (e)
Issue:
Covered Bonds – eligibility requirements
Question number:
154
Date of question:
16 October 2006
Publication of answer:
26 October 2006
Question:
The CRDTG has made it clear, when answering Q62 and 138, that
the LTV requirements in Annex VI, Part 1, point 68 apply on a
loan by loan basis. However, this doesn’t explain how this
eligibility requirement applies to each loan.
There are indeed 2 different ways to apply the LTV requirement to
a single loan:
1. The LTV requirement applies to each loan with a view to
making individual loans available as collateral (i.e. if the LTV
exceeds 80 %, the loan is not available as a whole); or
2. While applying to each loan, the LTV requirement determines
the portion of the loan which may be eligible (only the part of
the loan abiding by the 80% LTV requirement is deemed
eligible). This treatment would be similar to the RRE treatment
in Annex VI, Part 1, point 45 d), which requires the value of
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the property to exceed by a substantial margin (i.e., LTV) the
exposures. According to this provision, only the part of the
loan which does not exceed a given LTV (80% as general rule
according to a recent survey of CEBS), may be assigned a riskweight of 35 %.
Which treatment (1 and/or 2) may be used?
Answer:
Economically both options 1 and 2 are equivalent in practice from
the perspective of covered bond safety. In the case of option 2, the
non-eligible portion of the loan that is pledged to bondholders
actually could provide some additional cover for bondholders at
the expense of other creditors of the issuing institution – as long as
the availability of liquidation proceeds for bond holders was not
capped at the relevant percentage of property value. If such a cap
was in place, the two options are fully identical, economically.
Consequently, covered bonds collateralised according to both
options should be treated as eligible for the preferential capital
treatment.
Area:
2006/48/EC, Annex VI, Part 1, points 68 to 71
Issue:
Eligibility of covered bonds originating outside the EU
Question number:
129
Date of question:
26 July 2006
Publication of answer:
12 October 2006
Question:
In the CRD there are clear requirements concerning the treatment
of covered bonds originating from the EU. However, EU banks
operating globally also have a substantial amount of covered
bonds in the US.
Is it possible for A-IRB banks to apply for eligibility of US
covered bonds that have the same characteristics as the eligible
covered bonds according to CRD requirements?
Answer:
Annex VI, Part 1, points 68 to 71 apply to covered bond as defined
in Article 22 (4) of Directive 85/611/EEC. This definition limits
the scope of the term "covered bonds" to certain instruments
issued by credit institutions that have their seat in a Member State.
Area:
2006/48/EC, Annex VI, Part 1, point 68(d) & (e)
Issue:
Eligible assets for covered bonds
Question number:
155
Date of question:
16 October 2006
Publication of answer:
15 January 2007
Question:
On 4 April 2006 a question was raised to the CRD Transposition
Group concerning ”Eligible assets for covered bonds”, cf. question
62, Annex VI, Part 1, point 68 (d) & (e). The question was,
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whether, in connection with the starting section of point 68 (d)
“loans se-cured by RRE (…) up to the lesser of the principal
amount of the liens that are combined with any prior liens and
80% of the pledged of the properties.” [Similar provision under
point 68(e) for CRE], the LTV requirement should be interpreted
as applying to each loan. In the reply dated 20 June 2006 it is
stated that “The requirement applies to each loan…”. In Annex
VI, Part 1, point 68 (d) it also appears that an eligible assets class
can be “senior units issued by French Fonds Communs de
Créances or by equivalent securitisation entities governed by the
laws of a Member State securitising residential real estate
exposures provided that at least 90 % of the assets of such Fonds
Communs de Créances or of equivalent securitisation entities
governed by the laws of a Member State are composed of
mortgages that are combined with any prior liens up to the lesser
of the principal amounts due under the units, the principal amounts
of the liens, and 80 % of the value of the pledged properties”
[Similar provision under point 68(e) for CRE]. Our question is
whether the above mentioned decision, that the LTV requirements
in Annex VI, Part 1, point 68 (d) & (e) applies to each loan, also
will apply for units of residential /commercial real estate
exposures securitised by securitisation entities.
Answer:
This requirement applies to each loan, on an ongoing basis, as
clarified in Q154.
Area:
Directive 2006/48/EC, Annex VI, Part 1, point 73
Issue:
Risk weights for short-term exposures to institutions & corporates
Question number:
94
Date of question:
1 June 2006
Publication of answer:
8 August 2006
Question:
According to Annex VI, Part 1, section 14 (point 73) Table 6 is to
be used for both institutions and corporates for short-term
exposures. Assuming that the mapping of an ECAI ratings into
credit quality steps in tables 5 and 6 would be the same, a shortterm exposure for a corporate, with a rating considered as credit
quality step 4, will receive a risk weight 50% higher than if it was
long-term. This doesn’t have much sense if we take into account
the risk assumed in each of these transactions. Also, the structure
of risk weights for credit institutions appears to present, again
assuming the same mapping, some inconsistencies. If a Supervisor
chooses Option 2 (point 29) the risk weight of institutions in credit
quality steps 3 and lower will receive a higher risk weight for
exposures short-term than long-term. In case the selected option
for institutions was number 1 (point 26), then the results are even
worse. Institutions from EU will normally receive, under this
option, a risk weight of 20% for long-term exposures, compared
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with the range established in table 6. In addition, regardless of the
option used for institutions, the risk weight for exposures with
original maturity of less than tree months the risk weight assigned
is 20%. How does table 6 interact with these kinds of exposures?
Answer:
If the mapping of ECAI ratings into short and long term credit
quality steps is the same, then the results would be as set out in the
question. This reflects the treatment agreed at G-10level, in Basel,
for these kind of exposures, which has been incorporated into the
CRD text.
It is important to note that:
- in considering the mapping of credit assessments to credit quality
steps, competent authorities will take into account the relationship
between short- and long-term assessments and will seek to address
any inconsistencies that arise by adjusting the mapping; and
- for risk-weighting purposes, short-term assessments are deemed
to be issue specific.
Area:
2006/48/EC, Annex VI, Part 1, point 73
Issue:
Short-term exposures to institutions – Standardised approach
Question number:
41
Date of question:
27 February 2006
Publication of answer:
23 May 2006
Question:
The treatment of short-term exposures to credit institutions and
corporates is set out in Annex VI, Part 1, point 73. If we
understand it correctly the treatment is linked to the treatment of
exposures to institutions pursuant to points 33 to 36. We see
certain inconsistency between point 73 applicable only to credit
institutions and points 33 to 36 applicable to institutions, i.e.,
credit institutions and investment firms, caused by replacing the
word institutions with the term credit institutions in the final
version of Directive 2006/48/EC, Part 1, point 73. Moreover, there
is no change in Article 79(1)(n) in this respect. We would like to
know whether points 33 to 36 should be applied provided that a
short-term exposure assessment of an exposure to an investment
firm is available.
Answer:
The treatment in Annex VI, Part 1, point 73 sets out the risk
weights that should be assigned to the exposures described in
points 33 to 36 (i.e., where a short-term exposure assessment is
available).
The treatment set out in point 73 should be applied to both credit
institutions and to investment firms. The heading of Annex VI,
Part 1, section 14 will be corrected as part of the work of the
lawyer/linguists to finalise the CRD text.
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Area:
2006/48/EC, Annex VI, Part 1, point 73
Issue:
Short-term exposures
Question number:
150
Date of question:
5 September 2006
Publication of answer:
28 November 2006
Question:
In Article 79 and the Annexes, the CRD makes reference to short
term claims on institutions and corporates. Please specify the exact
definition of short term: One year or three months? Initial duration
of exposure or remaining duration of exposure? How should one
treat extensions in duration of finance contracts?
Answer:
Short term exposures to institutions and corporates - as referred to
in point 73 of Annex VI, Part 1 - are those exposures for which a
specific short term credit assessment by a nominated ECAI is
available. Please see also the answer to Q149.
Area:
2006/48/EC, Annex VI, Part 1, point 73
Issue:
Treatment of short term exposures
Question number:
302
Date of question:
18 December 2007
Publication of answer:
13 March 2008
Question:
1. Having in mind that the identification of exposures to be
allocated in the short term exposure class precedes the allocation
of exposures to institutions, we would like to clarify the following:
Is the treatment prescribed in Annex VI, Part 1, point 73 of
2006/48/EC regarding short term exposures to institutions and
corporates, also applicable in the cases where the competent
authorities choose the Central Government risk weight based
method for exposures to institutions set out in points 26 – 27 of the
same Annex? If the answer is negative, is it then implied that all
short term exposures with maturity of 3 months or less to
institutions are assigned a risk weight of 20% according to point
28 of Annex VI, Part 1?
2. Is the treatment prescribed in points 14 to 15 of Part 3
applicable for short term exposures to institutions regardless of
whether the Central Government risk weight based method or the
credit assessment method is adopted for exposures to institutions?
For instance, should a long-term exposure to an institution that
would be assigned a risk weight of 20% under the Central
Government risk weight based method, be assigned a risk weight
of 150% if the risk weight that would be assigned to a short term
rated facility of that institution were 150%? If yes, would this
150% risk weight be applied irrespective of whether the institution
has or does not have an exposure to this short term rated facility?
If a competent authority adopts the Central Government risk
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weight based method, will the risk weight to be assigned to rated
bonds, whether short term or long term, issued by institutions, be
based on this method or on the credit rating of the bond?
Answer:
1. See answer to Q41. The treatment in Annex VI, Part 1, point 73
sets out the risk weights that should be assigned to the exposures
described in points 33 to 36 (i.e., where a short-term assessment is
available and the credit assessment based method is used). When
the central government risk weight based method is used, point 28
shall apply.
2. Points 14 and 15 relate to long term and short term credit
assessments, and not to short term exposures. These provisions do
not lend themselves to the central government risk weight based
method, which does not rely on institutions' credit assessment. If a
competent authority adopts the central government risk weight
method, risk weights of institutions are determined in accordance
with Annex VI, Part 1, points 26 to 28 no matter whether short
term or long term credit assessment are available.
Area:
Directive 2006/48/EC, Annex VI, Part 1, point 74
Issue:
Exposures in the form of collective investment undertakings
Question number:
113
Date of question:
3 July 2006
Publication of answer:
8 August 2006
Question:
Directive 2006/48/EC does not provide for any definition
concerning the collective investment undertakings. Directive
611/85/EEC refers to undertakings of collective investment in
transferable securities (UCITS) and other collective investment
undertakings. UCITS are undertakings whose sole object is the
collective investment in transferable securities of capital raised
from the public and which operates on the principle of risk
spreading and the units of which are, at the request of holders,
repurchased or redeemed, directly or indirectly, out of the
undertaking’s assets.
We would like to know if the coverage area of collective
investment undertakings referred to in section 15 of Annex VI
includes both undertakings of collective investment in transferable
securities and other collective investment undertakings or includes
only the former category?
Answer:
The concept of CIUs referred to in Annex VI, section 15 is
broader than the concept of UCITS, i.e., it encompasses also
collective investment undertakings that are not UCITS.
Area:
Directive 2006/48/EC, Annex VI, Part 1, point 74
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Issue:
Exposures in the form of collective investment undertakings
(CIUs)
Question number:
125
Date of question:
19 July 2006
Publication of answer:
12 October 2006
Question:
We would like to know what the relation between the following
exposures is: 15. Exposures in the form of collective investment
undertakings (CIUs) (Annex VI, point 74) and private equity
investments (PEIs) and venture capital firms (VCFs) that most
likely represent funds or “funds of funds”. We add that PEIs and
VCFs are mentioned in 11. Item belonging to regulatory high-risk
categories, Annex VI, point 66.
Is it possible to assume that CIUs that are not UCITS (see
Directive 85/611/EEC) represent non-regulated collective
investment undertakings only? So, do collective investment
undertakings that are not UCITS include PEIs and VCFs and then
would PEIs and VCFs be treated according to Annex VI points 74
to 76, particularly point 75 (a credit assessment by a nominated
ECAI is available)?
We are uncertain about whether PEIs and VCFs would be
authorised for application of the procedure mentioned in points 77
to 81 with regard to the conditions stipulated there and
characteristics of PEIs and VCFs (e.g. representing most probably
non-regulated funds or “funds of funds” that hold participation in
companies whose shares are not negotiable; a form of investments
in the funds: participation certificates, shares, subordinated debts,
credits etc.).
Granting that PEIs and VCFs would be treated under the category
15. Exposure in the form of CIUs (Annex VI, points 74 and 75) so
then why does the exposure class 11. Item belonging to regulatory
high-risk categories (point 66.) include PEIs and VCFs? A 150 %
risk weight can also be stipulated based on Annex VI, point 76
dealing with an exposure class of 15. CIUs.
Answer:
1. Is it possible to assume that collective investment undertakings
(CIUs) that are not UCITS (see Directive 85/611/EEC) represent
non-regulated collective investment undertakings only?
No, there can be CIUs from third countries which are regulated
and CIUs from Member States which are regulated but under
regulations that do not transpose the UCITS directive (for
instance, a Member State could have a law in place regulating
open-ended real estate funds).
2. So, do collective investment undertakings that are not UCITS
include PEIs and VCFs and then would PEIs and VCFs be treated
according to Annex VI, Part 1, points 74 to 76, particularly point
75 (a credit assessment by a nominated ECAI is available)?
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CIUs, like UCITS, would be expected to be open-ended in nature,
i.e., at the request of holders, shares in a CIU would be
repurchased or redeemed, directly or indirectly, out of the CIU's
assets. Alternatively, the CIU would continuously take actions to
the end that the market price of shares in it did not significantly
vary from the net asset value. Private equity and venture capital
funds are normally not open-ended in nature and rather constitute
holdings of equity or participations. If they were in fact open
ended in nature, there would be discretion for competent
authorities to require credit institutions either to assign them to the
CIU or to the regulatory high risk items exposure class, if the latter
exists in their jurisdiction.
3. Why does the exposure class 11. Items belonging to regulatory
high-risk categories (point 66) include PEIs and VCFs?
Annex VI, Part 1, point 66 mentions private equity and venture
capital investments as examples of items that can constitute high
risk items. Competent authorities may decide that exposures to
such items shall be assigned a 150% risk weight.
Area:
Directive 2006/48/EC, Annex VI, Part 1, point 74
Issue:
Collective investment undertakings – investment certificates
Question number:
219
Date of question:
21 February 2007
Publication of answer:
24 May 2007
Question:
In question 125 there is written in the answer that CIUs, like
UCITS, would be expected to be open-ended in nature. How
should be treated investment certificates which could be issued by
close-ended funds (the certificates are not redeemable in cash, out
of the undertaking's assets, on a daily basis but only in fixed dates)
and the underlying exposures of certificates are transferable
securities (i.e. certificates without rating and the underlying
exposures are government bonds). Should this certificates be
assigned to segment "EXPOSURES IN THE FORM OF
COLLECTIVE INVESTMENT UNDERTAKINGS" and can be
treated under point 79 to 81 (when the criteria from point 77 are
met) and if not what should be the right segment and how should
be assigned the risk weight?
Answer:
From the description in the question, it may be concluded that the
investment certificates are units in CIUs as they are redeemable
out of the undertaking's assets, even if only on specific dates. This
redeemability at the holder's request is a feature that distinguishes
CIUs from other entities. Another feature that would indicate that
investment certificates are units in CIUs would be if there was a
management company in place, the assets of which were strictly
separated from those of the units holders.
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Area:
Directive 2000/12/EC, Annex VI, Part 2, point 5(c)
Issue:
Review of ECAI recognition
Question number:
86
Date of question:
31 May 2006
Publication of answer:
19 September 2006
Question:
How is the following ECAI ongoing review requirement to be
interpreted: "The competent authorities must be able to receive
from the ECAI the extent of its contacts with the senior
management of the entities which it rates"?
Answer:
The requirement should be interpreted as an obligation by the
applicant ECAI to inform the competent authorities, when
requested, of the extent of its contacts with the issuer.
In this regard it is useful to keep in mind paragraph 102 of the
CEBS guidelines on ECAI recognition (GL07). This states that:
“It will also have to be demonstrated that the ECAI reviews each
credit assessment at least annually (regardless of whether a
reassessment has already been undertaken in response to a
significant change in financial conditions). The ECAI should
provide a detailed summary on how these reviews are conducted,
including the extent of contacts with the senior management of the
rated entity."
Area:
2006/48/06, Annex VI, Part 3
Issue:
Use of the parent's credit assessment for purposes of riskweighting a group's entity.
Question number:
243
Date of question:
19 June 2007
Publication of answer:
20 July 2007
Question:
How to define the risk weight of controlled undertaking's
exposure, if only its parent undertaking has credit assessment
(rating) of eligible ECAI and controlled undertaking itself was not
rated by eligible ECAIs? Could the credit assessment (rating) of
parent undertaking be used for the purposes of defining risk
weights of controlled undertaking's exposures? Or shall this
controlled undertaking be treated as unrated undertaking?
Answer:
According to Annex VI, Part 3, point 11, credit assessment for
issuers within a corporate group cannot be used as credit
assessment of another issuer within the same corporate group. This
prevents the extension of a rating of a parent to its 'controlled
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entity', which should be treated as unrated. See answer to Q135.
Area:
2006/48/EC, Annex VI, Part 3, point 1, Article 80(1)
Issue:
Recognised ECAI
Question number:
332
Date of question:
26 March 2008
Publication of answer:
29 May 2008
Question:
There were some doubts whether according to the provisions of
the Directive, the nomination of ECAIs (one or more) is obligatory
or compulsory. According to Article 80(1) of the Directive
2006/48/EC: "To calculate risk-weighted exposure amounts, risk
weights shall be applied to all exposures, unless deducted from
own funds, in accordance with the provisions of Annex VI, Part 1.
The application of risk weights shall be based on the exposure
class to which the exposure is assigned and, to the extent specified
in Annex VI, Part 1, its credit quality. Credit quality may be
determined by reference to the credit assessments of External
Credit Assessment Institutions (‘ECAIs’) in accordance with the
provisions of Articles 81 to 83 or the credit assessments of Export
Credit Agencies as described in Annex VI, Part 1. According to
part 3 point 1 subpara 1 i 2 of Annex VI of the Directive
2006/48/EC: "A credit institution may nominate one or more
eligible ECAIs to be used for the determination of risk weights to
be assigned to asset and off-balance sheet items. A credit
institution which decides to use the credit assessments produced
by an eligible ECAI for a certain class of items must use those
credit assessments consistently for all exposures belonging to that
class." If the nomination of an ECAI(s) should be compulsory
than a bank which decides not to nominate any ECAI will treat all
exposures as unrated. So, what should be the understanding of the
above provisions?
Answer:
The distinction between 'nominated' and 'eligible' ECAI under the
Directive makes it clear that a credit institution is not required to
'nominate' one or more 'eligible' ECAI, and may decide to treat all
exposures as unrated as implicitly provided for in Annex VI, Part
3, points 1 and 2.
Please note that credit institutions shall disclose the names of the
nominated ECAIS and the reasons for any changes in accordance
with Annex XII, Part 2, point 7.
Area:
2006/48/EC, Annex VI, Part 3, point 11
Issue:
Use of credit assessments of issuers within a corporate group for
SPVs under the Standardised approach
Question number:
135
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Date of question:
4 August 2006
Publication of answer:
28 November 2006
Question:
Sometimes credit institutions or corporates create ad-hoc vehicles,
which only have the purpose of issuing bonds to finance them.
These specific vehicles always have a rating, which is an implicit
rating of the parent company. In the situation where the credit
institution or the corporate are unrated, but their refinancing
subsidiary benefits from a credit assessment, will you allow them
to use the latter’s assessment to risk weight an exposure on the
parent entity?
Answer:
The extension of a rating of an entity to its parents, especially in
the case of a SPV, is prevented by the general prohibition of
Annex VI, Part 3, point 11.
Area:
2006/48/EC, Annex VI, Part 3, point 12
Issue:
Long term/short term credit assessment
Question number:
159
Date of question:
17 October 2006
Publication of answer:
15 December 2006
Question:
Does the provision imply the possibility to use the long-term credit
assessments, in case there is no short-term assessment available,
also for short-term exposures?
Answer:
If no specific short term assessment for an item exists, the risk
weight for the item is determined on the basis of long term credit
assessments - if available - according to Annex VI, Part 3, points 8
to 11.
Note however that the risk weight for an unrated short term
facility has to be determined according to Annex VI, Part 3, points
14 and 15 if other short term facilities exist that are rated.
Area:
2006/48/EC, Annex VI, Part 3, points 12 to 15
Issue:
Short-term exposures and short-term credit assessments
Question number:
149
Date of question:
31 August 2006
Publication of answer:
28.11.2006
Question:
When determining the risk weights for exposures to institutions
under standardised approach according to the credit assessment
based method (Annex VI, Part 1, points 29 to 32) the Directive
stipulates certain rules for “short-term credit assessments” and
“short-term exposures” in Annex VI, Part 1, points 33 to 36, 73
and Part 3, points 12 to 15. However, the Directive does not define
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what is meant by a short-term credit assessment and a short-term
exposure. The Directive uses explicitly other terms describing
exposures to institutions, i.e., exposures with an original effective
maturity of three months or less (Annex VI, Part 1, points 31 to
32) and exposures of up to three months of residual maturity
(Annex VI, Part 1, point 34, 37 to 38), which are self-explanatory.
The lack of definitions of a short-term exposure and a short-term
credit assessment in the Directive or their interrelation with other
terms used in Annex VI of the Directive (mentioned above) is
confusing and may lead to various interpretations. The Basel text
is more transparent and consistent in this area as it uses only the
term short-term claims on banks, which it defines as claims on
banks having an original maturity of three months or less, except
those which are expected to be rolled over (paragraphs 62 and 63
of the Basel Accord).
1. Is the term short-term exposures to institutions equivalent to the
term exposures to institutions with an original effective maturity
of three months or less according to the Directive? If not, what is
the interrelation between those two terms used in the Directive?
2. What is the definition of a short-term credit assessment? How
does it relate to a short-term exposure to an institution?
3. It is unclear whether in Table 4 and 5 (Annex VI, Part 1, points
29 and 31 respectively), the credit assessment refers to an
assessment of a given exposure (assigned considering points 8 to
11, Part 3) or to an assessment of a given institution. If this is the
assessment of the exposure, how one should read points 30 and 32
(Annex VI, Part 1)? If this is the assessment of the institution,
according to what table should issue-specific assessments be
translated to risk-weights and should such issue-specific
assessments be taken into consideration at all?
Answer:
1. Is the term short-term exposures to institutions equivalent to the
term exposures to institutions with an original effective maturity of
three months or less according to the Directive? If not, what is the
interrelation between those two terms used in the Directive?
No, the terms are not synonymous. Short term exposures to
institutions and corporates as referred to in point 73 of Annex VI,
Part 1 are those exposures for which a specific short term credit
assessment by a nominated ECAI is available. Note that the
assumption is that where an ECAI issues short term credit
assessments, these are always exposure specific. In the context of
exposures to institutions, points 33 to 36 set out how the risk
weights interact with the risk weights for exposures of a residual
maturity of three months or less as set out in point 31 (referred to
as "the general preferential treatment for short term exposures")
where the credit assessment based method is used.
2. What is the definition of a short-term credit assessment? How
does it relate to a short-term exposure to an institution?
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See answer to 1.
3. It is unclear whether in Table 4 and 5 (Annex VI, Part 1, points
29 and 31 respectively), the credit assessment refers to an
assessment of a given exposure (assigned considering points 8 to
11, Part 3) or to an assessment of a given institution. If this is the
assessment of the exposure, how one should read points 30 and 32
(Annex VI, Part 1)? If this is the assessment of the institution,
according to what table should issue-specific assessments be
translated to risk-weights and should such issue-specific
assessments be taken into consideration at all?
The risk weights in Table 4 and 5 apply both to assessments of
specific exposures and of institutions, unless points 35 and 36
prescribe the use of a specific short term credit assessment. Points
8 to 11 in Annex VI, Part 3 set out how exposure-specific and
issuer assessments are applied to individual exposures. Points 30
and 32 in Annex VI, Part 1 set out the treatment for unrated
institutions but apply only if no exposure-specific or issuer
assessment applies according to Annex VI, Part 3, points 8 and 9.
Area:
2006/48/EC, Annex VI, Part 3, point 16
Issue:
Use of credit assessments for exposures denominated in a foreign
currency
Question number:
160
Date of question:
17 October 2006
Publication of answer:
15 December 2006
Question:
In view of the provision, is it possible to apply the credit
assessment referring to an obligor’s exposure denominated in a
foreign currency, for the purpose of deriving a risk weight for
another exposure denominated in that same obligor’s domestic
currency, in case the assessment for a domestic exposure is
missing?
Answer:
The provision explicitly prohibits only the transference of a credit
rating for domestic currency exposures to exposures in foreign
currencies. The intention of this particular provision is to set out
that credit assessments can only be used for exposures in the same
currency – whether domestic or foreign – as the exposures to
which the credit assessment pertains.
Area:
Directive 2006/48/EC, Annex VII, Part 1, point 3
Issue:
Scope of the scaling factor
Question number:
122
Date of question:
17 July 2006
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Publication of answer:
12 October 2006
Question:
Basel paragraph 14 introduces a scaling factor of 1.06 to the IRB
capital requirement resulting from the revised framework, while
the CRD specifies this treatment for each particular portfolio, by
adding the scaling factor to the risk weight function.
In particular, are specific risk weighted exposure amounts (such as
SL or other non credit obligation like residual value for leasing
which are not included in the risk-weight function) to be adjusted
by this scaling factor?
The issue is raised as to whether a strict and mere reading of the
CRD (no scaling factor unless otherwise specified) is appropriate
as Basel specifies that the driver of this scaling factor is the ELUL decisions. How should the following exposures held by IRB
credit institutions be treated:
1. Exposures which are directly risk-weighted (no use of the riskweight function), but subject to an EL calculation (SL
according to point 31 of Annex VII, Part 1). Consistently with
the Basel rationale, they should be subject to the scaling factor
mechanism.
2. Exposures to which an EL of zero is assigned (non creditobligation according to Article 88(4).
3. Exposures which are directly risk-weighted by means of a SArelated treatment, but not subject to the SA (i.e., alternative
treatment for real estate collateral laid down in Annex VIII,
Part 3, point 73).
4. Exposures subject to SA (roll-out, permanent partial use,
grandfathering for certain equity exposures). In this case, the
scaling factor is not appropriate.
Answer:
The Directive only requires the application of the scaling factor to
exposures for which the risk-weight function shall be used.
Accordingly, the scaling factor shall not be applied where its
application is not explicitly provided for.
Area:
Directive 2006/48/EC, Annex VII, Part 1, point 3
Issue:
IRB - Meaning of the risk-weighting function
Question number:
365
Date of question:
3 December 2008
Publication of answer:
23 February 2009
Question:
Annex 7, Part 1, point 3 states the risk weighted exposure
formulas to corporate, institutions, central governments and
central banks. The Capital Requirement and Risk-weighted asset
formula is not stated very clearly. Could you please clearly define
the formula for both Capital Requirement (K) and Risk-weighted
assets as in International Convergence of Capital Measurement
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and Capital Standards (A Revised Framework – Comprehensive
Version), page 64. Then my question is on the coefficient 12.5 in
the formulae. We think that this is coming from 100/8, which
stands for 8% capital adequacy ratio. What happens, if our local
regulator sets the ratio as 12%. Shall we update the formula with
100/12 instead of 12.5?
Answer:
The CRD and the Basel IRB risk weighting functions are one and
the same (see also Q368). In particular, both formulae include a
12.5 coefficient when expressing capital requirements in terms of
'risk weighted assets' (Basel) or 'risk weighted exposures amounts'
(Annex VII, Part 1, point 3).
Had the minimum 'capital' ratio be set at 12% (instead of 8%), the
risk-weighting formulae would have been different (100/12
coefficient instead of a 100/8 coefficient).
Where a regulator set a ratio of 12% (instead of 8%) as part of the
Pillar 2 framework, the bank still needs to calculate and disclose
minimum capital requirements using the 8% standard for the
purposes of Pillar 3. Pillar 2 requirements are own funds
requirements in excess of the minimum level.
Area:
Directive 2006/48/EC, Annex VII, Part 1, point 3 and 10
Issue:
Translation mistake in Dutch version
Question number:
368
Date of question:
15 December 2008
Publication of answer:
23 February 2009
Question:
In paragraph 3 of Annex VII it is a translation mistake. I.e. instead
of English words "term factor" the phrase in Dutch language is
used. i.e. "Looptijdfactor". Besides, there's also a mistake writing
the formula of RWs for retail exposures. In the formula of risk
weight (RW) not the part of formula that is subtracted from the
main part, i.e. "<...> -PD*12.5*1.06" must be changed to "<...> PD * LGD ) * 12.5 * 1.06 ".
Answer:
Both issues are 'corrigenda'.
The term 'Looptijdfactor' should be read as 'Maturity factor'.
Consistent with the Basel text, the correct formula for the risk
weight RW should be read as follows:
(RW) = {LGD*N[(1 - R) - 0.5*G(PD) + (R/(1 - R))0.5*G(0.999)]
- PD*LGD}*12.5*1.06
Area:
Directive 2006/48/EC, Annex VII, Part 1, point 4
Issue:
Adjustment of risk weighted exposure amounts
Question number:
89
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Date of question:
31 May 2006
Publication of answer:
8 August 2006
Question:
According to Annex VII, Part 1, point 4, the risk weighted
exposure amount for each exposure which meets the requirements
set out in Annex VIII, Part 1, point 29 and Annex VIII, Part 2,
point 22 may be adjusted according to the given formula. Is this
provision in compliance with the provisions of Annex VIII, Part 3,
point 90?
According to Article 93(3), where the risk-weighted exposure
amount already takes account of credit protection under Articles
84 to 89, as relevant, the calculation of the credit protection shall
not be further recognised under Articles 90 to 93. Does this mean,
that when a credit institution applies the provisions of Annex VII,
Part 1, point 4, it shall not at all apply the provision of Annex VIII,
Part 3, point 91?
Answer:
The treatment set out in Annex VII, Part 1, point 4 only applies to
the protected amount of the exposure and is available as an
alternative to the treatment in Annex VIII, Part 3, point 90.
For the unprotected part of the exposure, the treatment set out in
Annex VIII, Part 3, point 91 shall be applied.
Area:
Directive 2006/48/EC, Annex VII, Part 1, point 5
Issue:
IRB approach - firm size adjustment
Question number:
100
Date of question:
9 June 2006
Publication of answer:
8 August 2006
Question:
Directive 2003/361/EC says SME is defined as enterprises with
employees less than 250. Enterprises that satisfy this criteria and
sales under EUR 50 million or assets EUR 43 million are
considered SMEs.
Basel II paragraph 273 enables firm-size adjustment for SMEs in
the corporate exposure class (Firm-size adjustment for small- and
medium-sized entities (SME) 273. Under the IRB approach for
corporate credits, banks will be permitted to separately distinguish
exposures to SME borrowers (defined as corporate exposures
where the reported sales for the consolidated group of which the
firm is a part is less than €50 million) from those to large firms. A
firm-size adjustment (i.e. 0.04 x (1 – (S – 5) / 45)) is made to the
corporate risk weight formula for exposures to SME borrowers. S
is expressed as total annual sales in millions of euros with values
of S falling in the range of equal to or less than €50 million or
greater than or equal to €5 million. Reported sales of less than €5
million will be treated as if they were equivalent to €5 million for
the purposes of the firm-size adjustment for SME borrowers.
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Following that CRD enables the firm size adjustment and says:
"For exposures to companies where the total annual sales for the
consolidated group of which the firm is a part is less than EUR 50
million credit institutions may use the following correlation
formula for the calculation of risk weights for corporate
exposures."
1.) We think that CRD enables firm size adjustment to all firms as
far as the total annual sales are below EUR 50 million. Is this
interpretation correct?
2.) Considering 2003/361/EC, will the firm-size adjustment be
applicable to firms with employees under 250 and assets under
EUR 43 million?
Answer:
1) Yes, in principle. In certain circumstances, this shall however
be substituted for by total assets (see point 5, second subparagraph).
2) Yes, if and only if they meet the condition in point 5. Directive
2003/361/EC is not relevant for the CRD; the only relevant
provisions are set out in the CRD itself.
Area:
Directive 2006/48/EC, Annex VII, Part 1, point 5
Issue:
IRB approach - firm size adjustment
Question number:
107
Date of question:
23 June 2006
Publication of answer:
8 August 2006
Question:
My question about firm-size adjustment for SME under IRB
approach. Company A has annual sales of €20m alone, and is
included in a group which has consolidated annual sales of €180m.
Then, a bank grants a loan of €2m to Company A.
Do we use firm-size adjustment for SME under IRB approach in
CRD?
a) Yes, because, annual sales of Company A are €20m (
irrespective of group's annual sales).So it is below €50m.
b) No, because, annual sales of the group (which Company A is
included) is €180m. So it is above the threshold of €50 m.
Answer:
The text of Annex VII, Part 1, points 5 is clear: the 50 million euro
limit applies to the total annual sales of the consolidated group
(including connected clients) of which the firm is a part. So b) is
correct.
Area:
2006/48/EC, Annex VII, Part 1, point 6
Issue:
Clarification of CRD provisions on specialised lending
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Question number:
47
Date of question:
8 March 2006
Publication of answer:
19 September 2006
Question:
For specialised lending exposures that a credit institution cannot
demonstrate that its PD estimates meet the minimum requirements
set out in Part 4 of Annex VII it shall assign risk weights to these
exposures according to table 1.
The competent authorities may authorise a credit institution to
generally assign preferential risk weights of 50% to exposures in
category 1, and a 70% risk weight to exposures in category 2,
provided the credit institutions’ underwriting characteristics and
other risk characteristics are substantially strong for the relevant
category.
The Basel Accord provides for a similar national discretion.
Paragraph 277 states that. "At national discretion, supervisors may
allow banks to assign preferential risk weights of 50% to “strong”
exposures, and 70% to “good” exposures, provided they have a
remaining maturity of less than 2.5 years or the supervisor
determines that banks’ underwriting and other risk characteristics
are substantially stronger than specified in the slotting criteria for
the relevant supervisory risk category.
All this said, we deem it necessary to clarify what the CRD
requires when it states that “the credit institutions’ underwriting
characteristics and other risk characteristics are substantially
strong for the relevant category”.
In particular, this provision can be referred alternatively to:
Answer:
a)
the characteristics of the single project;
b)
the internal evaluation process of the bank.
The provision in Annex VII, Part 1, point 5 introduces a discretion
to "...allow credit institutions to generally assign preferential risk
weights...". Such a preferential treatment should be applied to the
institution's total exposures that are subject to the 'slotting'
treatment and can only be granted if credit institutions have
processes and criteria in place which justify on the basis of a
generally lower level of risk a lower capital requirement than the
standard one. Consequently, this preferential treatment can only be
granted to credit institutions which have stricter underwriting and
other standards which ensure a lower risk in the relevant category
than the "normal" one.
This can be achieved by different means, e.g., stricter
requirements for individual projects, underwriting standards under
which only ‘particular low risk projects’ are eligible for a given
category.
Further explanations can be found in paragraphs 182 to 189 of the
CEBS guidelines on the implementation, validation and
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assessment of IRB and AMA (GL10).
Area:
Directive 2006/48/EC, Annex VII, Part 1, point 6
Issue:
Specialised lending – preferential treatment
Question number:
349
Date of question:
21 July 2008
Publication of answer:
7 October 2008
Question:
In the answer to Q47, it is indicated that further explanations can
be found in paragraphs 182 to 189 of the CEBS guidelines on the
implementation, validation and assessment of IRB and AMA.
Paragraph 187 of the above-mentioned guidelines provides that
competent authorities may authorise an institution to assign
preferential risk weights to highly-rated (categories 1 and 2)
specialised lending (SL) exposures with remaining maturities of
less than 2,5 years, provided the respective conditions are fulfilled.
To our understanding, the meaning of the provision in paragraph
6, Annex VII, Part 1 is not different from the relevant meaning,
indicated in CEBS guidelines. According to such considerations,
preferential treatment can be applied only for SL exposures with
maturity of less than 2,5, provided that bank complies with the
requirement to have substantially strong underwriting and other
characteristics. However, different interpretation of this national
discretion is possible. Could this preferential treatment be applied
for all exposures of categories 1 and 2, regardless of their
maturity? I.e. the preferential risk weights (50% and 70%) in all
cases are applicable to exposures with remaining maturity of less
than 2,5 years and they can (subject to national discretion of
supervisory authorities) be applicable to exposures with remaining
maturity of more than 2,5 years. Which interpretation is correct?
Answer:
The correct interpretation is that the preferential risk weights of
50% and 70% are available to exposures having a maturity of less
than 2,5 years and as discretion for competent authorities to any
exposures having a maturity equal to or exceeding 2,5 years where
the strong characteristics test is met.
Area:
Directive 2006/48/EC, Annex VII, part 1, point 8
Issue:
Treatment of receivables under the securitisation framework
Question number:
165
Date of question:
25 October 2006
Publication of answer:
28 November 2006
Question:
To us the intention of Annex VII, Part 1, point 8 and point 15 is
not clear. Point 8/15 states that for purchased corporate/retail
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receivables, refundable purchase discounts, collateral or partial
guarantees that provide first-loss protection for default losses,
dilution losses, or both, may be treated as first-loss positions under
the IRB securitisation framework. It seems to intend that the
mentioned items (refundable purchase discounts, collateral or
partial guarantees that provide first-loss protection for default
losses, dilution losses, or both) may be ‘taken out’ of the IRB
framework and treated in the IRB securitisation framework.
However, how to treat only this received protection as ‘first
losses’ under the Securitisation framework, without assessing the
whole pool of purchased receivables under the Securitisation
framework is not clear. Another possibility is that the intention
was to only clarify that if purchased corporate receivables are
treated under the IRB securitisation framework, refundable
purchase discounts, collateral or partial guarantees that provide
first-loss protection for default losses, dilution losses, or both, may
be treated as first-loss positions.
Answer:
Where the purchase price of receivables reflects a discount (below
the nominal of the claim) and this discount provides first loss
protection to the credit institution (single reserve), the IRB
securitisation treatment laid down in Annex IX may be used.
Likewise, when collateral or partial guarantees obtained on
receivables provide first loss protection and these credit risk
mitigation techniques cover default losses, dilution losses or both,
they may be treated as first loss protection under the IRB
securitisation framework.
Such arrangements are equivalent to a synthetic securitisation
where the credit institution bought protection for the first loss
tranche of the pool of receivables and has retained the upper
tranche of the risk of the pool. Consequently, if the credit
institution chooses the treatment in Annex VII, Part 1, points 8 and
15, it applies the applicable risk weight for the collateral received
(cash in the case of a refundable purchase discount) or for the
guarantor to the first loss tranche and treats the retained upper
tranche as a securitisation position – assuming the latter is unrated
- by applying the supervisory formula.
Area:
2006/48/EC, Annex VII, Part 1, point 12
Issue:
Correlation to be used for retail exposures secured by commercial
real estate
Question number:
298
Date of question:
7 December 2007
Publication of answer:
3 April 2008
Question:
Basel paragraph 328 states that in the case of residential mortgages
a correlation of 0.15 should be used in determination of the risk
weighted exposures. In the CRD, see point 12, this definition had
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been widened to real estate. So not only residential real estate is
covered but also exposures secured by commercial real estate are
part of the scope. This leads to much higher capital requirements
for banks using A-IRB for retail SME lending secured by
commercial real estate in comparison to either retail SME lending
with a comparable LGD (but secured by other asset types) or for
SME lending secured by commercial real estate that fall under the
corporate treatment. From the perspective of risk this looks quite
illogical and leads to totally different outcomes in comparison to
the original Basel II accord.
1. Do you agree with the above interpretation of the CRD that also
in the case of retail SME exposures secured by commercial real
estate a correlation of 0.15 should be used?
2. What is, in the view of the CRDTG, the underlying intention of
this change to the original BIS2 accord?
3. Can, in your view, the current text in the CRD be seen as an
unintended sideeffect of the aim of the Commission to have a
broader scope of application for real estate colleteral for SA and FIRB approaches ?
In CP3 the asset correlation of 0.15 was still to be used for risk
weighted asset amounts for residential mortgage exposures in the
retail portfolios only. - In the working paper of the Commission
services on the treatment of real estate lending it was stated that:
“Any real estate collateral for which institutions can estimate
LGDs subject to the minimum requirements for own-LGD
estimates are eligible for recognition under the Retail IRB
Approach presupposed the institutions meets also the minimum
requirements for real estate collateral set out in Annex 2.
Depending on the nature of collateral it will be treated either on
the retail mortgage curve or on the other retail curve.”
Answer:
A correlation of 0.15 shall apply to retail SME exposures secured
by commercial real estate, provided that the SME exposures meet
the conditions of Article 86(4).
While the Basel text refers only to exposures secured or partly
secured by residential mortgages, the reference to 'retail exposures
secured by real estate collateral' means that all retail exposures
secured by real estate are subject to the 0,15 correlation instead of
being treated as 'other retail exposures'.
Area:
2006/48/EC, Annex VII, Part 1, point 21
Issue:
Unfunded credit protection for equity exposures: Simple Risk
Weight approach
Question number:
27 (see also Q37)
Date of question:
20 February 2006
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Publication of answer:
1 June 2006
Question:
Point 21 states that “credit institutions may recognise credit
protection obtained on an equity exposure in accordance with the
methods set out in Article 90 to 93”. Nevertheless, Articles 90 to
93 deal with substitution effect for unfunded credit protection for
credit risk purposes, and Annex VIII does not provide any insight
into how equity risk should be treated. Equity risk and credit risk
are not one and the same; the former corresponds to the risk
incurred by institution on equity prices while the later refers to the
risk of default of a counterparty. It must be noted that Basel
recognises guarantees but not unfunded credit derivatives, wherein
the capital requirement is determined through use of the marketbased approach (paragraph 349). Assuming that the substitution
mechanism may be applied to the part of the equity exposures
guaranteed by a protection provider which supports the risk of
unfavourable equity prices movements, below which the
protection provider would pay, how to interpret the following
provisions:
1. Provisions of Annex VIII for the eligibility of guarantees, which
refer to “credit events”/credit quality of protected exposures (e.g.
point 14, ii) iii)…). Should these provisions be disregarded when
applied to equity risk?
2. Are the provisions of point 21 (“credit events” for credit
derivatives) relevant for equity risk purposes (e.g., the bankruptcy,
insolvency or inability of the obligor to pay its debts)?
Answer:
There was a lot of debate both at G-10 and EU level on the
economic differences behind credit and equity exposures. This has
been reflected in designing different prudential treatments for
equity exposures, i.e., one similar to what is applied to credit
exposures (PD/LGD) and two market-based approaches. The
prudential distinction between equity and credit risk is also
reflected in regulatory provisions for trading book exposures.
That said, the suggested assumption on the substitution
mechanism is correct. However, this means that the credit
institution should use the protection provider's PD in conjunction
with the given values of LGD and M under the PD/LGD approach.
Furthermore, the provisions in Annex VIII on the eligibility of
guarantees that specifically refer to credit events and credit quality
should not be applied literally, but according to the general
principle behind them. For example, operational requirements
relating to the credit protection being direct and the extent of
which being clearly defined and incontrovertible will still be
applicable The provision in Annex VIII, Part 2, point 20 that
defines credit events for credit derivatives may only be applied
when relevant to equity risk.
Area:
2006/48/EC, Annex VII, Part 1, point 21
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Issue:
Funded credit protection for equity exposures
Question number:
326
Date of question:
3 March 2008
Publication of answer:
14 May 2008
Question:
In Annex VII, Part 1, point 21 it is stated that for the simple risk
weight approach for equity exposures credit institutions may
recognise unfunded credit protection as credit risk mitigation.
Does this automatically exclude any funded credit protection? Can
you please elaborate on exactly why funded credit protection is
excluded?
Answer:
Yes, funded credit protection is excluded. This is consistent with
Basel paragraph 349. In particular, we would assume that funded
credit protection for equity exposures could for instance take the
form of a funded guarantee – i.e. the collateral provided by a
counterparty would be realised by the credit institution if the value
of the equity falls below a certain value – and would be treated as
a guarantee with collateral for the resulting exposure to the
guarantor.
Area:
2006/48/EC, Annex VII, Part 1, point 24
Issue:
Unfunded credit protection for equity exposures: PD/LGD
approach
Question number:
37 (see also Q27)
Date of question:
27 February 2006
Publication of answer:
7 July 2006
Question:
Banks using the PD/LGD approach for equity may recognise
unfunded credit protection obtained on an equity exposure
according to the CRM rules. Effectively this would mean
substituting the PD of the equity with that of the protection
provider. The values of LGD and M are set according to fixed
values mentioned in Annex VII, Part 2, §25-§27 (LGD 90% or
65% and M 5 years). Our interpretation is that in substituting the
PD values, the minimum PD value for equity exposures under the
PD/LGD approach, mentioned in Annex VII, Part 2, §24 shall also
apply. Is our interpretation correct?
Answer:
No, the minimum PD value for equity exposures under the
PD/LGD approach shall not apply because it is not included in
Annex VII, Part 1, point 24.
Area:
2006/48/EC, Annex VII, Part 1, point 27
Issue:
Leasing – treatment of residual values
Question number:
190
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Date of question:
12 January 2007
Publication of answer:
26 February 2007
Question:
The treatment of unguaranteed residual values in Annex VII, Part
1, point 27 of Directive 2006/48/EC has given rise to varying
interpretations among national supervisors. The co-existence of
different treatments for lease contracts with open (unguaranteed)
residual values would clearly lead to an unlevel playing field for
EU leasing institutions. Annex VII, Part 1, point 27 of the CRD
states that the risk weighted exposure amount for unguaranteed
residual values should be “provisioned for each year and (…) be
calculated as follows: 1/t*100%*exposure value; where t is the
number of years of the lease contract term.” Does the CRD TG
confirm that Annex VII, Part 1, point 27 should be interpreted as
meaning that t is the remaining lease term, the capital to be set
aside thus increasing as a convex function of the lease term over
the contract life and cumulating in a 100% risk weight when the
contract comes to term? Indeed, residual value risk is realised only
(if it occurs at all) at the end of a lease and the above interpretation
is line with the true risk levels faced by the lease originator.
Answer:
"t" is the remaining lease term. The 'provisioning' for each year
referred to in Annex VII, Part 1, point 27, means that the risk
weighted exposure value shall be increased each year to 1/t *100%
exposure value with t (>=1) being an integer number reflecting the
nearest number of whole years of the lease remaining. In other
words, t decreases as the lease matures so that the discounted
value steps up gradually from a small value to 100%.
Area:
2006/48/EC, Annex VII, Part 1, point 27
Issue:
Calculation of risk weighted exposure amounts for other non
credit-obligation assets
Question number:
334
Date of question:
7 May 2008
Publication of answer:
7 October 2008
Question:
The question is referring to the calculation of risk weighted
exposure amounts for other non credit-obligation assets. There
was a case in one IRB bank (lessor) that had a lease contract
signed for some of its premises for undefined period of time,
claiming it was an operating lease. Risk weighted assets for
unsecured residual value of this premises should be calculated
according to the formula: RWEA=1/t * 100% * exposure value. Is
it possible that lease contract is signed for undefined period and if
so, which value of 't' should be used in such case?
Answer:
Yes, independent on the type of lease (finance or operating lease),
the term of a lease may be fixed, periodic or of no predefined
duration.
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The significance of a lease of no predefined duration is that it
gives the lessee the option to terminate the contract at any chosen
time. The risk for the lessor is that the lessee could cancel the lease
contract at short-notice. In this case, only the minimum lease
payments (cf. point 4 of Annex VII, Part 3 of Directive
2006/48/EC) which the lessor will receive until a cancellation of
the contract becomes effective will be available for compensation
of depreciation of the leased property. Consequently, the residual
value to be accounted for as a non-credit obligation asset depends
on the shortest period until a cancellation of the lease contract by
the lessee could become effective.
The maturity 't' to be taken for lease contracts is the greater of 1
and the nearest number of whole years of the lease remaining (cf.
answer to Q190). Institutions should adopt a prudent and
conservative approach in determining the earliest date at which a
cancellation of the lease contract could become effective. Where
this cannot be established clearly, such a prudent approach would
dictate that the value of 't' should be taken as 1.
In case of a typical effective cancellation period of less than 1
year, the formula in point 27 of Annex VII, Part 1 of Directive
2006/48/EC results in accounting for the whole residual value of
the leased property.
Area:
Directive 2006/48/EC, Annex VII, Part 1, point 36.
Issue:
Treatment of collective provisions under IAS 39 in the Directive
Question number:
164
Date of question:
24 October 2006
Publication of answer:
2 April 2007
Question:
The treatment of "collective provisions under IAS 39" in the
Directive is questioned. More particularly it is noted that it is not
clear whether ‘collective provisions’ under IAS 39 can be treated
as ‘general provisions’.
Answer:
Collective impairment under IAS 39, given that it covers incurred
losses on portfolios of financial assets, is in principle dealt with in
the same way as specific impairment.
This assessment does however not prevent such impairment losses
from being included in the calculation of the provisions
excess/shortfall (which is determined on the basis of all value
adjustments and provisions) subject to the limitations and
exclusions given in Annex VII, Part 1, point 36. Only the portion
of collective impairments allocated to exposure classes included in
the treatment of expected loss amounts may be taken into account.
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Area:
2006/48/EC, Annex VII, Part 1, point 36
Issue:
Equity – value adjustments and provisions
Question number:
289
Date of question:
12 November 2007
Publication of answer:
20 December 2007
Question:
Annex VII, Part 1, point 36 describes how to treat expected losses,
value adjustments and provisions under the IRB approach for nonequity exposures. In Article 57 sentence 2, lit. (q) deduction of
negative amounts resulting from point 36 in Annex VII, Part 1 and
from points 32 (Simple Risk Weight) and 33 (PD/LGD) is
required. How can banks then benefit from specific provisions
made for equity exposures if they are not reflected in this
calculation? Should the exposure value for equity be already net of
specific provisions? If strictly following the rules for equity
exposures I do not see any benefit if specific provisions (value
adjustments) have been made.
Answer:
In accordance with Annex VII, Part 3, point 12, the exposure value
for equity shall be the value presented in the financial statement
(i.e. net of value adjustment and specific provisions). Value
adjustments and specific provisions pertaining to equity exposures
under the IRB approach are consequently taken into account in the
'denominator' of the ratio and not as part of the 'nominator' in
accordance with Article 57.
Area:
Directive 2006/48/EC, Annex VII, Part 2, point 13
Issue:
Maturity of repo style transactions subject to master netting
agreement (see also Q128)
Question number:
121
Date of question:
17 July 2006
Publication of answer:
12 October 2006
Question:
Basel paragraph 323 (version dated November 2005) states that
“for transactions falling within the scope of paragraph 321 subject
to a master netting agreement, the weighted average maturity of
the transactions should be used when applying the explicit
maturity adjustment. A floor equal to the minimum holding period
for the transaction type set out in paragraph 167 will apply to the
average. Where more than one transaction type is contained in the
master netting agreement a floor equal to the highest holding
period will apply to the average. Further, the notional amount of
each transaction should be used for weighting maturity”.
Repo style transactions are referred to in this provision, while the
Directive (and in particular Annex VII, Part 2 point 13) seems
silent on the maturity treatment of such exposures subject to a
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master netting agreement. What maturity does the CRD lay down
for repo style transaction subject to master netting agreements?
Answer:
Annex VII, Part 2, point 13(c) shall also apply to repurchase
transactions or securities or commodities lending or borrowing
transactions which are subject to a master netting agreement. As a
consequence, M shall be the weighted average remaining maturity
of the transactions with a 10-day floor.
Area:
Directive 2006/48/EC, Annex VII, Part 2, point 13(a)
Issue:
Calculation of the maturity value
Question number:
166
Date of question:
26 October 2006
Publication of answer:
4. January 2007
Question:
How the maturity value (M) should be calculated for a floating
rate note/loan, where only the next interest coupon is fixed and the
coupons following are not exactly known? In Annex VII, Part 2,
point 13 a) it is stated that "instrument subject to a cash flow
schedule, M shall be calculated according the following formula:".
In point 13 e) it is stated that "when a credit institution is not in a
position to calculate M as set out in (a), M shall be the maximum
remaining time (in years) that the obligor is permitted to take to
fully discharge its contractual obligations". Should point 13 a) or
e) to be applied for floating rate notes/loans? If point 13 a) is
applied, should M be calculated by using only exactly known cash
flows or would it be possible for banks to estimate the future
floating rate coupons using the method selected by the banks
themselves? The method could simply be to assume that the
coupon stays as it is currently or to derive future coupons from the
yield curve. If it were possible to include the future floating rate
coupons into the calculation of M, slightly smaller value of M
would be calculated, depending on the level of interest rate: the
higher the coupon the smaller the M. Should competent authorities
set some qualitative requirements for coupon estimation? How
negative cash flows should be treated in calculating M? When
Interest Rate Swaps (IRS) are in question, the bank typically pays
fixed/floating interest and receives floating/fixed interest. If net of
cash-flows were close to zero or if the net were negative, the value
of M would become odd. Since only positive cash flows (ie. the
receivables of the bank) are important from credit risk point of
view, would it be possible to instruct banks to omit negative cash
flows when calculating M? In that case M for IRS would be
calculated only from the receive leg of the transaction. Should
point 13 e) apply for IRS contracts?
Answer:
In order for the formula in point 13(a) to be applied, the
instrument must be subject to a predetermined cash flow schedule.
It is not possible to apply the formula if assumptions of future
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coupons need to be made.
Point 13(e) must be applied to a floating rate note/loan, resulting
in a more conservative measure of M which equals the maximum
remaining time (in years) that the borrower is permitted to take to
fully discharge its contractual obligation, requiring an assessment
based on the loan agreement. The same goes for interest rate
swaps which by definition are not subject to a predetermined cash
flow schedule.
If an institution uses the Internal Models Method for certain
exposures, future cash flows may be taken into account in
accordance with point 13(f).
Area:
2006/48/EC, Annex VII, Part 2, point 13(c)
Issue:
Maturity of repo-style transactions. (see also Q121)
Question number:
128
Date of question:
26 July 2006
Publication of answer:
12 October 2006
Question:
Point 13(c) defines what maturity value to use in the RW formula,
under the IRB Advanced approach, for the various types of
exposure. Previously (in the proposed Directive - previous
version), this said "For exposures arising from repurchase
transactions or securities or commodities lending or borrowing
transactions which are subject to a master netting agreement M
shall be the weighted average remaining maturity of the
transactions where M shall be at least 5 days. The notional amount
of each transaction shall be used for weighting the maturity."
Business requirements were written for this accordingly - i.e. that
weighted average maturity should be calculated for a netted pool
of repo-style transactions.
However, at some point this was amended to read as it does in the
final Nov 2005 version: "For exposures arising from .. […] .. ..
fully or nearly-fully collateralised derivative instruments (listed in
Annex IV) transactions .. and fully or nearly-fully collateralised
margin lending transactions which are subject to a master netting
agreement, M shall be the weighted average remaining maturity of
the transactions where M shall be at least .. […] .. .. 10 days ... The
notional amount of each transaction shall be used for weighting
the maturity."
It is now not clear whether or not this is supposed to include repostyle transactions. Everywhere else in the CRD, they are always
referred to explicitly as "repurchase transactions, securities or
commodities lending or borrowing transactions". In other words,
throughout the CRD, "derivatives" does not include repos.
However, if this is the case then there is now nothing in paragraph
13 which specifies what maturity to use for netted repos. They are
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omitted. Is this an omission and the intention is that 13(c) should
still include repo-style transactions (particularly since margin
lending transactions are specifically now mentioned)?
There is a "catch-all" paragraph 12(e) for "everything else" but
that says to use a maturity of 1 year. It is unlikely that this means
to use a maturity of 1 year for all repo-style transactions, since in
the Foundation Approach, all repo-style transactions get a maturity
of 0.5 years.
Answer:
Annex VII, Part 2, point 13(c) shall also apply to repurchase
transactions or securities or commodities lending or borrowing
transactions which are subject to a master netting agreement. As a
consequence, M shall be the weighted average remaining maturity
of the transactions with a 10-day floor.
Area:
2006/48/EC, Annex VII, Part 2, point 14
Issue:
Calculation of maturity – use of 'day count' convention
Question number:
287
Date of question:
7 November 2007
Publication of answer:
8 February 2008
Question:
The Bond market currently has a number of differing 'day count'
conventions that are used to calculate accrued interest on different
securities. Under the criteria for removing the 1 year floor under
the IRB approach as set out in Annex VII, Part 2, Paragraph 14,
the maturity applied to short term transactions e.g. repos is
calculated as the greater of 1 day and M. Assuming that the
maturity is expressed in days, can banks use different
denominators in order to express this maturity as a fraction of a
year, based on the 'day count' convention used to calculate interest
for the underlying transactions? e.g. Were the underlying bond in
a REPO transaction calculates accrued interest based on either
360, 365 or Actual days, can IRB banks also used these day count
conventions as the denominator for expressing a short term
maturity calculated in days as a fraction of a year ?
Answer:
Banks may apply the day count according to the market
convention relevant for the respective market segment.
Area:
Directive 2006/48/EC, Annex VII, Part 2, point 16
Issue:
Maturity mismatches and CRM
Question number:
88
Date of question:
31 May 2006
Publication of answer:
11 September 2006
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Question:
In Annex VII, Part 2, paragraph 13 there is a requirement for the
credit institutions in accordance with the calculation of their own
maturity (M) values to consider paragraphs 14-16 of that Part 2.
There is a provision in paragraph 16 that “maturity mismatches
shall be treated as specified in Articles 90 to 93”. Calculation of
own maturity (M) values is connected with the use of own LGD
and (or) conversion factors. But at the same time, according to the
Article 91, only credit institutions using the Standardised approach
or using IRB approach, but not calculating their own estimates of
LGD and conversion factors, may recognise credit risk mitigation
in accordance with Subsection 3 “Credit risk mitigation”.
How should paragraph 16 be interpreted in this context?
Answer:
The Directive is silent for Advanced IRB institutions, who
calculate their own estimates of LGD and conversion factors, that
choose to reflect the maturity mismatch into the LGD estimation
(for all exposure classes). As with other areas of the validation
process, competent authorities will review credit institutions'
internal process and make their prudential assessment accordingly.
However, if institutions choose to reflect CRM effects by applying
the substitution approach, the provisions relevant for Foundation
IRB should be applied (see also the published answer to Q4).
Annex VII, Part 2, point 16 is not in contradiction to Article 91. In
fact, it sets a separate provision for credit institutions using own
estimates of LGD and/or conversion factors for the treatment of
maturity mismatches in relation to exposures to corporates,
institutions, central governments and central banks. This is
technically implemented by a reference to the respective
provisions for the treatment of maturity mismatches under Articles
90 to 93. This treatment is described in Part 4 of Annex VIII.
Therefore, if credit institutions choose to reflect CRM effects by
adapting the substitution approach as set out in Articles 90 to 93
and Annex VIII, maturity mismatch provisions described in Part 4
of Annex VIII should be applied in relation to exposures to
corporates, institutions, central governments and central banks
(see also the published answer to Q4).
Area:
Directive 2006/48/EC, Annex VII, Part 3
Issue:
Definition of exposure values
Question number:
207
Date of question:
30 January 2007
Publication of answer:
20 July 2007
Question:
One of the parts of the EAD consists of the amount currently
drawn. Has the amount currently drawn to be the total account
debt? Is it right to considered only the capital drawn plus unpaid
interest but not ordinary fees?
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Answer:
We interpret the question as asking how the exposure value of a
loan (the expression EAD does not exist in the Directive) should
be determined and more specifically whether it corresponds to the
outstanding amount plus unpaid interest but excluding fees.
The basic rules is that for the calculation of the minimum capital
requirements institutions must use the exposure values prescribed
in the respective parts of Directive 2006/48/EC. Article 74(1)
states that ‘save where otherwise provided, the valuation of assets
and off-balance sheet items shall be effected with the accounting
framework to which the credit institution is subject under
Regulation (EC) No 1606/2002 and Directive 86/635/EEC'. With
respect to the IRB approach, Annex VII, part 3, point 1 specifies
that for exposures to corporate, institutions, governments and
retail, the exposure value of on-balance sheet exposures shall be
measured gross of value adjustments. The answer to Q161 already
elaborates on how this should be implemented, also in the context
of possible prudential filters.
Whether unpaid interest and fees belong to the exposure value
depends on whether they are recognised in the on-balance sheet
exposure according to the accounting framework to which the
institution is subject.
Area:
2006/48/EC, Annex VII, Part 3
Issue:
Own estimates of conversion factors for undrawn purchase
commitments – Purchased corporate receivables
Question number:
330
Date of question:
18 March 2008
Publication of answer:
25 July 2008
Question:
The Basel II Accord advises in Paragraph 367: "Banks using the
advanced IRB approach will not be permitted to use their internal
EAD” estimates for undrawn purchase commitments". Does such
a provision also exist in the CRD in situations where banks are
using the risk quantification standards for retail exposures as set
out in Annex VII, Part 4 to calculate risk weighted exposure
amounts for Purchased Corporate Receivables i.e. can banks use
their own estimates of conversion factors to calculate exposure
values for undrawn purchase commitments when the retail
standards are applied to Purchased Corporate Receivables.
Answer:
According to Annex VII, Part 3, point 9 (e), and subject to the
approval of the competent authorities, 'credit institutions which
meet the requirements for the use of own estimates of conversion
factors as specified in Part 4 may use their own estimates of
conversion factors across different product types as mentioned in
points a) to d)'. Undrawn purchase commitments for revolving
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purchased receivables belong to these product types.
In applying the above provision, the risk quantification standards
for retail exposures may be used subject to the conditions laid
down in Annex VII, Part 1, point 7, second sentence.
It must be noted that the CRD does not include the specific
treatment of Basel paragraph 367. The CRD only provides a
specific treatment (i.e. conversion factor of 0%) for 'undrawn
purchase commitments for revolving purchased receivables that
are unconditionally cancellable or that effectively provide for
automatic cancellation at any time by the institution without prior
notice' in accordance with Annex VII, Part 3, point 9 (c).
Area:
20006/48/EC, Annex VII, Part 3, point 3
Issue:
On-balance sheet netting
Question number:
195
Date of question:
18 January 2007
Publication of answer:
2 April 2007
Question:
Annex VII, Part 3, point 3 states that - For on-balance sheet
netting of loans and deposits, credit institutions shall apply for the
calculation of the exposure value the methods set out in Articles
90 to 93. Annex VIII, Part 3, point 3 states that - Loans and
deposits with the lending credit institution subject to on-balance
sheet netting are to be treated as cash collateral. Does the
provisions of Annex VII, Part 3, point 3 imply that banks should
only reflect the credit risk mitigation effects of on-balance sheet
netting of loans and deposits through an adjustment to the
exposure value (EAD) rather than through an adjustment to the
LGD? Assuming the answer to the above is yes, does this
treatment therefore fall outside the IRB treatment prescribed for
funded collateral in Annex VIII, Part 3, point 61 i.e. the
calculation of LGD* (the effective LGD)?
Answer:
On-balance sheet netting of loans and deposit is treated as cash
collateral. This means that for an IRB credit institution which does
not use its own estimates of LGD, as indicated in the question
above, the Financial Collateral Comprehensive Method applies. In
this case, loans granted to and deposits lodged with the
counterparty are treated as exposures and loans granted by and
deposits received from the counterparty to the lending credit
institution as collateral.
The haircuts for cash collateral are 0 (Table 3 of Annex VIII, Part
3, point 36) except when a currency mismatch exists. IRB credit
institutions which do not use their own estimates of LGD - as
addressed in the question - shall use LGD* as calculated under
point 61 for risk-weighting purposes. For firms using the
Standardised
approach
and
the
Financial
Collateral
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Comprehensive Method, E* as calculated under Annex VIII, Part
3, point 33 shall be taken as the exposure value.
Area:
2006/48/EC, Annex VII, Part 3, point 4
Issue:
Treatment of an operating lease (as opposed to finance lease)
Question number:
24
Date of question:
20 February 2006
Publication of answer:
23 May 2006
Question:
According to Annex VII, Part 3, point 4, the exposure value for
leases shall be the discounted minimum lease payments, and,
according to Article 86(8), the “other non credit-obligation”
exposure class shall include the residual value of leased properties
if not included in the lease exposure as defined in Annex VII, Part
3, point 4.
These provisions are globally in line with paragraphs 523 and 524
of Basel, which make a distinction according to the risk of residual
value incurred by banks. To a certain extent, the same holds true
for IAS 17. However, while accounting rules clearly identifies two
types of lease (operating lease versus finance lease), the Directive
is relatively silent, and refers only to “leases”.
Do these provisions of CRD apply to both operating leases and
finance leases as defined by IAS 17 or only to finance lease since
operating lease has to be considered as a non-credit obligation?
Answer:
The relevant provisions of the CRD do not differentiate between
finance leases and operating leases. Annex VII, Part 3, point 4 sets
out what constitutes the exposure value for leases, and this applies
to all types of leases.
Any element of a lease which does not fall under the definition in
Annex VII, Part 3, point 4, would fall into the "other non-credit
obligation" class (see Annex VII, Part 1, point 27).
Area:
2006/48/EC, Annex VII, Part 4
Issue:
Inclusion of Basel II IRB-related provisions in the CRD
Question number:
178
Date of question:
27 November 2006
Publication of answer:
15 January 2007
Question:
Are paragraphs 414 and 415 of the Basel II accord concerning
rating assignment horizon in IRB approaches translated in the
CRD? If so where?
Answer:
Annex VII, Part 4, point 18 states that "a credit institution shall
take all relevant information into account in assigning obligors and
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facilities to grade or pools" and that "information shall be current
and shall enable the credit institution to forecast the future
performance of the exposure". There is no specific requirement in
Directive 2006/48/EC to use a longer time horizon than one year
when assigning obligors to rating grades or pools.
Area:
Directive 2006/48/EC, Annex VII, Part 4 point 6, 19 and 23,
Annex VII, Part 2, point 5 and 6
Issue:
Obligors' grades
Question number:
317
Date of question:
11 February 2008
Publication of answer:
3 April 2008
Question:
Under the IRB approach (Annex VII, Part 4, point 19) each
obligor belonging to corporates, institutions and central banks is
assigned to an obligor grade. Furthermore, it is stipulated (in
Annex VII, Part 4, point 6) that the obligor rating reflects
exclusively quantification of the risk of obligor default. If an
exposure is protected by means of unfunded credit protection then
according to Annex VII, Part 2, points 5 and 6 this unfunded credit
protection may be recognised in the PD and potentially also by
adjusting LGD (the latter case relates to credit institutions that are
permitted to use own LGD estimates).
As we understand it this substitution approach is also reflected in
the COREP tables for IRB approach where the “inflow” and
“outflow” columns are included and the resulting PD after
substitution.
However, according to Annex VII, Part 4, point 23 it is allowed to
reflect the guarantees associated to an exposure directly in an
adjusted obligor grade.
Does it really mean that in the case of available guarantees a credit
institution may choose whether it shall recognise it by directly
adjusting the obligor grade or by adjusting PD and/or LGD? In
other words, does it imply that the original obligor and guarantee
provider are not necessarily separately rated by the credit
institution and there is just one resulting grade or PD?
Answer:
Each obligor shall be assigned to an obligor grade in accordance
with Annex VII, Part 4, point 19. Please note that the substitution
mechanism for guarantees requires a PD for the protection
provider.
Annex VIII, Part 3, point 90 makes it clear that for the covered
portion of the exposure, the PD may be the PD of the protection
provider, or a PD between that of the borrower and that of the
guarantor if a full substitution is deemed not to be warranted. That
is why the PD may be adjusted, where needed.
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Adjusting 'grade' and adjusting 'PD' are one and the same thing.
An obligor grade is a risk category to which obligors are assigned
and from which estimates of PD are derived.
Area:
2006/48/EC, Annex VII, Part 4, points 17 to 19
Issue:
IRB assignment to grades or pools
Question number:
43
Date of question:
28 February 2006
Publication of answer:
2 May 2006
Question:
In comparison with the July 2004 version there has been a change
in §17. The (a), (b) and (c) have shifted a line and the former
heading "1.2 Assignment to grades or pools" is now subpart (c) of
§17. As a result §18 and §19 now seem to refer only to the
structure of rating systems for retail exposures instead of being
applicable to both retail and corporate rating systems (as they were
under the July 2004 text and as they are in the Basel Framework
document (§410 & §411).
a) Have these paragraphs been changed intentionally?
b) If so, what is the rationale for this change?
Answer:
This is a typographical error which will be corrected as part of the
work of the jurist/linguists to finalise the CRD text.
Area:
2006/48/EC, Annex VII, Part 4, point 44
Issue:
Definition of default – 90 days of past due
Question number:
224
Date of question:
9 March 2007
Publication of answer:
8 May 2007
Question:
According to an objective definition of default, the obligor get
default when is past due more than 90 days on any material credit
obligation to the banking group. But, when does the obligor cure?
When past due is less or equal than 90 days or when there is no
unpaid debt, i.e. past due is equal to 0 day?
Answer:
According to Annex VII, Part 4, point 47, if the credit institution
considers that a previously defaulted exposure is such that no
trigger of default continues to apply, the credit institution shall rate
the obligor or facility just as they would for a non-defaulted
exposure. This means that the exposure 'cures' when the obligor is
no longer past due more than 90 days for any material credit
obligation provided that the credit institution considers that the
obligor is no longer unlikely to pay its credit obligations in full.
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Area:
2006/48/EC, Annex VII, Part 4, point 44
Issue:
Definition of default at a facility level
Question number:
255
Date of question:
23 July 2007
Publication of answer:
8 October 2007
Question:
Point 44 of Part 4 in Annex VII states that in the case of retail
exposures credit institutions may apply the definition of default at
a facility level. Point 44 states that in the case of retail exposures
each exposure shall be assigned to a grade or a pool as part of the
credit approval process. If an institution uses a retail scoring
model for assignment to risk pools and applies the definition of
default at a retail facility level, shall it necessarily define risk pool
at a facility level as well. Can the above-mentioned institution
define pools at an obligor level, even if it uses the definition of
default at a retail facility level?
Answer:
In accordance with Annex VII, Part 4, point 13, rating systems
shall reflect both obligor and transaction risk and shall capture all
relevant obligor and transaction characteristics. Institutions shall
demonstrate that these characteristics are properly captured. This
means that institutions can not define pools at an obligor level
only, if there are relevant differences in characteristics at facility
level. In contrast, applying the definition of default at a facility
level as permitted under Annex VII, Part 4, point 44 is not
inconsistent with defining risks pools at an obligor level.
Area:
2006/48/EC, Annex VII, Part 4, points 66, 71, 86 and 95
Issue:
Length of the underlying historical observation period
Question number:
252
Date of question:
13 July 2007
Publication of answer:
8 October 2007
Question:
In accordance with the paragraphs 66, 71, 86, 95 in quantifying
risk parameters, the length of the underlying historical observation
period used shall be at least five years (or two years, if national
discretion is adopted by the supervisor). Does this underlying
historical observation period cover only defaults or both input
parameters and defaults? Does this wording mean that defaults of
above-mentioned time period shall be used? For example, if an
institution uses statistical model in order to calculate PD, shall it
use defaults for at least two years (if national discretion is adopted
by the supervisor)? Or maybe the institution can use input
parameters of one year and defaults of another year?
Answer:
The probability of default is estimated based at least on the basis
of two years of data (observation period for defaults of two years).
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See also the answer to Q230.
Area:
2006/46/EC, Annex VII, Part 4, point 71
Issue:
Length of data
Question number:
230
Date of question:
9 April 2007
Publication of answer:
10 July 2007
Question:
In Directive 2006/48/EC, Annex VII, Part 4, point 71 it is stated
that - Irrespective of whether a credit institution is using external,
internal or pooled data sources or a combination of the three, for
their estimation of loss characteristics, the length of the underlying
historical observation period used shall be at least five years for at
least one source (…) Member States may allow credit institutions
to have, when they implement the IRB Approach, relevant data
covering a period of two years. The period to be covered shall
increase by one year each year until relevant data cover a period of
five years (Requirements specific to PD estimation for retail
exposures). The requirements for validation seem to be treated
separately. The question is weather the absolute minimum
requirement of two years for relevant data could be interpreted as
one year data for constructing the model and one more year for
validation of the model (out of time) or, as our current
understanding is, the minimum requirement of two years is for the
data used for constructing/developing the model and additional out
of time data should be used for validation of the model?
Answer:
With respect to length of the underlying historical observation
period, 2006/46/EC, Annex VII, Part 4 refers to the data used for
estimation at 'implementation date' and does not require a specific
additional timeframe for validation purposes. This means that an
institution must use risk parameter estimates based on all available
relevant data subject to the minimum length of data required in
Part 4 when it is authorised to implement the IRB approach for a
certain exposure class, business unit and/or risk parameter but at
implementation date, would not yet be required to possess
additional data for validation. Using the same data however for the
estimation of PD and for the validation of the estimate would not
be meaningful.
In accordance with Article 84 (2), internal validation of IRB
system is a minimum requirement to receive permission from
competent authorities. Internal validation should draw
on historical data which cover as long a period as possible (Annex
VII, Part 4, point 111) and includes the use of other quantitative
validation tools and comparisons with relevant external data
sources (Annex VII, Part 4, point 112).
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Area:
2006/48/EC, Annex VII, Part 4, point 80
Issue:
ELBE and LGD for defaulted assets
Question number:
28
Date of question:
20 February 2006
Publication of answer:
11 September 2006
Question:
According to paragraph 80 "for the specific case of exposures
already in default, the credit institution shall use the sum of its best
estimate of expected loss for each exposure given current
economic circumstances and exposure status and the possibility of
additional unexpected losses during the recovery period".
Is there any case in which credit institutions will have a chance to
use the aforementioned “sum”? The two components of this sum
should be subject to different separate treatments: on the one hand,
the best estimate of expected loss (ELBE) should be included in the
treatment of expected loss amounts (i.e. comparison with value
adjustments and provisions). On the other hand, the possibility of
additional unexpected losses during the recovery period gives rise
to the “K” treatment (i.e., LGD - ELBE multiplied by 12.5 in order
to calculate a risk weight) according to Annex VII, Part 1,
paragraph 3.
Should the possibility of additional unexpected losses during the
recovery period (which has to be taken into consideration in the
specific case of exposures already in default) be determined by
means of an independent calculation or by subtracting ELBE from
pre-default LGD? This latter case seems to be prescribed by §272
of Basel referring to the LGD within the meaning of §469 (i.e.,
original LGD). Does it mean that post-default LGD could never be
smaller than pre-default LGD and that no possibility of additional
unexpected losses during the recovery period would be taken into
account when ELBE is equal to, or exceeds, pre-default LGD?
Answer:
Q1: Is there any case in which credit institutions will have a
chance to use the aforementioned “sum”?
The credit institution is required to assign as LGD to a defaulted
exposure an amount that reflects additional, unexpected losses
during the recovery period beyond its best estimate of expected
loss. Note that the LGD of a defaulted exposure as referred to in
Annex VII, Part 1, point 3 equals this sum of the best estimate of
expected loss and the additional, unexpected losses during the
recovery period. So the capital requirement effectively equals the
amount of additional, unexpected losses during the recovery
period (i.e., capital requirement = EAD * max(0; LGD-ELBE)).
Q2: Should the possibility of additional unexpected losses during
the recovery period be determined by means of an independent
calculation or by subtracting ELBE from pre-default LGD?
In contrast to pre-default LGD, post-default LGD needs to be
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determined according to Annex VII, Part 4, point 80 and would,
also depending on the state of the work-out process, not
necessarily equal pre-default LGD. This does however not mean
that a credit institution is not allowed to directly estimate postdefault LGD rather than making a separate estimate of additional
unexpected losses. An estimate of ELBE is still required for the
treatment of expected losses according to Annex VII, Part 1, point
36.
Q3: Does it mean that post-default LGD could never be smaller
than pre-default LGD and that no possibility of additional
unexpected losses during the recovery period would be taken into
account when ELBE is equal to, or exceeds, pre-default LGD?
Such a relationship between pre- and post-default LGDs cannot be
established in general. Regarding the possibility of additional
unexpected losses, please see the answer to Q1 above.
Area:
2006/48/EC, Annex VII, Part 4, point 100 & Annex VII, Part 2,
point 16
Issue:
Treatment of maturity mismatches under AIRB
Question number:
4
Date of question:
9 December 2005
Publication of answer:
12 April 2006
Question:
According to Annex VII, Part 2, point 16, maturity mismatches
regarding exposures to corporates, institutions and central
governments and central banks shall be treated as specified in
Articles 90 to 93 of the CRD. These provisions apply to FIRB and
AIRB Corporate, but not IRB Retail. However, Annex VII, Part 2,
point 16, seems to be incompatible with Annex VII, Part 4, point
100, insofar that it also applies for AIRB Corporate, but is more
restrictive than the treatment according to Articles 90 to 93.
Answer:
This question raises the following two issues:
1.
whether there is any stricter treatment for maturity
mismatches for A-IRB institutions as compared with F-IRB
ones; and
2.
whether the A-IRB prudential treatment set out for
exposures to corporates, institutions, central governments
and central banks also applies to retail exposures.
As to the former, it is not envisaged, either in the CRD or in Basel
(requirements in relation to the guarantee treatment in question are
identical) to have stricter maturity mismatch requirements for the
use of own estimates of LGDs (AIRB) than for the use of the LGD
values set out in Annex VII, Part 2, point 8 (FIRB).
The interpretation of point 99 should be: if the tenor of a guarantee
is scheduled in a way that the remaining maturity of this guarantee
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is less than the remaining maturity of the obligation then
nevertheless the guarantee must stay in force for all amounts that
will become due until the guarantee expires, to the extent of the
amount of the guarantee.
This is consistent with the cross reference in Annex VII, Part 2,
point 16 (which determines that maturity mismatches regarding
exposures to corporates, institutions and central governments and
central banks shall be treated as specified for the Standardised and
the FIRB Approaches).
As to the second issue, the CRD is silent for AIRB institutions that
choose to reflect the maturity mismatch in the LGD estimation (for
all exposure classes). As with other areas of the validation process,
supervisors will review credit institutions' internal process and
make their prudential assessment accordingly.
However, if institutions choose to reflect CRM effects by applying
the substitution approach, FIRB provisions for maturity mismatch
should be applied to exposures to corporates, institutions, central
governments and central banks.
Furthermore, no CRD provision prevents credit institutions from
applying it also to retail exposures.
Area:
2006/48/EC, Annex VIII
Issue:
Allocation of collateral
Question number:
236
Date of question:
22 May 2007
Publication of answer:
20 July 2007
Question:
The local supervisor has included a paragraph on the subject of the
allocation of collaterals indicating that in cases where the eligible
collateral covers more than one bank account of the customer, its
value is allocated to each account based on the debit balance of the
account. We believe that this does not allow local banks to use
collateral/capital optimisation. We would appreciate if you can
provide information about whether other European supervisors
have imposed a similar restriction.
Answer:
The Capital Requirement Directive does not contain a restriction
as to how banks may allocate collateral that is available for more
than one exposure.
However, it should be noted that if ‘optimisation’ of collateral
goes against either the economic substance or the legal
documentation of a transaction (for example if documentation or
market convention dictates how collateral is allocated), then the
recognition of such collateral should be done in line with those
factors.
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Area:
2006/48/EC, Annex VIII
Issue:
Eligibility of insurance companies as credit protection provider
Question number:
300
Date of question:
14 December 2007
Publication of answer:
13 March 2008
Question:
How will credit insurance be treated under the CRD in case a bank
buys an insurance policy, covering all payment risks. Is in such a
case credit substitution allowed? (i.e. will credit insurance be
treated as if it is a credit guarantee). Is there a different treatment
for credit insurance bought from an official Export Credit Agency
and a pure private credit insurance company? What is the relevant
capital adequacy legislation for banks that apply credit insurance
as a risk mitigation instrument?
Answer:
See answer to CRDTG Q184. Both public export credit agencies
and private credit insurance companies may be eligible provided
that the credit protection provider meets the eligibility criteria of
Annex VIII, Part 1, point 26 and that the minimum requirements
for unfunded credit protection laid down in Part 2 of Annex VIII
are met.
It must be noted that sovereign and other public sector counterguarantees are specifically dealt with in Annex VIII, Part 2, point
16 and 19. Please note that for the purpose of applying the double
default treatment, credit protection provided by export credit
agencies shall not benefit from any explicit central government
counter-guarantee in accordance with Annex VIII, Part 1, point 29.
Area:
2006/48/EC, Annex VIII, Part 1
Issue:
Credit risk mitigation – eligibility
Question number:
184
Date of question:
8/12/1006
Publication of answer:
15 January 2007
Question:
Directive 2006/48/EC is not clear about the eligibility of insurance
as unfunded credit risk protection for the standardised approach
purposes. Annex VIII Part 1 par. 26 contains eligible providers of
unfunded credit protection. According to par. 26 insurance
companies may be recognised as eligible protection provider.
Annex VIII Part 2 par. 14 states conditions for recognition of
guarantee or credit derivative for the purposes of unfunded credit
protection.
Question: Does it mean that only those two instruments are
eligible credit risk mitigation instruments for the standardised
approach purposes? Are insurance policies and mortgage
indemnity insurance policies recognised as CRM instruments for
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the standardised approach purposes? In our opinion, the answer
shall be positive in both cases, however we need a clear
confirmation.
Answer:
Provided that the provider meets the eligibility criteria of Part 1,
point 26(g), any credit protection may be recognised as long as the
minimum requirements for unfunded credit protection laid down
in Part 2 of Annex VIII (including specific requirements either for
guarantees or credit derivatives) are met.
Part 2, point 18(a) provides for a specific treatment with respect to
unfunded credit protection covering residential mortgage loans,
which will allow for the recognition of many mortgage indemnity
insurance policies.
Area:
2006/48/EC, Annex VIII, Part 1, points 3 to 5
Issue:
Use of master netting agreements
Question number:
231
Date of question:
16 April 2007
Publication of answer:
18 June 2007
Question:
The text in point 5 of Annex VIII, Part 1 implies that eligible
master netting agreements covering repurchase transactions and/or
securities or commodities lending or borrowing transactions
and/or other capital market-driven transactions (“MNA”) may be
recognised only on condition that the Financial Collateral
Comprehensive Method (“FCCM”) is used for calculating effects
of financial collateral used by the regulated entity in question.
Therefore, those entities which use the Financial Collateral Simple
Method (“FCSM”) for reflecting effects of financial collateral are
apparently not allowed to reflect effects of the MNA when
calculating credit risk capital requirements. We are not sure, what
the wording “without prejudice to point 5” in Annex VIII, Part 1,
point 4 exactly means. Nevertheless, we suppose that in the case
of on-balance sheet netting, the FCSM may be used. To sum up,
we would appreciate clarification of the following items: 1) in the
case of the MNA, either the FCCM or internal VaR models may
be used, but it is not allowed to use the FCSM; 2) entities which
use the FCSM for financial collateral are not allowed to recognize
effects of the MNA in calculation of credit risk capital
requirement; 3) in the case of on-balance sheet netting, either the
FCSM or the FCCM may be used; 4) the choice of the method
used for calculation of on-balance sheet netting effects does not
depend on the choice made for the financial collateral (e.g. a bank
may use FCCM for financial collateral and FCSM for on-balance
sheet netting, or FCSM for the financial collateral and FCCM for
the on balance sheet netting). We wonder to know whether our
conclusions are right.
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Answer:
1. This is partially correct. For exposures to which Annex VIII
applies according to Article 91, recognition of master netting
agreements is possible in accordance with Annex VIII, Part 3,
points 5 to 23. For this purpose, the fully adjusted exposure value
E* can be calculated either according to points 12 to 21 by using
internal VaR models, or according to points 5 to 11 by using
volatility adjustments. In the latter case, the volatility adjustments
to be applied shall be calculated as set out in points 30 to 61 for
the Financial Collateral Comprehensive Method, i.e. by using
either the Supervisory Volatility Adjustments Approach or the
Own Estimates Volatility Adjustments Approach. However, in this
case E* must not be calculated according to points 33, 60 and 61
(as for the Financial Collateral Comprehensive Method), but
according to point 11 of Annex VIII Part 3. Alternatively master
netting agreements can be treated under the Internal Models
Method for Counterparty Credit Risk in accordance with Annex
III, Part 6, point 1.
2. Yes, recognition of master netting agreement under the
Financial Collateral Simple Method is not possible.
3. For calculating the effects of on-balance sheet netting under
Annex VIII, institutions shall use the Financial Collateral
Comprehensive Method if there is a maturity mismatch.
Otherwise, and only if risk-weighted exposure amounts are
calculated under Articles 78 to 83 and the Financial Collateral
Comprehensive Method is not used for financial collateral for any
other exposure, the Financial Collateral Simple Method may be
used.
4. No. If for recognising the effects of on-balance sheet netting the
Financial Collateral Comprehensive Method is used, it is not
possible to use the Financial Collateral Simple Method for any
other exposures. The requirement of Annex VIII, Part 3, point 24
(i.e. an institution shall not use both the Financial Collateral
Simple Method and the Financial Collateral Comprehensive
Method) includes financial collateral in the form of loans and
deposits used as collateral in the context of on-balance sheet
netting. It is also not possible to use the Financial Collateral
Simple Method for any other exposures for purposes of
recognising the effects of master netting agreements, since this
requires adopting the Financial Collateral Comprehensive Method
(cf. first sentence of Annex VIII Part 1 point 5).
Area:
2006/48/EC, Annex VIII, Part 1, point 8 a) - e)
Issue:
Use of credit institutions' bonds for CRM purposes
Question number:
221
Date of question:
23 February 2007
Publication of answer:
23 April 2007
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Question:
We wonder why the demands on unrated interest rate instruments
used as financial collateral in CRM are so much harder compared
to Basel 1. Instruments issued by an OECD bank such as bonds,
guarantees, deposits etc. received a RW of 20% in Basel 1. In
Basel 2 however the collateral have to meet the demands for
financial collateral set out in Annex VIII point 8 to able to use the
volatility haircuts in the directive, otherwise a RW of 100% is
used. We feel that many of the bonds issued by OECD-banks used
as collateral fail to meet the requirements a) and/or e) in the
paragraph. How do you motivate this when these bonds were
accepted under Basel 1, and guarantees and deposits issued by the
same bank are okay to use for CRM? An example is a private
placement issued by an OECD-bank. These bonds aren’t listed and
therefore can’t be used in CRM. Are there any circumstances
when bonds that meet demands b)-d) but not a) and e) can be
accepted for CRM?
Answer:
Instruments issued by third party institutions which will be
repurchased on request may be recognised for CRM purposes
(Annex VIII, Part 1, point 25). Moreover, the eligibility criteria set
out in Annex VIII, Part 1 do not apply in relation to exposures
subject to the IRB approach using own estimates of LGD.
Area:
2006/48/EC, Annex VIII, Part 1, points 12-22
Issue:
Currency mismatch for 'other collaterals'
Question number:
238
Date of question:
30 May 2007
Publication of answer:
10 July 2007
Question:
In a situation when an exposure and its collateral are denominated
in different currencies, does a bank also need to apply the
volatility adjustment for currency mismatches to the additional
collateral types that are eligible only under the IRB Approach e.g.
real estate collateral, leasing, other physical collateral etc.
Answer:
The scope of this question is limited to situations where
institutions do not apply own LGD estimates under the IRB
approach. Then, for other eligible collateral, LGD* calculated as
set out in Annex VIII, Part 3, point 69 to 72 shall be taken as the
LGD for the purposes of Annex VII. Volatility adjustments used
to calculate the fully adjusted exposure value E* (and then LGD*)
under the Financial Collateral Comprehensive Method do not
apply to 'other collaterals'.
With respect to exposures collateralised by eligible financial
collateral and eligible IRB collateral, see the answer to Q203.
Area:
2006/48/EC, Annex VIII, Part 1, point 13
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Issue:
Beneficial owners of personal investment companies
Question number:
35
Date of question:
22 February 2006
Publication of answer:
2 May 2006
Question:
After approval of the amendments made by the EP, Annex VIII,
Part 1, point 13 covers not only “owners” of residential real estate
property, but also “the beneficial owner in the case of personal
investment companies”. We would appreciate more detailed
description of the “beneficial owner”.
Our opinion is as follows: a) in a case where an investor builds a
house and then lets the whole house out to tenants, "beneficial
owners" are the tenants who hire the rooms and further let the
rented rooms out. However, this seems to us to come under
specialised lending; b) another case may be a housing cooperative
that owns flats – beneficial owners could be the users of the flats,
who are members of this cooperative, pay a rent to the
cooperative, but are still not the owners of the flats.
Answer:
The CRD text refers to the "the beneficial owner in the case of
personal investment companies". Personal investment companies
are usually established by individuals as a tax-efficient way of
holding some of their assets, including residential property. The
beneficial owner of the personal investment company is usually
the individual themselves.
Neither of the examples given in the question correctly describes
the beneficial owner.
Area:
2006/48/EC, Annex VIII, Part 1, point 20
Issue:
Meaning of the term "affiliates" in the context of receivables
Question number:
158
Date of question:
16 October 2006
Publication of answer:
15 December 2006
Question:
Part I paragraph 20 and Part II paragraph 9 (b) point (iv) restrict
the use of receivables from affiliates as risk mitigants. Does the
term “affiliate” mentioned in these paragraphs cover all related
group entities (i.e. subsidiaries, parent undertaking and other
subsidiaries of the parent undertaking etc.), as well as employees ?
In the context of Part I paragraph 26 point (g) affiliate corporate
entities are mentioned separately from parent and subsidiary
corporate entities of the credit institution? What is the meaning of
“affiliate” for the purposes of point (g) paragraph 26 of Part I?
Answer:
The term "Affiliate" has different meanings in different parts of
the CRD. Q80 clarifies that the term affiliate – as opposed to
subsidiary – used in Annex X, Part 3, point 27 (e) also comprises
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the parent undertaking. The purpose of the provision is to ensure
risk transfer outside of the group.
In the provisions listed below, affiliate must be construed as
follows:
Annex VIII, Part 1, point 20
Eligible receivables do not include amounts receivable owed by
"affiliate parties". This provision excludes amounts owed by
parties affiliated with the borrower from the range of eligible
collateral. Affiliate parties should be interpreted in the context of
the requirements on risk management in Annex VIII, Part II point
9(b)(iv): affiliates of the borrower include subsidiaries, parent
undertakings and employees. The scope of the term affiliate does
not only comprise other group entities.
Annex VIII, Part 1, point 26(g)
Eligible providers of unfunded credit protection include other
corporate entities, including parent, subsidiary and affiliate
corporate entities of the credit institution. The purpose of this
provision is to clarify that the scope of eligible providers is wideranging and regardless of the protection provider's relations with
the credit institution (e.g., captive insurance companies), provided
that certain conditions in terms of credit worthiness are met.
Area:
2006/48/EC, Annex VIII, Part 1, point 29
Issue:
Eligibility of protection providers (step 2 and/or 3)
Question number:
25
Date of question:
20 February 2006
Publication of answer:
12 April 2006
Question:
The third indent refers to an internal rating with a PD equivalent to
or lower than that associated with a credit quality assessment step
2 or above, at the time the credit protection was provided or for
any period of time hereafter. The fourth indent requires the
protection provider to have a PD equivalent to or lower than that
associated with credit quality assessment step 3. It must be noted
that this wording is in line with Basel paragraph 307 ii) b).
Does this provision mean that the step 2 requirement referred to at
the third indent, applies only to the time the credit protection was
provided? This latter interpretation seems correct, but in this case,
how should the reference to “for any period of time hereafter” be
construed in connection with the fourth indent?
Answer:
There are three requirements in the text on the rating of the
protection provider. The second indent introduces what is in effect
a "transparency" requirement. The third and fourth indents
introduce "quality" requirements and cover the situation where a
protection provider is either upgraded or downgraded. They must
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both be met for the protection provider to be eligible. There are
two possibilities:
(i) at the time the protection is taken out, the provider is at least
Step 2, but is subsequently downgraded to Step 3. In this case the
protection remains eligible;
(ii) at the time the protection is taken out, the provider is at least
Step 3, but is subsequently upgraded to Step 2. In this case the
protection becomes eligible at the time of the upgrade
If the protection provider currently does not meet the requirements
of the fourth indent (because it is Step 4 or below), it is not
eligible regardless of whether it met the requirements of the third
indent previously.
Area:
2006/48/EC, Annex VIII, Part 1, point 30
Issue:
Treatment of protection sellers
Question number:
198
Date of question:
10 January 2007
Publication of answer:
26 February 2007
Question:
It appears that the only reference in the CRD to the treatment
applicable to the protection seller in the context of the Banking
Book relates to basket products (Annex VII, Part 1, point 59 and
Annex VIII, Part 1, point 9). What treatment should be applied by
the protection seller of a total return swap, for example, which is
booked in the Banking Book?
Answer:
Article 78(1) and Annex VII, Part 3, point 11, in conjunction with
Annex II, require that credit derivatives - which include total
return swaps - be treated as full risk items. The exposure value is,
therefore, 100% of the value of the credit derivative.
The references quoted in the question seem to be incorrect and
should refer to Annex VI, Part 1, point 89 and Annex VII, Part 1,
point 9.
Area:
Directive 2006/48, Annex VIII, Part 1, point 30
Issue:
Credit risk mitigation – 'credit spread options'
Question category:
200
Date of question:
10 January 2007
Publication of answer:
23 April 2007
Question:
Annex VIII, point 30 states that credit default swaps, total return
swaps and credit linked notes are eligible as forms of credit risk
mitigation. Does the CRD recognise credit spread options as
credit risk mitigants?
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Answer:
The CRDTG is currently not aware of cases where credit spread
options (CSO) meet all the recognition criteria for eligibility under
Annex VIII. Nonetheless, there is nothing to prevent an institution
interested in gaining recognition for a CSO as eligible credit
protection to demonstrate to the competent authority that a certain
CSO is "economically similar" to other recognised credit
derivatives and that it fulfils all the other eligibility criteria and
minimum requirements. The assessment of the eligibility of a CSO
as a credit risk mitigant has to be performed on a case-by-case
basis with an appropriate level of conservatism. CEBS will make
sure that this assessment is applied in a similar manner across
jurisdictions.
Area:
2006/48/EC, Annex VIII, Part 2, point 3(d)
Issue:
On-balance sheet netting
Question number:
245
Date of question:
11 July 2007
Publication of answer:
08 October 2007
Question:
We would like to know what exactly is meant by the provision of
the requirement 'The credit institution must monitor and control
the relevant exposures on a net basis'. Can you please give us an
example as well?
Answer:
The requirement refers to the way the lending credit institution
monitors and controls the exposure in question in its internal risk
management and requires taking into account the effects of the
netting agreement for these internal purposes, in accordance with
Annex VIII, Part 1, point 4. It is meant to exclude a situation
where a firm only seeks recognition for regulatory purposes, but
does not find the arrangement with the borrower sound enough to
also rely on it for internal purposes.
Area:
2006/48/EC, Annex VIII, Part 2, point 9(b)(ii)
Issue:
Minimum requirements for recognition of receivables as collateral
Question number:
38
Date of question:
27 February 2006
Publication of answer:
23 May 2006
Question:
According to Annex VIII, Part 2, point 9(b)(ii) receivables may
only be recognised as collateral if, among other requirements,
compliance with environmental restrictions are reviewed on a
regular basis. In our national transposition we find it very difficult
to interpret this requirement, especially in relation with
‘receivables’ as a collateral-type. We have two specific questions:
a) What kind of ‘environmental restrictions’ are intended here and
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what relation is there with the recognition of receivables as
collateral?
b) Why is it that ‘environmental restrictions’ do not play a role in
the recognition of real estate as collateral (see Annex VIII, Part 2,
point 8)?
Answer:
The text in questions refers to the need for the institution to review
compliance with (i) loan covenants, (ii) environmental restrictions,
and (iii) other legal requirements on a regular basis.
"Environmental restrictions" refers to the (legal or non-legal)
conditions within a jurisdiction that would have the effect of
restricting the level of security offered by the posting of
receivables as collateral.
Examples of such environmental restrictions could be local market
practice or customs that restrict the transfer of rights against
receivable exposures.
In relation to real estate collateral, it is not clear that there would
be similar restrictions (non-legal, as legal certainty is already
covered for real estate collateral) on the transferability of the
collateral, in comparison to receivables. So this issue does not
need to be monitored by institutions for real estate collateral.
Institutions do, however, need to be aware of the extent to which
potential environmental liability may arise in relation to real estate
collateral.
Area:
2006/48/EC, Annex VIII, part 2, point 14 (c) i)
Issue:
Eligibility of credit derivatives
Question number:
227
Date of question:
20 March 2007
Publication of answer:
21 June 2007
Question:
Annex VIII, part 2, point 14(c)(i) states that a credit derivative
contract may not contain any clause, the fulfilment of which is
outside the direct control of the lender, that would allow a
unilateral cancellation of the protection by the protection provider
However, it was brought to our attention that ISDA standard
documentation on Credit derivatives contains a clause hat allows
the protection provider to call for termination of all outstanding
transactions when the protection buyer is in default. As a
consequence, if bank A goes bankrupt, protection provider B will
mark-to-market the contracts and settle all payments due up to that
point. Provider B will provide no further protection on future
defaults of the initially protected portfolio. Thus, the creditors of
the defaulted bank A are worse off than without the clause.
According to banks, they use this clause to protect the contract
parties from involvement in complex, uncertain bankruptcy
processes. We wonder if credit derivatives that include such a
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clause, are eligible as Credit Risk Mitigant under the CRD. Our
initial point of view is that Credit derivatives including this clause
do not meet these requirements and therefore seem to be
ineligible. Industry participants tell us that such clauses are more
or less standard in Credit derivative documentation. As such our
decision could have far reaching implications. That is why we are
seeking input from the CRDTG. Our Question is: Are credit
derivatives that contain a unilateral 'cancellation at protection
buyers bankruptcy'-clause eligible or not?
Answer:
The specific clause described in the question does not negatively
affect eligibility if it is contained in a master netting agreement
and it is ensured that the net value of the protection is paid out
upon cancellation so that the protection buyer would be able to
obtain equivalent new protection. While his own bankruptcy can
be considered beyond the control of the protection buyer it must
be noted that in a master netting agreement, such clause actually
ensures the effectiveness of the netting and avoids that the
individual mutual claims from the underlying transactions enter
into the bankruptcy procedure.
Area:
2006/48/EC, Annex VIII, Part 2, point 18(a)
Issue:
Unfunded credit protection for residential mortgage loans
Question number:
51
Date of question:
10 March 2006
Publication of answer:
20 June 2006
Question:
How should the provision contained in the last sentence of point
18(a) be interpreted in relation with the previous requirements
[point 14(c)(iii) and 18(a) first and second sentences]? According
to point 18(a):
"On the qualifying default of and/or non-payment by the
counterparty, the lending credit institution shall have the right to
pursue, in a timely manner, the guarantor for any monies due
under the claim in respect of which the protection is provided.
Payment by the guarantor shall not be subject to the lending credit
institution first having to pursue the obligor. In the case of
unfunded credit protection covering residential mortgage loans,
the requirements in paragraph 14(c)(iii) and in [the] first
subparagraph of this point, have only to be satisfied within an
overall period of 24 months."
We understand that the provision in 18(a) [last sentence] aims at
limiting the maximum timeframe within which a guarantor must
pay claims when the unfunded credit protection applies to
exposures secured by residential properties. That is, paragraph
18(a) seeks to protect lenders in case the enforcement of the
mortgaged collateral takes more than two years. We are working
on the assumption that:
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• the 24 month period starts from the time of default;
• during this period, the credit institution should pursue the obligor
in order to realise the mortgage (or other) collateral or start any
other procedure to the same end [that is, the requirement in the
second sentence of 18(a) is suspended]; and
• guarantors shall pay claims in a timely manner, as soon as the
enforcement procedure is completed and the claim notified and
perfected (i.e., the loss calculated) and in any case no later than 24
months from the obligor default.
Answer:
The first assumption stated in the question, on the 'timing' of the
24 month period, is correct.
The second assumption, on proceedings to realise the mortgage (or
other) collateral, is partially correct. The requirement in the second
sentence of 18(a) is suspended until the collateral is realised and
loss established. Where this is within the 24 month period, the
second sentence of 18(a) then applies again, and the guarantor
must pay in a timely manner.
On the third assumption, guarantors must, of course, pay claims in
a timely manner at the appropriate stage of the process. If the
proceedings to realise the collateral are complete before 24 months
after default, the credit institution shall have the right to make a
claim and, once perfected, including the expeditious sale of the
property, the perfected claim must be paid in a timely manner.
If the proceedings to realise the mortgage collateral are not
complete before 24 months after default, the credit institution shall
have the right to make a claim, regardless of the status of the
proceedings. In this case, the claim payment will be based on the
estimated value of the collateral. A final settlement will occur
upon completion of proceedings to realise the collateral; the credit
institution must continue to pursue the obligor in a timely manner
to complete the proceedings.
Area:
2006/48/EC, Annex VIII, Part 3
Issue:
Risk weighting of an unrated single tranche credit linked note for
the protection seller
Question number:
268
Date of question:
7 September 2007
Publication of answer:
11 December 2008
Question:
In the case of an unrated single tranche credit linked note where
the protection seller (investor) has paid funds to a counterparty
(this may be an SPV or the protection buyer), the protection seller
(investor) is exposed to a credit exposure on the reference asset
and on the funds paid out to the counterparty to the credit
derivative contract at the inception of the contract. Which of the
three risk weightings below would be considered the most
appropriate for the protection seller (investor) to apply to the funds
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paid out to the counterparty?
1) The risk weighting of the underlying reference asset
2) The risk weighting of the counterparty holding the funds (this
may be an SPV or the protection buyer)
3) The risk weighting of any collateral security e.g. government
securities, where the counterparty holding the funds is an SPV set
up specifically for the purposes of the credit linked note contract.
Note: Previously the higher of the three weightings above was
applied by the protection seller (investor) to the funds paid out to
the counterparty.
Answer:
The investor in a credit linked note has two exposures; one to the
protection buyer (i.e. the note issuer) and one to the reference
asset. To illustrate, note that the investor will face a loss both in a
credit event relating to the reference asset and in case the note
issuer defaults. Credit institutions need to provide own funds for
both of these exposures. Collateral may be recognised in
accordance with the applicable provisions.
Where the CLN is issued by an SPV, the exposure to the note
issuer should reflect the economic substance of the particular
structure. Where the holder of the note is exposed to the risk of
non-performance of collateral, then this should be reflected as the
additional exposure.
As the question relates to 'single tranche' CLNs, it should be noted
that many CLNs that use SPVs often back a single, mezzanine
tranche of a reference asset pool and should therefore be treated
under the securitisation framework, where the risk weight will be
driven by the external rating, where one exists.
Area:
2006/48/EC, Annex VIII, Part 3
Issue:
Treatment of collateral under the Financial Collateral
Comprehensive Method/Financial Collateral Simple Method –
effect of 'over-collateralisation'
Question number:
338
Date of question:
29 May 2008
Publication of answer:
25 July 2008
Question:
Under the Financial Collateral Comprehensive Method, the value
of any mitigation may decrease in value depending on the type of
mitigation and if the mitigation is in a different currency than the
exposure. Is it possible to make up for this decrease in value by
increased collateral?
Consider this example (Standardised approach): Loan of GBP
1,000,000 to a BBB rated corporate, attracting a risk weighting
percentage of 100%. This is mitigated by a USD debt security
equivalent to GBP 1,000,000 issued by a AAA rated financial
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institution, which under the comprehensive method for
collateralisation would attract a risk weighting percentage of 0%.
We are assuming an original maturity of 1 year, a residual
maturity of 6 months and a liquidation period of 10 days. Given
this information, under the comprehensive method for financial
collateral the amount of the mitigation is reduced by a price
volatility adjustment of 1% and a currency volatility adjustment of
8%. There is no price volatility adjustment on the exposure,
because this is in cash. Consequently, we calculate the reduced
mitigation amount to be GBP 910,000. Given this example, the
total Risk Weighted Asset would be calculated as follows:
910,000 * 0% = 0, 90,000 * 100% = 90,000, total 90,000.
If we now assume that the USD debt security was equivalent to
GBP 2,000,000, would this compensate for the reduction of the
collateral value due to the volatility adjustments, i.e. lead to a
RWA as follows: 1,000,000 * 0% = 0.
Similarly, under the simple method for collateral, a cash
mitigation is weighted by a higher risk weighting percentage if it
is in a different currency than the exposure. Is it possible to
compensate for the higher resulting risk weighted asset by over
collateralising the exposure?
Answer:
1. The calculation under the Financial Collateral Comprehensive
Method is correct subject to Annex VIII, Part 4 in case of maturity
adjustment.
Banks shall compare EVA and CVAM in accordance with Annex VIII,
Part 3, point 33, with E*, the fully adjusted exposure value to
which the risk weight of the counterparty (100% in the example
above), being E* = max {0, [EVA - CVAM]}. This means that the
credit risk mitigation effect of over-collateralisation may lead to a
fully adjusted exposure value of zero as long as: E x (1+HE) < C x
(1-HC-HFX).
2. No, under the Financial Collateral Simple Method, a higher
resulting risk weight cannot be compensated by over
collateralising the exposure. This is because the risk reducing
effect of the collateral is recognised by substituting the risk weight
of the uncollateralized exposure with the risk weight for a direct
exposure to the collateral instrument. Therefore, no adjustments
will be made to the value of the exposure as it is done under the
Financial Collateral Comprehensive Method.
Area:
Directive 2006/48/EC, Annex VIII, Part 3, point 3
Issue:
Eligibility of collateral – cash held by the lending firm
Question number:
357
Date of question:
15 September 2008
Publication of answer:
28 October 2008
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Question:
The Bank lends funds for the acquisition of the bonds issued by
the Bank itself. These bonds that are pledged to the Bank do not
have ECAI credit risk assessment and are not included into trading
lists made by recognized exchanges. Using these bonds as a
collateral there’s no credit risk for the loan (or the part of the loan)
collateralized by these bonds because the Bank itself issues them.
The client is indebted only the rest of the loan and the Bank is
obliged by the amount equal to the value of the bonds. After the
Bank redeems the pledged bonds, the funds are used to cover
credit of the client, and the rest of these funds is transferred to the
client’s account, but only in such the case if the amount of these
funds exceeds client’s obligation to the Bank. Point 3 provides that
investments in credit-linked notes issued by the lending bank may
be treated as cash collateral. Is it possible to treat the bonds
described in the above-mentioned case as eligible collateral in
accordance with point 3? Or maybe these bonds can be recognized
as eligible collateral under point 4 of Part 2, Annex VIII as far as
the transaction described in the example above by its essence is
similar to master netting agreement? Is it possible to treat these
bonds as eligible collateral under point 7 (c) of Part 1 of Annex
VIII? From point 7 (c) of Part 1 of Annex VIII it is not clear which
credit risk assessment (issuer’s or emission’s) should be taken into
account. Is it possible to recognize these bonds as eligible
collateral for capital adequacy calculation purposes in general?
Answer:
This may be eligible as cash collateral under Annex VIII, Part 1,
point 7 (a) as long as the maturity of the bond and the pledge is
equal or exceeds that of the loan under the Financial Collateral
Simple Method. Under the Financial Collateral Comprehensive
Method, currency and maturity mismatches are permitted under
Annex VIII, Parts 3 and 4 respectively.
Area:
2006/48/EC, Annex VIII, Part 3, point 7
Issue:
Comprehensive Method- Master Netting Agreement Basel II – net
position by security
Question number:
325
Date of question:
29 February 2008
Publication of answer:
14 May 2008
Question:
(Please see below a question I raised to the CEBS and their
answer, which was to contact you on this).
According to the Basel II framework E* for Master Netting
Agreement is (§176) E* = max {0, [(Σ(E) – Σ(C)) + Σ (Es x Hs)
+Σ (Efx x Hfx)]} Where Es = net position by security
CRD applies the same formula. However, it defines Es as net
position in each type of security. Annex VIII, Part 3, points 7
states: For the purposes of point 6, ‘type of security’ means
securities which are issued by the same entity, have the same issue
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date, the same maturity and are subject to the same terms and
conditions and are subject to the same liquidation periods as
indicated in points 34 to 59".
The questions would be: Why does the CRD differs from Basel II?
Why was this difference between Security (BII) and type of
security (CRD) introduced? Looking at the criteria, what would be
an example for which two different securities (under BII) would
be grouped in a single 'type of security ' (under CRD)?
Answer:
Basel paragraph 176 defines Es as the absolute value of the net
position in a given security (and not net position by security). The
CRD only clarifies this concept.
Area:
Directive 2006/48/EC, Annex VIII, Part 3, point 11
Issue:
Master netting agreement
Question number:
214
Date of question:
13 February 2007
Publication of answer:
24 May 2007
Question:
Is it possible to get examples of Master netting agreements used to
calculate E* (fully adjusted exposure value)?
Answer:
It is for institutions to demonstrate that master netting agreements
comply with the minimum requirements in the Directive. This
makes it inappropriate to give specific examples. Such agreements
typically mitigate the risk of multiple exposures to one
counterparty by netting all gains and losses on these exposures
into one amount. Annex VIII, Part 2, point 4 and point 5 state the
minimum requirements that have to be fulfilled. An institution has
to verify if these requirements are met, before the effect of Master
netting agreements can be taken into account when calculating the
fully adjusted exposure value.
Area:
2006/48/EC, Annex VIII, Part 3, points 14 and 15
Issue:
Authorisation to use internal models
Question number:
253
Date of question:
18 July 2007
Publication of answer:
12 October 2007
Question:
We are a little bit confused about point 14 and 15 of Part 3, Annex
VIII, Directive 2006/48/EC. It says that the internal models
approach is available to credit institutions that have received
recognition for an internal risk management model under Annex V
of Directive 2006/49/EC. Does that mean that credit institutions
that have approval for using internal models for market risk do not
have to apply to the competent authority for recognition of an
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internal model for calculation of exposures to repo-style
transactions? Furthermore, is an internal model that is mentioned
in points 12 to 21 of Part 3, Annex VIII of 2006/48/EC different
from an EPE model mentioned in Annex III, 2006/48/EC? Does
that mean that there are two different internal models that credit
institutions can use for calculating exposures to repo-style
transactions? Are there any conditions under which credit
institutions are not allowed to a use VAR/EPE model?
Answer:
1. Credit institutions that are authorised to use internal models for
market risk are not required to formally apply for an additional
authorisation, but must meet the qualitative and quantitative
standards laid down in points 16 to 21 subject to supervisors'
scrutiny (e.g. specific waiver process for this approach).
2. Yes, the internal model set out in points 12 to 21 of Part 3,
Annex VIII of 2006/48/EC is different from an "effective EPE
model" set out in Annex III, 2006/48/EC. Note in particular the
differences in the calculation of the exposure value and the scope
of application (see point 12 of Annex VIII, Part 3 and point 2 of
Annex III, Part 2, respectively) of the two different models.
3. Yes, firms are not permitted to apply these methods for
regulatory purposes if they do not conform to the Directive.
Area:
2006/48/EC, Annex VIII, Part 3, point 24
Issue:
Use of both the Financial Collateral Simple Method and the
Financial Collateral Comprehensive Method – trading book
Question number:
254
Date of question:
20 July 2007
Publication of answer:
8 October 2007
Question:
Point 24 of Part 3 of Annex VIII defines that "a credit institution
shall not use both the Financial Collateral Simple Method and the
Financial Collateral Comprehensive Method." However, Directive
20006/49/EC in Annex II, point 8, defines that the use of the
Financial Collateral Simple Method shall not be permitted for the
recognition of the effects of financial collateral in the trading
book. Does all the above mentioned mean that the institution that
uses the Financial Collateral Comprehensive Method for financial
collateral in the trading book must also apply the comprehensive
method in the banking book? Is it possible to use the simple
method in the banking book and the comprehensive method in the
trading book at the same time?
Answer:
Institutions which use the Financial Collateral Comprehensive
Method as required by Annex 2, point 8 of 2006/49/EC for their
trading book exposures are not required also to apply the Financial
Collateral Comprehensive Method for all exposures in their non-
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trading book.
Area:
2006/48/EC, Annex VIII, Part 3, point 24
Issue:
Combined use of the Financial Collateral Simple Method and the
Financial Collateral Comprehensive Method for purposes of
applying the 'look-through' approach to CIU
Question number:
263
Date of question:
8 August 2007
Publication of answer:
8 October 2007
Question:
Can the Financial Collateral Simple Method (described in Annex
VIII, Part 3, Points 24 to 29) be used by a third party (i.e a
custodian) that calculates the exposure amounts on CIU using the
"look through approach" (according to Paragraph 12, Article 87)
on behalf of its clients, knowing that the credit institutions (the
clients) holding the CIU exposures calculate their own direct
exposure amounts under the IRB framework (that is to say using
the Financial Collateral Comprehensive Method) ? In other words,
how does Annex VIII, Part 3, point 24 (which states that: "The
Financial Collateral Simple Method shall be available only where
risk-weighted exposure amounts are calculated under Articles 78
to 83." And that: "A credit institution shall not use both the
Financial Collateral Simple Method and the Financial Collateral
Comprehensive Method") interact with Article 87(12) when a
credit institution resorts to a third party to calculate its CIU
underlying exposures amount using the "look through approach" ?
Answer:
The use of the 'alternative method' referred to in the second
paragraph of Article 87(12) implies by definition the use of the
Standardised approach (plus one notch) for a limited list of predefined items. This calculation has to be performed by a third
party on behalf of the credit institution. This treatment should be
considered as an exception to the general rule laid down in Annex
VIII, Part 3, point 24 preventing credit institutions from using both
methods. This means that the correctness of the calculation to be
performed by the third party does not necessarily require the use
of the Financial Collateral Comprehensive Method.
Area:
2006/48/EC, Annex VIII, Part 3, point 24
Issue:
Combined use of the Financial Collateral Simple Method and the
Financial Collateral Comprehensive Method.
Question number:
323
Date of question:
26 February 2008
Publication of answer:
14 May 2008
Question:
According to the provision of Annex II of Directive 2006/49/EC in
calculating risk-weighted exposure amount for repurchase
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agreements, reverse repurchase agreements, securities or
commodities lending or borrowing transactions based on securities
or commodities included in the trading book institution is not
allowed to use the Financial Collateral Simple Method (point 8).
Further, the Directive 2006/48/EC (Annex VIII, Part 3, Point 24)
states that a credit institution shall not use both Financial
Collateral Simple Method and the Financial Collateral
Comprehensive Method. If the institution (which calculates riskweighted exposure amounts according to standardized approach)
at the same time has repurchase agreements, reverse repurchase
agreements, securities or commodities lending or borrowing
transactions based on securities or commodities included in the
trading book and repurchase agreements, reverse repurchase
agreements, securities or commodities lending or borrowing
transactions based on securities or commodities included in the
banking book is it allowed to use the Financial Collateral Simple
Method for the exposure due to repurchase agreements, reverse
repurchase agreements, securities or commodities lending or
borrowing transactions based on securities or commodities
included in the banking book? If the institution is obliged to use
the Financial Collateral Comprehensive Method for above
mentioned exposures based on the securities /commodities
included in the banking book could we say that, even an institution
on standardized approach which has repo transactions based on
securities included in trading book can not use the Financial
Collateral Simple Method for any exposure in the banking book?
Answer:
See answer to Q254
Area:
2006/48/EC, Annex VIII, Part 3, points 24 to 29
Issue:
Financial collateral simple method – currency mismatches
Question number:
191
Date of question:
15 January 2007
Publication of answer:
26 February 2007
Question:
In a situation when an exposure and its collateral are denominated
in different currencies, does a bank using the Financial Collateral
Simple Method also need to apply the volatility adjustment for
currency mismatches? Assuming the answer to the above is yes,
does the bank have the option of using either the standard
supervisory volatility adjustments as set out in Annex VIII, Part 3,
Table 3 or its own estimates of the volatility adjustment?
Answer:
In the Financial Collateral Simple Method, subject to a 20% floor,
the risk-weighting of the collateral instrument – no matter whether
there is a currency mismatch – is substituted for the risk-weighting
of the exposure. According to point 27 and 28 of Annex VIII, Part
3, a 0% risk-weight may be applied under limited circumstances
where there is no currency mismatch. The volatility adjustment
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appropriate to currency mismatch is meant to adjust the value of
the collateral under the Financial Collateral Comprehensive
Method and cannot be used for the purposes of applying a
substitution mechanism.
Area:
2006/48/EC, Annex VIII, Part 3, point 33
Issue:
Calculating E* in the Financial Collateral Comprehensive Method
Question number:
44
Date of question:
28 February 2006
Publication of answer:
2 May 2006
Question:
The formula contains an underscore; should it instead be a
'Minus'?
E*=max{0,[E(VA)_C(VAM)]}
Answer:
This is a typographical error which will be corrected as part of the
work of the jurist/linguists to finalise the CRD text.
Area:
2006/48/EC, Annex VIII, Part 3, points 33 & 36
Issue:
Volatility adjustment percentage for exposures with a credit
quality step of 5 or 6
Question number:
282
Date of question:
1st November 2007
Publication of answer:
20 December 2007
Question:
Regarding the formula for the volatility adjusted exposure
specified in Annex VIII, Part 3, point 33: EVA = E x (1+HE), to
calculate the HE value, which volatility adjustment percentage
should be applied if the exposure (not the collateral) has a credit
quality step of 5 or 6? Should it be a) 0%; b) 100%; c) the
percentage specified in Table 1 of Paragraph 36 (debt securities)
for credit quality step 4 (for exposures to Sovereigns) or 2-3 (for
non-Sovereigns)? d) the highest available percentage in the table
(i.e. 21.213%); e) other? (Which?)
Answer:
Table 3 under Annex VIII, Part 3, point 36 refers to 'other
exposures types'. In accordance with Annex VIII, Part 3, point 39,
for non-eligible securities, the volatility adjustment is the same as
for non-main index equities listed on a recognised exchange (i.e.
35,355). This also holds true for the haircut to be applied on
exposures for which institutions lend non-eligible instruments. See
also Basel paragraph 153.
Area:
2006/48/EC, Annex VIII, Part 3, points 33 to 36
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Issue:
Calculation of volatility-adjusted exposure for debt securities
Question number:
266
Date of question:
28 August 2007
Publication of answer:
8 October 2007
Question:
To calculate the volatility-adjusted exposure for debt securities, as
specified in Annex VIII, Part 3, Section 1.4.2, point 33, which
volatility adjustment percentage should be applied if the exposure
has a credit quality step of 5 or 6? Should it be a) 0%; b) 100%; c)
the percentage specified in Table 1 below point 36 (debt
securities) for credit quality step 4 (for exposures to Sovereigns) or
2-3 (for non-Sovereigns)? d) the highest available percentage in
the table (i.e. 21.213%); e) other? (Which?)
Answer:
Exposures with a credit quality step 5 or 6 are not eligible as
funded credit protection in accordance with Annex VIII, Part 1,
and thus are not referred to under point 36.
Area:
2006/48/EC, Annex VIII, Part III, point 73
Issue:
Alternative treatment for real estate
Question number:
270
Date of question:
14 September 2007
Publication of answer:
18 October 2007
Question:
In case of using the alternative treatment for real estate as
described under point 73 (Annex VIII, Part III): After
collateralisation, let us assume, there is still an uncollateralised
amount of the exposure and a further distributable amount of the
collateral. Is it possible to use the standard IRBA risk mitigation
(LGD substitution) as shown under points 68 - 72 for the rest of
the mortgage to collateralise the rest of the exposure?
Answer:
No, the treatment under point 73 is an alternative to the general
treatment using LGD as calculated in accordance with points 69
and 72.
Area:
2006/48/EC, Annex VIII, Part 3, point 73
Issue:
Alternative treatment for real estate under point 73 of Annex VIII,
Part 3
Question number:
23
Date of question:
20 February 2006
Publication of answer:
12 April 2006
Question:
As an alternative treatment to points 68 to 72, the competent
authorities may authorise credit institutions to apply a 50 % risk
weighting to the part of the exposure fully collateralised by real
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estate.
Is this treatment subject to the same transitional provisions as
paragraph 72 (e.g., until 31 December 2012), which allows credit
institutions to assign a 30 % LGD for senior exposures secured by
residential or commercial real estate?
Answer:
The two alternatives available are (i) paragraphs 68 to 72
including the transitional element; or (ii) paragraph 73. The
transitional provision does not apply to paragraph 73.
Area:
Directive 2006/48/EC, Annex VIII, Part 3, points 76-77
Issue:
Treatment of financial collateral
Question number:
203
Date of question:
22 January 2007
Publication of answer:
2 April 2007
Question:
Does a CRD equivalent approach exist for the Basel II treatment
of an exposure that is collateralised by eligible financial collateral
and eligible IRB collateral? In this approach a 0% LGD may be
applied to the portion of the exposure that is collateralised by
eligible financial collateral? (Basel II Paragraph 295) The CRD
does not have a row for 'eligible financial collateral' in Annex
VIII, Part 3, Table 5, which implies that banks should use the
'effective LGD' formula set out in Annex VIII, Part 3, point 61
regardless of whether the exposure is also collateralised by eligible
IRB collateral
Answer:
For banks applying the IRB approach but not using their own
estimates of LGD, eligible financial collateral is dealt with in
accordance with the Financial Collateral Comprehensive Method
which results in the calculation of a 'LGD*' for risk-weighting
purposes. In other words, the risk mitigation effects of financial
collateral are reflected in E* (the fully adjusted value of the
exposure) and then reflected in LGD* in accordance with Annex
VIII, Part 3, point 61, rather than being reflected directly in LGD*
as is the case for receivables, real estate and other collateral
subject to collateralisation levels referred to in Table 5.
Annex VIII, Part 3, point 68 makes it clear that LGD* shall be
taken as the LGD for the purposes of Annex VII.
Exposure collateralised by eligible financial collateral and eligible
IRB collateral are treated as follows:
a) Point 77 of Annex VIII, Part 3 requires the volatility-adjusted
value of the exposure to be sub-divided into parts each
covered by only one type of collateral and the unsecured
portion, as relevant;
b) Application of the Financial comprehensive method results in
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a LDG* for the part of the volatility adjusted exposure value
that is equivalent to applying a LDG of 0%
Area:
Directive 2006/48/EC, Annex VIII, Part 3, point 86
Issue:
Partial protection – tranching – specialised lending
Question number:
342
Date of question:
1 July 2008
Publication of answer:
28 October 2008
Question:
We encountered an issue of tranched partial protection. A bank is
an originator of SME exposures (typically exposures related to
energy savings projects) that are guaranteed by EIF on a portfolio
basis. The guarantee is structured. The first loss in an amount of a
certain percentage is borne by the bank and the remaining loss is
equally shared by the bank and EIF. According to the CRD Annex
VIII Part 3 section 2.2.1 we understand that tranched protection
(which case this is) is treated according to the provisions for
securitised exposures.
1) Is it correct to assume that tranched protection (including this
particular example) is to be treated according to the provisions for
securitised exposures? If so, should all conditions for (synthetic)
securitisation apply in this case (e.g. significant transfer of risk)?
2) Moreover, we understand that the securitisation treatment is not
relevant in the case of specialised lending exposures originated by
the bank which are assessed by the slotting criteria. In this case the
security package is just one criterion of the set of qualitative
criteria chosen by the bank in compliance with the
recommendation of the competent authority. The securitisation
treatment may, however, be applicable in the case of the PD/LGD
approach to specialised lending exposures. Is the above-mentioned
interpretation correct?
Answer:
1. Yes, the transaction meets the definition of 'synthetic
securitisation' laid down in Article 4(38) as the tranching is
achieved by a guarantee while the pool of exposures remains on
the balance sheet of the originating credit institution. Accordingly,
risk weighted exposure amounts have to be calculated according to
Articles 94 to 101.
2. Where relevant, this treatment also applies to specialised
lending exposures regardless of their prudential treatment under
Annex VII, Part 1, point 6 (i.e. application of the PD/LGD
approach or slotting criteria). It must be noted that the factor
'security package' relates to the asset control, the rights and means
at the lender's disposal to monitor the location and condition of the
asset, the insurance against damages, and not to the structure of
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the protection.
Please note that the pool of SMEs loans constitute payment
obligations the existence of which predates the tranching, and
should then be regarded as securitisation along the lines of CEBS
GL 10 (see Annex III point 4 on specialised lending).
Area:
Annex VIII, Part 3, points 87 and 88
Issue:
Credit conversion factor – CRM techniques
Question number:
271
Date of question:
20 September 2007
Publication of answer:
5 December 2007
Question:
For off-balance sheet items, do you take into account the effect of
credit risk mitigation techniques after the effect or before the
effect of credit conversion factors?
Answer:
See answer to Q208
Area:
Directive 2006/48/EC, Annex VIII, Part 3, point 89 (see also
Annex VI, Part 1, points 4 and 9)
Issue:
Standardised approach – exposures denominated and funded in
domestic currency
Question number:
68
Date of question:
28 April 2006
Publication of answer:
20 June 2006
Question:
According to Basel II (paragraphs 201, 54 and footnote 19), a
lower risk weight may under the standardised approach be applied
at national discretion to portions of claims guaranteed by the
sovereign, central bank and in some cases regional governments
and local authorities, where the guarantee is denominated in the
domestic currency and the exposure is funded in that currency.
The application is direct, i.e., without guarantees meeting the
eligibility requirements.
Is there any intention for the EU to deviate from this treatment?
If not, can it be interpreted that the same treatment has been
reflected in Directive 2006/48, Annex VIII, Part 3, point 89 and
Annex VI, Part 1, points 4 and 9?
Answer:
Article 93 requires that in order for a lending credit institution to
use Annex VIII, Part 3 the requirements of Article 92 must be met.
As point 89 in Annex VIII, Part 3 appears under the heading of
unfunded credit protection, the eligibility and minimum
requirements of Article 92(5) and (6) including the references to
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Annex VIII, Parts 1 and 2 are applicable to guarantees recognised
under point 89. Note that this is fully in line with the treatment set
out in the Basel II text which does not exempt such guarantees
from the general requirements either.
Area:
2006/48/EC, Annex VIII, Part 4
Issue:
Maturity mismatch – CIU as collateral
Question number:
222
Date of question:
5 March 2007
Publication of answer:
8 May 2007
Question:
The CRD, in Annex VIII, Part 4 indicates how to calculate the
maturity mismatch on funded credit protection. According to
Annex VIII, Part 1, Section 1.3.2 CIU are recognised as eligible
collateral. How can we calculate the adjustment for maturity
mismatch if the assets in which the fund has invested are not
known to the credit institution? Shall we consider the maturity of
the CIU (if there is one) or do we apply the shortest maturity in
which the fund is allowed to invest? (usually there are no
restrictions)
Answer:
The maturity of the credit protection shall be the earliest date at
which the protection may terminate or be terminated in accordance
with Annex VIII, Part 4, point 3. The maturity of the instruments
that the CIU invests in is not relevant in this respect provided that
the CIU itself has no maturity or call date, because then it may be
assumed that the CIU reinvests the cash it receives from the
underlying securities that mature. The maturity of the underlying
instrument is not relevant.
Area:
2006/48/EC, Annex IX
Issue:
Liquidity facilities for ABCP conduits
Question number:
20
Date of question:
10 February 2006
Publication of answer:
12 April 2006
Question:
When a bank provides liquidity to an asset-backed conduit, from a
regulatory capital requirement perspective, how does a bank need
to account for the liquidity facility? How much capital is required
to hold from a regulatory stand-point? Also if a bank is providing
a program wide credit enhancement for a conduit, how do they
need to account for the liability from a capital requirement
perspective?
Answer:
The prudential treatment for liquidity facilities to asset-backed-
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conduits is mainly in Annex IX of recast Directive 2000/12/EC
because they fall into the definition of securitisation position.
In particular, institutions using the Standardised approach for
credit risk will apply Annex IX Part 4, points 11 and 12, subject to
any further provisions referred to therein. Exposure values are
determined according to Annex IX, Part. 4, points 13 to 15.
Institutions using the IRB approach for credit risk will refer to
Annex IX, Part 4, points 37 to 41 in order to choose the
appropriate method to be used, depending on whether it is either a
rated or an unrated position. In the former case (including the use
of inferred ratings), the Rating Based Approach would be used as
set out in Annex IX, Part 4, points 46 to 51. In the latter case,
either the Supervisory Formula Method (as set out in Annex IX,
Part 4, points 52 to 59) or, subject to the approval of competent
authorities, the Internal Assessment Approach (as set out in Annex
IX, Part 4, points 43 to 44) will apply. Otherwise, a 1250% risk
weight will be applied as set out in Annex IX, Part 4, point 41.
Exposure values are determined according to Annex IX, Part 4,
points 58 to 59.
With respect to credit enhancements provided to ABCP conduits,
the prudential treatment is the same as previously specified for
liquidity facilities.
If a credit institution provides a “program wide credit
enhancement” together with a liquidity facility (i.e., a credit
institution has two overlapping positions), Annex IX, Part 4, point
5 will apply.
Area:
2006/48/EC, Annex IX, Part 1, point 1
Issue:
Calculation of KIRB in a residential mortgage backed securities
transaction
Question number:
127
Date of question:
25 July 2006
Publication of answer:
28 November 2006
Question:
In the context of a typical RMBS transaction, how would an
originator bank calculate KIRB for a reserve account that it has
either fully or partially funded either through a subordinated loan
or a cash deposit?
Can the reserve account be treated as an equity exposure in the
calculation of KIRB in that the cash deposited by the originator is
analogous to investing in a risky equity-like instrument in an
unsecuritised context?
Answer:
The treatment of a reserve account should follow the principle of
economic substance underpinning the treatment of securitisation
transactions and, therefore, should depend on who is ultimately
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bearing the risk linked to the reserve account:
a. the SPE and ultimately the holders of securitisation positions
(if the reserve account has been transferred to the SPE and
constitutes an asset on its balance sheet or has been ceded or
pledged to it in a way that the risk of losses in value of this
account is directly borne by the SPE); or
b. the originator if the reserve account constitutes for him an
exposure (claim or contingent claim) towards the SPE (i.e., is a
securitisation position according to the CRD because, e.g., the
originator commits to allow the SPE to draw on a debit
account, gives a guarantee to a third party that allows the SPE
to draw on a debit account, or is committed to replenish an
existing credit account in which the SPE holds cash or certain
assets).
Having said that, the following issues should be clarified:
Definition of securitised exposures
KIRB represent a "point-in-time" calculation that may be made on
different dates. If the KIRB calculation is performed at the
settlement date of the transaction (t0), cash or assets in a reserve
account that will belong to the SPE at any date in the future (tn)
(according to (a) above) are not included in the underlying
portfolio provided that the cash or assets have not been transferred
to the SPE at t0. All other types of exposures that may be created
subsequent to t0 because of the securitisation itself (e.g., I/R swaps
entered into by the originator) will not be included either.
If the KIRB calculation is being performed on subsequent reporting
dates (tn) the cash or assets in a reserve account or any other
exposures of the SPE, according to (a), will be included in the
definition of securitised exposures.
Calculation of capital charges
Originators/investors (both are subject to the same prudential
treatment according to the CRD) should hold regulatory capital in
respect of all securitisation positions (liquidity facilities, I/R
swaps, etc.) and including any exposures described in (b) above. It
follows that KIRB should always have the same value for both
originator and investor at the same point of time.
Therefore, provided they are unrated and the conditions for the use
of the supervisory formula are satisfied, the relevant amounts
should be included in the calculation of 'L' and 'T' in the
supervisory formula.
It is also worth noting that any exposure cannot be included in the
definitions of both the securitised exposures and the securitisation
positions for the same transaction at the same reporting date either it is included in the underlying pool of exposures or it
represents a securitisation position. Perhaps this is best illustrated
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by an example:
An originator transfers €100 of mortgages to an SPE that issues
€100 of notes to the market. The originator also lends €10 on a
subordinated basis to the SPE and this is invested in covered
bonds.
The covered bond investment by the SPE should be included in
the definition of securitised exposures and the originator should
include a €10 'securitisation position' for having lent this amount
to the SPE. The risk weight of this securitisation position would be
calculated in the normal way via the supervisory formula.
Area:
2006/48/EC, Annex IX, Part 2, point 1
Issue:
Recognition of collateral – Cap to securitisation exposures
Question number:
340
Date of question:
13 June 2008
Publication of answer:
12 September 2008
Question:
According to Annex IX, Part 2, point 1, if a bank overcomes the
significant credit risk transfer test, then the securitised exposures
may be excluded from the calculation of risk –weighted exposure
amounts and the specific treatment set by this Annex may be
applied to the securitisation exposures. For example, a
standardised bank originates a securitisation of exposures secured
by residential mortgages which attract a risk-weight of 35%
(amount of securitised assets: 100). The bank holds a junior
tranche equal to 5. It applies the cap to its securitisation exposures
because the capital charge which would be calculated for the
securitised exposures had they not been securitised is lower than
the junior tranche the bank holds (8%*35%*100 is lower than 5).
If this is the case, we wonder whether the operational requirements
regarding the recognition of the collateral set by the Directive
(Annex VI, part 1, points 45 to 60) should be respected, given the
fact that this cap is computed on the basis of a risk-weight given
only to exposures which comply with the mentioned set of
requirements.
Answer:
The cap shall be calculated as if the securitised exposures had not
been securitised. Accordingly, a preferential risk weight such as
the 35% remains subject to the conditions that would be applicable
had the exposure not been securitised.
Area:
Directive 2006/48/EC, Annex IX, Part 2, points 1 and 2
Issue:
Securitisation - Master trust capital requirement
Question number:
106
Date of question:
19 June 2006
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Publication of answer:
28 November 2006
Question:
Broadly speaking, a master trust programme presents the
following characteristics:
a) recurring sale of similar assets to the SSPE up to a
predetermined amount;
b) the SSPE finances the sales by issuing asset backed securities at
each sale date;
c) the overall underlying portfolio backs all the securities issued:
no legal segregation is provided among the assets sold in
different times;
d) the originator is required to hold a credit enhancement position
which can vary according to the portfolio of assets which is
sold at each time; the amount of credit enhancement varies in
order to achieve the same rating for all the senior tranches (the
older ones and the newer ones).
With regard to the master trust securitisations we would like to
know whether they fail to meet the operational requirements set by
the Directive (Annex IX, Part 2, points 1-2) in order to recognise a
“significant credit risk transfer”.
Even if an explicit clause that enables the originator to vary
significantly its credit support is not included in the securitisation
documentation, we think that the master trust characteristics imply
by definition the possibility for the originator to shield the
investors from any significant credit risk on the securitised assets
by underwriting an increasing amount of junior tranche during the
life of the programme.
That happens because a master trust structure implies a sort of
cross-subsidising effect among the different portfolios, whereby
the junior tranche which has been issued at time t2 supports
implicitly also the credit risk losses incurred on the portfolio sold
at time t1.
The case is expressly dealt with by the Basel Accord (par.
554.f.ii). While the text of the CRD (Annex IX, Part. 2, point1(g))
does not mention it explicitly we deem the same conclusion can be
reached by interpretation.
Answer:
Annex IX, Part 2, point 1(g) includes the situation described in
par. 554(f)(ii) of the Basel text. As a consequence, there is no
difference on substance between the two documents on this issue.
Whether or not a "master trust" transaction meets these
operational requirements should however be assessed on a
transaction-by-transaction basis and it is not possible to reach a
final ex-ante determination on any single category of transactions.
Such an assessment will be conducted on the basis of the
following criteria:
(a) if the originator is required to provide additional credit
enhancing support to the transaction according to terms and
conditions in the underlying contract or all other relevant
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documentation, then the transaction shall not be recognised as a
securitisation for prudential purposes;
(b) if the originator is not required to provide credit enhancing
support, then we may have two further scenarios depending on
whether the underlying documentation either includes or does not
include the maximum level of credit enhancing support that the
originator may (but is not obliged to) grant:
(b1) in the former case, the structure would be eligible, but the
specified maximum level would then represent the capital
charge for the originator after the securitisation has taken
place irrespective of the actual support granted from time to
time;
(b2) in the latter case, i.e., in the absence of a cap clearly
specified in the documentation, the KIRB would represent the
capital charge for the originator after the securitisation has
taken place.
Area:
Directive 2006/48/EC, Annex IX, Part 2, point 2
Issue:
Synthetic securitisations: credit protection
Question number:
109
Date of question:
28 June 2006
Publication of answer:
8 August 2006
Question:
One of the conditions that need to be fulfilled when synthetic
securitisation is in question is: (b) The credit protection by which
the credit risk is transferred complies with the eligibility and other
requirements under Article 90-93 for the recognition of such credit
protection. For these purposes, special purpose entities shall not be
recognised as eligible unfunded protection provider.
Which are the eligibility and other requirements that need to be
fulfilled when the actual credit risk transfer to third parties is done
through credit linked notes issued by a special purpose entity and a
special purpose entity has pledged the collateral to the originator?
We would like to interpret the directive so that the eligibility and
minimum requirements of credit derivatives as well as of financial
collateral need to be fulfilled in this kind of case. We have
however understood that directive is also interpreted in a way that
only the requirements of financial collateral need to be fulfilled.
Answer:
If the actual credit risk transfer is being done through credit linked
notes issued by a special purpose entity and this special purpose
entity has pledged the collateral to the originator, eligibility
requirements both for the financial collateral and for the credit
protection should be complied with.
The eligibility requirement for the protection provider are not
applicable because the credit risk transfer is collateralised (note
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however that the special purpose entity would not be recognised as
an eligible protection provider of unfunded protection as explicitly
stated in Directive 2006/48/EC, Annex IX, Part 2, point 2(b)).
Area:
2006/48/EC, Annex IX, Part 2, point 2
Issue:
Tranching - Significant risk transfer
Question number:
279
Date of question:
30 October 2007
Publication of answer:
8 February 2008
Question:
In a typical CDO structure, a 'warehouse' SPV may be set up to
accumulate exposures until a sufficiently large pool is available
for the issuance of securities to the market in a securitisation. Can
this 'warehouse' SPV be considered a securitisation under the rules
for significant credit risk transfer in Annex IX, Part 2, Paragraph 1
even if it does not have at least two different tranches of creditors
or securities?
Answer:
As a general requirement, the originator has to demonstrate that
significant credit risk has been transferred to investors in order to
receive the securitisation treatment. A SPV accumulating
exposures until a sufficiently large pool is available for the
issuance of securities does not seem to achieve any risk transfer.
Furthermore, a securitisation is normally defined as a situation
where tranching is present (see answer to Q248).
Nevertheless, the securitisation treatment may apply if the
underlying exposures are securitisation positions.
Area:
2006/48/EC, Annex IX, Part 2, points 2 and 3
Issue:
Treatment of expected losses in synthetic securitisations
Question number:
31
Date of question:
20 February 2006
Publication of answer:
7 July 2006
Question:
According to point 2 “an originator credit institution of a synthetic
securitisation may calculate risk–weighted exposure amounts and,
as relevant, expected loss amounts, for the securitised exposures in
accordance with points 3 and 4 below, if significant credit risk has
been transferred to third parties”.
According to point 3, “for credit institutions calculating riskweighted exposures amounts and expected loss amounts under
Articles 84 to 89, the expected loss amount in respect of such
exposures shall be zero”.
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In our understanding, the Directive requires only expected losses
to be calculated in the following situations:
1. Securitised exposures are not included in EL (at the top of the
ratio) where significant credit risk has been transferred unless
there is a maturity mismatch. In this latter case, an additional risk
weighted amount [the RW(Ass)] is calculated, including EL on
securitised exposures;
2. EL and RWA calculation on securitised exposures are used for
the purposes of “KIRB”.
Answer:
1. It is correct that the expected loss (EL) amounts of securitised
exposures are not reflected in the calculation of EL amounts as set
out in Annex VII, Part 1, points 29 et seq. Annex IX, Part 2, point
7 requires credit institutions to treat a maturity mismatch as set out
in Annex VIII. The text goes on to provide a formula that gives
explicit guidance on how the risk-weighted exposure amount for
the securitised exposures subject to the maturity mismatch should
be derived.
One parameter in this formula is RW(Ass), the risk-weighted
exposure amounts for the securitised exposures had they not been
securitised. Note that under the IRB approach, such risk-weighted
exposure amounts never contain EL amounts. However, the
general requirement to treat a maturity mismatch in accordance
with Annex VIII also extends to the expected loss amounts of the
securitised exposures. This derives from the fact that the general
maturity mismatch treatment in Annex VIII (to which Annex IX
refers) leads to an adjusted exposure amount that is reflected both
in the risk weighted exposure amounts and the EL amounts of
exposures subject to unfunded credit protection with a maturity
mismatch.
Had the Directive not intended this, i.e., a separate calculation of
the EL amounts of securitised exposure amounts subject to a
maturity mismatch, Annex IX would only contain the formula for
RW* and the reference to the general maturity mismatch treatment
in Annex VIII that precedes it would be superfluous.
[For the sake of completeness, note that the calculation of EL
amounts is straightforward: G* as in Annex VIII, Part 4, point 8 is
equal to the exposure amount in the case of the synthetic
securitisation. The EL amounts for the maturity mismatch are
consequently derived as PD x LGD x (exposure value - GA).
Exposure amounts refer to the amounts of the securitised
exposures and GA is derived according to Annex VIII, Part 4, point
8.]
2. KIRB by definition comprises the EL amounts (cf. Annex IX,
Part 1 point 1, 4th indent).
Area:
Directive 2006/48/EC, Annex IX, Part 2, points 2 to 4
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Issue:
Synthetic securitisation
Question number:
117
Date of question:
5 July 2006
Publication of answer:
28 November 2006
Question:
An originator institution of a synthetic securitisation may calculate
risk-weighted exposure amounts and as relevant, expected loss
amounts, for the securitised exposures in accordance with points 3
and 4 below, if significant credit risk has been transferred to third
parties either through funded or unfunded credit protection and the
transfer complies with the following conditions...
In calculating risk-weighted exposure amounts for the securitised
exposures, where the conditions in point 2 are met, the originator
credit institution shall, subject to points 5 to 7, use the relevant
calculation methodologies set out in Part 4 and not those set out in
Articles 78 to 79. For credit institutions calculating risk-weighted
exposure amounts and expected loss amounts under Articles 84 to
89, the expected loss amount in respect of such exposures shall be
zero. For clarity, point 3 refers to the entire pool of exposures
included in the securitisation. Subject to points 5 to 7, the
originator credit institution is required to calculate risk-weighted
exposure amounts in respect of all tranches in the securitisation in
accordance with the provisions of Part 4 including those relating to
the recognition of credit risk mitigation. For example, where a
tranche is transferred by means of unfunded credit protection to a
third party, the risk weight of that third party shall be applied to
the tranche in the calculation of the originator credit institution’s
risk-weighted exposure amounts.
Have we understood correctly, when we interpret the above
mentioned point in the following way:
Differing from the traditional securitisation, where originating
credit institution may exclude securitised exposures (i.e.,
underlying exposures) from the calculation of risk-weighted
exposure amounts if significant credit risk has been transferred
and the conditions for the transfer given in part 2 point 2 are
complied, the originating credit institution in the case of synthetic
securitisation may not exclude securitised exposures from the
calculation of risk-weighted exposure amounts. The originating
credit institution may instead calculate risk-weighted exposure
amounts of the securitised exposures in accordance with the
provisions of Part 4.
So, even if the originating credit institution were to transfer all of
its credit risk of the underlying portfolio to third parties, it would
still need to calculate the risk-weighted exposure amounts of the
underlying portfolio according to the rules of credit risk
mitigation. In case the conditions given in Annex IX, Part 2 point
2 are not met, the originating credit institution must calculate riskweighted exposure amounts of the securitised exposures as if no
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securitisation transaction has taken place and therefore no capital
relief is gained, despite the credit risk transfer.
Answer:
The questioner states "it would still need to calculate the riskweighted exposure amounts of the underlying portfolio". This may
be based on a misunderstanding: provided the applicable
requirements for synthetic securitisations are met, the riskweighted exposure amounts are not calculated for the individual
exposures in the underlying portfolio but in accordance with
Annex XI, Part 4. See the published answers to Q31 and 90 in this
respect.
The questioner also states "the originating credit institution must
calculate risk-weighted exposure amounts of the securitised
exposures as if no securitisation transaction has taken place and
therefore no capital relief is gained, despite the credit risk
transfer". It is true that when the conditions in Annex IX, Part 2,
point 2 are not met, risk-weighted exposure amounts are calculated
only for the exposures which have not been effectively securitised.
However, this does not mean that CRM (credit risk mitigation)
techniques cannot be applied to these exposures at all. If the first
loss is covered as set out in the rules in Part 6 of Annex VIII for nth
to default credit derivatives and the requirements of Article 92 are
met, these rules can be applied.
For instance, assume the first loss up to €15 million of a pool of 50
exposures of €2 million each is protected by a credit default swap
meeting the requirements in Article 92. This is equivalent to a
situation where the first 7 exposures to default in the pool are
protected in full. Consequently, the risk weighted exposure
amounts and, as applicable, expected loss amounts of the 7
exposures which produce the lowest risk weighted exposure
amounts can be modified according to Annex VIII, Part 6.
However, the recognition of credit derivatives which do not
protect the first n exposures to default in full is excluded according
to Annex VIII, Part 6. Consequently, had the credit institution in
the example above not obtained protection for the first loss but,
say, for the loss over €15 million only, such CRM would have to
be ignored where it was ineligible for the purposes of Annex IX,
Part 4.
Area:
Directive 2006/48/EC, Annex IX, Part 3
Issue:
Use of rating for ABS – rating limited to repayment on principal at
final maturity
Question number:
359
Date of question:
18 September 2008
Publication of answer:
11 December 2008
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Question:
A bank has purchased an ABS rated Aaa but whose rating from a
Rating Agency addresses only repayment on principal at final
maturity but whose interest repayment has not an external rating?
Can the overall ABS be applied the same capital charge as an ABS
with a rating both on principal and interest repayment?
Answer:
A credit assessment of an eligible ECAI to be used for the
purposes of calculating risk-weighted exposures amounts of a
securitisation position under Part 4 of Annex IX shall comply with
the conditions stipulated in Part 3 of that Annex. One of these
requirements is that there shall be no mismatch between the types
of payments reflected in the credit assessment and the types of
payment to which the credit institution is entitled under the
contract giving rise to the securitisation position in question.
Area:
2006/48/EC, Annex IX, Part 4
Issue:
Application of the scaling factor to securitisation exposures
Question number:
145
Date of question:
18 August 2006
Publication of answer:
28 November 2006
Question:
Is the Risk Weight that is derived from the Supervisory Formula
Approach also subject to the 1.06 scaling factor?
Answer:
As the published answer to Q122 makes clear, the scaling factor
applies when it is explicitly provided for. In this case, the scaling
factor is included in the KIRB definition. So, contrary to the usual
approach, the scaling factor increases capital requirements for
securitisation positions indirectly, i.e., by lifting the level below
which they should be deducted.
Area:
2006/48/EC, Annex IX, Part 4
Issue:
Supervisory Formula Approach - Specific credit enhancements
(discounts)
Question number:
235
Date of question:
11 May 2007
Publication of answer:
14 November 2007
Question:
1) In the context of a multi seller ABCP conduit, where an IRB
bank provides a programme wide credit enhancement which will
only be drawn after the seller provided (pool specific) discounts
have been depleted, how does the bank calculate (L) the amount of
securitisation exposures subordinate to the tranche in question for
the purposes of the Supervisory Formula Approach? Does the
CRD imply that IRB banks must ignore the pool specific credit
enhancements (discounts), which will turn this programme wide
enhancement into a first loss position?
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2) Can a programme wide liquidity facility that covers 100% of
the outstanding commercial paper be considered the most senior
position in the ABCP structure as stated in Paragraph 613 of the
Basel II Accord?
Answer:
First question. IRB firms are expected to apply the following
steps:
1) Calculating KIRB for each single transaction within the
programme based on the outstanding exposure values of the
underlying exposures (gross of discounts provided for by the
seller).
2) Calculating for each transaction the capital requirement by
using the SFA where L equals the transaction-specific credit
enhancement (i.e the seller's discount) and T=100 – L
3) Aggregating the capital requirement calculated in step 2 for all
transactions. = KIRB (PWCE)
4) Applying the SFA to the PWCE by using the aggregated
amount calculated in step 3 as KIRB will be used as the KIRB and
L=0.
By way of background, the CRDTG is aware of the difficulties of
applying the Supervisory Formula Approach to this type of
transaction. This is also one of the reasons why the Internal
Assessment Approach was developed, with a view to handling
exposures to ABCP conduits more easily.
Second question. Yes, provided that it covers all losses on the
underlying receivables pool that exceeds the amount of over
collateralisation/reserves provided by the seller, as set out in
paragraph 613, letter c) of the Basel text.
Area:
2006/48/EC, Annex IX, Part 4, Point 46
Issue:
Scaling factor
Question number:
311
Date of question:
18 January 2008
Publication of answer:
3 April 2008
Question:
Annex IX, Part 4, Point 46 specifies that the scaling factor to be
applied under the Ratings Based Approach is 1,06. Is it 1.06?
Answer:
Yes, if a decimal point delimiter is used. In the EU a comma
delimiter is used for decimals.
Area:
2006/48/EC, Annex IX, part 4, point 48
Issue:
Risk weighting of senior 'tranches'
Question number:
277
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Date of question:
12 October 2007
Publication of answer:
13 March 2008
Question:
We are unclear about the application of the 6%, 7% and 12% risk
weightings in a securitisation structure. For example, if a
securitisation has two AAA rated tranches, would one be risk
weighted 6% and the other 7%, or would the second tranche be
risk weighted 12%? In the latter case, the 6% risk weighting seems
to be almost meaningless. Furthermore, what would the situation
be if two AAA rated tranches ranked pari passu but with different
maturity dates? In our view, the 6% risk weight should be applied
to a position that is senior to a AAA rated tranche in the payment
waterfall and that the risk weighting of a ‘junior’ AAA tranche is
unduly conservative at 12%. We therefore suggest that it be
clarified that the 6% risk weight may be applied to securitisation
positions that are senior to securitisation positions that have a
CQS1, the latter being eligible for a 7% risk weighting. For
example, two AAA rated tranches that are pari passu but with
different maturity dates would be eligible for the 7% risk
weighting. This approach would be reflective of the payment
waterfall in a securitisation transaction and the risk inherent in
each of the senior positions. The rationale for our opinion is that
the 6% risk weighting introduced in the CRD was intended to be
in addition to the hierarchical risk weighting structure in Basel and
consequently, the definition of a ‘senior position’ should not be
imposed on the ‘super-senior‘ position recognised by the CRD.
Answer:
Q1: The second tranche would be risk-weighted 12% since it
would not comply with the definition of senior tranche. Paragraph
613 (b) of the Basel text provides an example supporting the
above interpretation.
Q2: the CRD does not refer to the maturity of a tranche. As a
consequence both tranches should get the 7% risk weight.
Both of them would get the 6% risk weight if there is a third
AAA-rated tranche, junior to them and which would get the 12%
risk weight.
Area:
Annex IX, Part 4, sections 2.5 and 3.7
Issue:
Securitisation- early amortisation
Question number:
182
Date of question:
6 December 2006
Publication of answer:
14 February 2007
Question:
If the standardised method is applied, the originator’s interest is
defined as “the exposure value of that notional part of a pool of
drawn amounts sold into a securitisation, the proportion of which in
relation to the amount of the total pool sold into the structure
determines the proportion of the cash flows generated by principal
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and interest collections and other associated amounts which are not
available to make payments to those having securitisation positions
in the securitisation.” (point 19).
In point 20 it is specified that “The exposure of the originator credit
institution, associated with its rights in respect of the originator's
interest, shall not be considered a securitisation position but as a pro
rata exposure to the securitised exposures as if they had not been
securitised.”
For IRBA, according to point 70, ‘originators interest’ shall be the
sum of:
(a) the exposure value of that notional Part of a pool of drawn
amounts sold into a securitisation, the proportion of which in
relation to the amount of the total pool sold into the structure
determines the proportion of the cash flows generated by principal
and interest collections and other associated amounts which are not
available to make payments to those having securitisation positions
in the securitisation; plus
(b) the exposure value of that Part of the pool of undrawn amounts
of the credit lines, the drawn amounts of which have been sold into
the securitisation, the proportion of which to the total amount of
such undrawn amounts is the same as the proportion of the exposure
value described in point (a) to the exposure value of the pool of
drawn amounts sold into the securitisation.” (point 70).
In point 71, the directive states that “The exposure of the originator
credit institution associated with its rights in respect of that part of
the originator's interest described in point 70(a) shall not be
considered a securitisation position but as a pro rata exposure to the
securitised drawn amounts exposures as if they had not been
securitised in an amount equal to that described in point 70(a). The
originator credit institution shall also be considered to have a pro
rata exposure to the undrawn amounts of the credit lines, the drawn
amounts of which have been sold into the securitisation, in an
amount equal to that described in point 70(b).”
From these provisions it is clear that if the originator is an IRBA
bank, it is explicitly required a capital charge for the undrawn
amounts of the credit lines (the drawn amount of which have been
sold into the securitisation) which are part of “originator’s interest”,
according to the general rules applied to these exposures. Nothing is
explicitly said for an SA bank which is originator of a revolving
securitisation with early amortisation with regard to the undrawn
amounts.
On the contrary, it seems to us that Basel II text (paragraph 590)
provides only one definition that coincides with the one the
Directive uses for IRBA banks (i.e., it includes both drawn and
undrawn amounts).
That said, for SA originator banks there might be two solutions:
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1) to use the IRBA banks “originator’s interest” definition that
appears consistent with Basel II;
2) to consider all undrawn amounts as an exposure of
originator: if this is the case, the capital requirement is
calculated according to the general rules provided for the
Standardised Approach (Articles 78-83).
To us, the correct solution is the former one. If not, we would like to
know the reason for adopting the latter solution.
Answer:
Option 2 applies according to 2006/48/EC.
The undrawn portion of all credit card exposures, including those
that have been securitised, represent undrawn exposures of the
originating credit institution: Any additional draws that are made on
securitised credit card exposures are not part of the investor’s
interest, but will add to the originator’s interest.
Under the Standardised approach, this is reflected in the fact that
originator’s interest and investor’s interest only relate to the drawn
amounts.
It should be noted that, under the Standardised approach, undrawn
retail exposures that are unconditionally cancellable will attract a
0% CCF and no capital will be required.
However, under the IRB approach, the exposure value for undrawn
retail exposures is unlikely to be 0. Thus, it was decided that part of
the undrawn exposures should not be treated as undrawn exposures
of the originator, but as undrawn exposures that had been
securitised.
This explains why there is a difference in treatment between firms
on the Standardised and IRB approaches.
Area:
2006/48/EC, Annex IX, Part 4, Section 3
Issue:
Hierarchy of methods – inferred ratings and IAA
Question number:
286
Date of question:
6 November 2007
Publication of answer:
8 February 2008
Question:
In relation to certain unrated exposures to ABCP conduits, it may
be possible to infer a rating from a junior rated position i.e. a
programme wide liquidity facility is considered to rank higher
than the rated commercial paper. If the bank also has approval to
use the Internal Assessment Approach for exposures to ABCP
conduits, does it have the option of using either its own internal
rating derived under the IAA method or the inferred rating derived
from the junior rated position? The hierarchy or methods set out
in Annex IX, Part 4, paragraph 38 seems to imply that inferred
ratings should be considered first before any rating derived from
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the IAA method.
Answer:
Yes.
Area:
2006/48/EC, Annex IX, Part 4, point 22
Issue:
Maximum capital requirement for additional capital requirements
for securitisations of revolving exposures with early amortisation
provisions
Question number:
33
Date of question:
20 February 2006
Publication of answer:
1 June 2006
Question:
According to point 22, for an originator credit institution subject to
the requirement in point 16, the total of the risk-weighted exposure
amounts in respect of its positions in the investors’ interest and the
risk-weighted exposure amounts under point 16 shall be no greater
than the greater of:
(a) the risk-weighted exposure amounts calculated in respect of its
positions in the investors’ interest;
(b) the risk-weighted exposure amounts that would be calculated
in respect of the securitised exposures by a credit institution
holding the exposures as if they had not been securitised in an
amount equal to the investors’ interest.
How does this formula work in practice? The risk-weighted
exposure amount in respect of positions in the investors’ interest is
at the same time a cap of the formula (a) and one of the elements
capped by the formula.
Answer:
Annex IX, Part 4, point 16 states that an originator shall calculated
a risk-weighted exposure amount for selling revolving exposures
into a securitisation that includes an early amortisation provision
(i.e., a contractual clause which requires, on the occurrence of
defined events, investors’ positions to be redeemed prior to the
originally stated maturity of the securities issued).
This capital is in addition to the capital that the originator must
hold against any positions that it holds in respect of the investor's
interest – for example if the originator provides a first-loss credit
enhancement position.
Point 22 ensures that the cap applies to the sum of the capital
against any positions the originator holds and the early
amortisation requirement calculated under point 16.
If the originator was not required to calculate the early
amortisation requirement under point 16, then the normal cap
outlined in Annex IX, Part 4, point 8 (Standardised approach) and
point 45 (IRB approach) would apply.
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For example, if the capital required against positions held in the
securitisation is greater than the capital required against the
underlying securities (i.e., 22(a) is greater than 22(b)) then there is
no early amortisation requirement and the normal caps will apply.
If the capital required against positions held in the securitisation is
less than the capital required against the underlying exposures
(i.e., 22(b) is greater than 22(a)) then the total capital required is
capped at the capital required against the underlying exposures to
meet the general principle outlined above.
The following example may further clarify the answer above:
100 euro of revolving exposures (RW: 100%)
90% investors’ interest
10% originator’s interest
The originator has a position in the investors’ interest – a junior
tranche – which amounts to:
Case 1) 12
Case 2) 5
The “early amortisation requirement” is equal to, say, 3.
The capital charge for the originator investors’ interest is
computed in the following manner:
A. Application of the general rule on cap to the junior tranche
The junior tranche capital requirement is equal to min(junior
amount; cap):
Case 1) min(12, 7.2) = 7.2 where 7.2 is equal to 8%*100%*90
Case 2) min(5, 7.2) = 5
B. Application of the capital requirement provided for in point 22
The originator’s total capital charge before applying the cap set by
point 22 is:
Case 1) 7.2+3
Case 2) 5+3
By applying the cap set by point 22(b), the capital charge for the
originator investors' interest is:
Case 1) 7.2
Case 2) 7.2 = 5 + 2.2 where 2.2 is the part of the “early
amortisation requirement” which must be added to the retained
securitisation exposure capital charge (i.e., 5), up to the cap.
It is obvious that in both cases the originator will be charged also
for the capital requirement for the originator’s interest computed
according to the rules set by points 19 and 20.
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Area:
2006/48/EC, Annex IX, Part 4, points 27 to 30
Issue:
Securitisations of retail exposures
Question number:
58
Date of question:
27 March 2006
Publication of answer:
2 May 2006
Question:
A definition for the retail exposure class is established in Articles
79(2) and 86(4). In these definitions the characteristics that an
exposure should have in order to be assigned in the “retail”
exposure class are also given.
Annex IX, Part 4, points 26 to 29, provides the treatment for
“securitisations subject to an early amortisation provision of retail
exposures……”.
It is not clear whether the term “retail exposures” refers to all the
exposures that fall in this exposure class according to the
definition given in Articles 79(2) and/or 86(4).
Should the definitions for the retail exposure class, given in
Articles 79(2) and/or 86(4) be extended to the securitisation
framework? In other words should securitisations, subject to an
early amortisation provision, of pools of exposures that fulfil the
criteria given in Articles 79(2) and/or 86(4) be treated according to
points 26 to 29, Part 4 of Annex IX?
Answer:
Yes, the definitions for retail exposures given in Article 79(2)
and/or 86(4) must be extended to the securitisation framework.
Area:
2006/48/EC, Annex IX, Part 4, point 46
Issue:
Scaling factor of 1.06 in relation to assets subjects to deduction
under the Securitisation framework
Question number:
13
Date of question:
9 December 2005
Publication of answer:
12 April 2006
Question:
Does the scaling factor of 1.06 apply to assets subject to deduction
under Annex IX, Part 4, point 44?
Answer:
The general spirit of the rules is that no capital requirements
should be higher that the exposure value. However, a strict reading
of point 46 would imply that the scaling factor would apply.
Annex IX, Part 4, point 74 provides that credit institutions may
either include securitisation positions in respect of which a 1250%
applies in their calculation of risk-weighted exposure amounts, or
deduct the exposure value of these positions from own funds.
Therefore:
(a) when credit institutions choose to deduct these positions, the
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scaling factor will not apply;
(b) when credit institutions choose to risk-weight these positions,
the scaling factor will apply, unless they are allowed by
competent authorities to extract them from the overall total of
credit risk-weighted exposures amounts for the purpose of
capital requirements calculations before the application of the
scaling factor.
Area:
Directive 2006/48/EC, Annex IX, Part 4, point 53
Issue:
Supervisory formula – Definition of T and L for revolving assets
Question number:
197
Date of question:
8 January 2007
Publication of answer:
24 May 2007
Question:
The input parameters of the SFA are calculated as follows: ·T (the
thickness of the tranche in which the position is held) is measured
as the ratio of (a) the nominal amount of the tranche to (b) the sum
of the exposure values of the exposures that have been securitised.
For the purposes of calculating T the exposure value of a
derivative instrument listed in Annex IV shall, where the current
replacement cost is not a positive value, be the potential future
credit exposure calculated in accordance with Annex III. ·L (the
credit enhancement level) is measured as the ratio of the nominal
amount of all tranches subordinate to the tranche in which the
position is held to the sum of the exposure values of the exposures
that have been securitised. Capitalised future income shall not be
included in the measured L. Amounts due by counterparties to
derivative instruments listed in Annex IV that represent tranches
more junior than the tranche in question may be measured at their
current replacement cost (without the potential future credit
exposures) in calculating the enhancement level. In the case of
securitisation of revolving assets, the exposure value of the
exposures that have been securitised is the sum of the nominal
amount of the securitised assets plus a portion of undrawn part of
the authorisation. As the exposure value of the exposures that
have been securitised is greater than the effective notional value of
this exposure, the ratio T and L are lower than those prevailing in
reality. In reality the structure of the deals is defined to keep
constant the credit enhancement ratio (except in default case), that
is to say an increase in the drawing of the securitised revolving
assets will imply an increase in the effective nominal of the credit
enhancement tranche in order to keep the attachment point stable.
[For example: The total nominal of a securitisation operation of
revolving assets is 60, with an authorisation of 100. A junior
tranche with a notional amount of 15 is sold by the bank. The bank
keeps the senior tranche with a nominal amount of 45. EAD of
securitised assets= 60+75%*(100-60)=90 L=15/90=16.66% to be
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compared with effective credit enhancement of 15/60=25%
T=45/90=50% to be compared with effective thickness of the
tranche 45/60=75%] Would it be possible to consider the
following definition of T and L in case of securitization of
revolving assets: T= nominal amount of the tranche in which the
position is held/ nominal amount of the securitised exposures? L=
nominal amount of the all tranches subordinate to the tranche in
which the position is held/ nominal amount of the securitised
exposures?
Answer:
For banks applying the IRB approach to the underlying exposures,
both the nominator and denominator of L and T should be
calculated based on the portion of drawn and undrawn balances
related to the securitised exposures (see also Q182). In the above
example and provided that the structure of the transaction
a) ensures that the credit enhancement ratio is kept constant over
the whole life of the transaction, and
b) in order for the originator to get recognition, fulfils the
operational requirements set out in Annex IX, Part 2, point 1 of
Directive 2006/48/EC,
L and T would equal 25% and 75% respectively.
Area:
2006/48/EC, Annex IX, Part 4, point 53
Issue:
Securitisations of pools containing exposures under both the
Standardised and IRB approaches – calculation of ELGD.
Question number:
285
Date of question:
6 November 2007
Publication of answer:
3 April 2008
Question:
In its response to question number 57 dated 17th March 2006 the
Transposition Group clarifies the determination of “KIRB” for
assets under the Standardised Approach and also mentions that the
prescribed determination of “KIRB” can be used when the
Supervisory Formula Method applies. However the Transposition
Group is silent on the calculation of ELGD which is required
under this method. We would be grateful if the Transposition
Group could clarify the following point: K[x] is a required input
for the calculation of S[x]. K[x] is a function of h, which itself is a
function of ELGD. Consequently the bank needs to calculate
ELGD of a portfolio partially made of assets subject to the
Standardised Approach. Would it be acceptable to use the
“simplified input” option stated in the CRD which allows the use
of an ELGD of 50% if the exposure value of the largest securitised
exposure is no more than 3% of the sum of the exposure values of
the securitised exposures? If the largest securitised exposure is
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more than 3%, should a Risk Weight of 1250% apply? If this
approach is not acceptable to the Transposition Group, we would
be grateful if we could receive some clarification on how to
calculate ELGD when a pool includes exposures under both the
Standardised and IRB approaches.
Answer:
Would it be acceptable to use the “simplified input” option stated
in the CRD which allows the use of an ELGD of 50% if the
exposure value of the largest securitised exposure is no more than
3% of the sum of the exposure values of the securitised
exposures?:
Yes.
If the largest securitised exposure is more than 3%, should a Risk
Weight of 1250% apply?
As a general rule, an LGD of 100% should be applied to those
parts of the underlying portfolio that would be subject to the
Standardised Approach, when calculating the ELGD to be
included in the supervisory formula. If an institution can
demonstrate that it is able to make appropriate assignments of such
exposures to the respective exposure classes under the IRB
approach, it may use the supervisory LGD applicable to the
respective exposures instead of using a 100% LGD.
Area:
2006/48/EC, Annex IX, Part 4, point 56
Issue:
Securitisation – liquidity facilities
Question number:
188
Date of question:
27 December 2006
Publication of answer:
26 February 2007
Question:
Is it correct that the 20% CCF mentioned in annex IX, part 4, point
56 is used for unrated market disruption liquidity facilities to
which the Supervisory Formula method or the IAA method
applies? Should a 100% CCF be used if the market disruption
facility is rated or if a rating can be inferred? For an unrated
market disruption facility to which the SF method applies, the
20% CCF is applied to the nominal amount of the facility and the
SF is used to calculate the risk weighted exposure amounts. It is
also clear that if the facility is rated, a 100% CCF applies and the
Ratings Based method should be used. Both aforementioned
situations are also stated in paragraph 638 of the Basel II text. It is
not unambiguously clear, however, which CCF is applicable in
case the IAA method is used or in case an inferred rating (as
mentioned in Annex IX, part 4, point 42) should be used according
to the hierarchy of methods (Annex IX, part 4, point 38). Our
interpretation is that an inferred rating is treated in the same way
as an external rating, and thus a 100% CCF and the Ratings based
method applies. For the IAA method, the situation is different,
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however. The IAA method actually does not duplicate the rating
agencies´ approach for liquidity facilities (which does not yet
exist!) but the approach for the commercial paper from the ABCP
or in practice the approach for the underlying assets. I.e. these
methodologies take into account the credit risk of the underlying
portfolio and the available credit enhancement if the liquidity
facility has been drawn but they do not recognise the probability
of being drawn. Therefore the interpretation is that for liquidity
facilities under the IAA a 20% CCF is applied.
Answer:
The above interpretation is correct: a 20% CCF should be applied
under the supervisory formula as well as under the IAA when the
rating agency methodology for rating liquidity facilities does not
include draw probability. A 100% CCF will be used under the
IAA where the rating agency methodology reflects the low
probability of draw of the facility.
Area:
2006/48/EC, Annex IX, Part 4, point 57
Issue:
Treatment of cash advance facilities
Question number:
202
Date of question:
10 January 2007
Publication of answer:
26 February 2007
Question:
Is it correct to conclude from Annex IX, part 4, point 57, that the
CCF of 0% not only applies to unrated but also to rated cash
advance facilities? It would not be logical from an economic point
of view if the same cash advance facility would get a 0% CCF if it
were unrated and a 100% CCF if it were rated. The Basel II text is
more explicit on this: from paragraph 641 it follows that cash
advance facilities - irrespective whether they are rated or unrated will get a 0% CCF.
Answer:
Yes the above interpretation is correct: cash advance facilities may
be subject to a 0% risk weight irrespective of whether they are
unrated or rated.
Area:
2006/48/EC, Annex IX, Part 4, point 67
Issue:
Risk weight amounts for securitisation tranches which are partially
guaranteed
Question number:
126
Date of question:
21 July 2006
Publication of answer:
12 October 2006
Question:
How does an IRB originator bank calculate the risk weighted
exposure amount for a retained tranche that lies above KIRB, of
which unfunded credit protection (e.g., a guarantee) has been
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obtained that covers only the most senior parts of the tranche?
Assuming that the risk weight of the protection provider is applied
to the covered senior subtranche of the position, how is the risk
weighted exposure amount for uncovered junior subtranche
determined using the adjusted value of 'T' described in Annex IX,
Part 4, point 67? An example would be helpful.
Answer:
The suggested interpretation is the correct one: the risk weight of
the protection provider shall be applied to the covered amount the most senior portion of the securitisation position.
Annex V of the Basel text may provide a helpful example in this
respect, although it refers to a position which straddles the KIRB
level. However, drawing on figures indicated there, the adjusted
value of T for the uncovered subtranche would equal 2%, as a
result of the difference between T= 4.5% and g=2.5%.
Area:
2006/48/EC, Annex IX, Part 4, points 72 and 73
Issue:
Securitisation: effect of value adjustments
Question number:
56
Date of question:
17 March 2006
Publication of answer:
7 July 2006
Question:
1. We understand that the treatment in point 72 can be applied to
other positions other than those receiving a 1250% risk weight. Is
this interpretation correct?
2. In point 73, and point 72 if the answer is yes to question 1, we
understand that value adjustments must be multiplied by a scaling
factor equivalent to the risk weight of the position, and not always
12.5. For example, if RW=250%, multiply value adjustments by
2.5; if RW=425%, by 4.25. Is this interpretation correct?
3. In case institutions do not opt for subtraction, must these value
adjustments be taken into account for the purposes of the
compensation of EL under IRB? If yes, isn’t this contradictory
with Annex VII, Part 1, point 36 (securitised positions being
excluded from EL computation)?
4. We understand that institutions can decide for the subtraction of
value adjustments on a deal by deal basis (i.e., credit institution
may decide not to subtract in certain deals). Similarly, we
understand that value adjustments on the securitised exposures can
be subtracted to any securitisation positions the institution may
hold (i.e., compensation across securitisation deals is allowed). Is
this interpretation correct?
Answer:
1. Point 72 makes reference to the underlying 'securitised
exposures' (e.g., a mortgage portfolio) and a firm that may have
taken value adjustments against these exposures. Only a firm that
holds a position in the securitisation that attracts a 1250% risk
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weight can recognise such value adjustments against its
securitisation positions.
Point 73 relates to value adjustments that a firm may take against
the 'securitisation position' (e.g., a rated mezzanine tranche) that it
holds. These value adjustments are recognised against the position
that they hold.
2. No, point 73 is clear that the scaling factor is always 12.5.
3. Annex VII, Part 1, point 36 explicitly excludes expected loss
amounts for securitised exposures and value adjustments and
provisions from EL calculation.
4. The CRD does not require a deal-by-deal choice. Rather, credit
institutions may make the relevant choice on a position-byposition basis; this implies that no compensation either across or
within securitisation deals is allowed, unless credit institutions
hold more than one 1250% risk-weighted securitisation position
related to the same transaction. This interpretation is consistent
with the particular treatment provided for securitisation exposures
which do not contribute to the EL amount calculation, for which
compensation across exposure classes is implicitly allowed.
Area:
2006/48/EC, Annex X, Part 1, point 3
Issue:
Operational risk – calculation of income indicator for new firms
Question number:
54
Date of question:
16 March 2006
Publication of answer:
6 June 2006
Question:
The text states that the relevant indicator shall be computed based
on three years of observations. In the case of credit institutions
operating for less than three years, the figures for computing the
relevant indicator (for BIA but also for TSA/ASA) should be those
estimated in their business plan, in addition to their audited actual
ones? Or, is it more accurate not to calculate the relevant indicator
but instead to use, as the case might be, directly the sum of net
interest income and net non-interest income (for the first operating
year) or an average of these elements for the years with available
figures?
Answer:
Annex X, Part 1, point 3 requires the use of the last three 12monthly observations at the end of the financial year. Where these
figures have not been audited, business estimates may be used. So
what is mandatory is always to use historical data when it is
available.
The CRD is, however, silent on the question of what happens (i) if
there are less than three observations available (a relatively new
firm), or (ii) if there are no observations available (a completely
new firm).
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In all situations, regardless of how much data is available to
perform the Annex X calculation, the firm is required to consider
operational risk as part of its internal assessment of capital under
Article 123. Similarly, this is one of the elements that competent
authorities will consider in their review of the internal assessment,
under Article 124.
Nonetheless, for firms who have been in operation for less than
three years, it seems reasonable to make use of forward-looking
business estimates in carrying out the calculation, provided that
historical data is used as soon as it is available.
Area:
Directive 2006/48/EC, Annex X, Part 1, point 3
Issue:
Operational risk calculation
Question number:
351
Date of question:
29 July 2008
Publication of answer:
7 October 2008
Question:
Regarding operational risk could you please clarify whether the
three-year average for gross income is calculated on the basis of
the last three twelve-monthly observations, i.e. the last 36 months
before the reporting date, or last three twelve-monthly
observations at the end of last year. For instance, when calculating
the average for the reporting date March 31, 2007, it is the average
from April 1, 2004 to March 31, 2007 or in the latter case the
whole calendar years 2004-2006? The answer to question number
269 to the CRDTG does not specify how the one-year average is
calculated for the example above.
Answer:
In accordance with Annex X, Part 1, point 3 and Part 2, point 2,
the three year average is calculated on the basis of the last three
twelve-monthly observations at the end of the financial year. For
the reporting date March 31, 2007, the calculation will be based on
the financial situation on 31 December 2006, using the whole
calendar years 2004-2006 (if the financial year ends 31
December).
Area:
Directive 2006/48/EC, Annex X, Part 1, points 3 and 9
Issue:
Computation of the relevant indicator for operational risk
Question number:
163
Date of question:
24 October 2006
Publication of answer:
14 February 2007
Question:
When calculating a 3 year average figure (so for the first time over
the years 2004, 2005 and 2006) one should take into account that as
from 2006 some banks will no longer have accounting figures
following local GAAP. This will lead to an average based partially
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on local GAAP figures and partially on IFRS-figures.
Answer:
The use of different accounting frameworks as the basis for the
calculation of the relevant indicators in the context of the calculation
of operational risk capital requirements is not seen as a difficulty.
Gross income is a proxy for the exposure to operational risk and
consequently the differences would not be particularly important.
The relevant indicator is calculated on the basis of the accounting
figures, so there is an implicit recognition that on first time adoption
of IFRS, there will be a short transitional period in which firms may
be obliged to calculate the indicator on the basis of two different
accounting frameworks.
Area:
Directive 2006/48/EC, Annex X, Part 1, point 5
Issue:
Calculation of the indicator for the Basic Indicator Approach to
operational risk
Question number:
91
Date of question:
31 May 2006
Publication of answer:
11 September 2006
Question:
The relevant indicator for calculation of operational risk capital
charge should be expressed as the sum of the elements listed in
Table 1. Could you provide any examples of items which should
be included into “other operating income”?
Answer:
The following are examples of items that could, under the
IAS/IFRS framework, be included in ‘other operating income’:
•
Rental income from investment property (IAS 40.75 (f) (i));
•
Lease income from operating leases (IAS 17.50).
When considering the items for inclusion in ‘other operating
income’ for the purposes of Directive 2006/48/EC, credit
institutions have to take into account the qualifications of
paragraphs 7 and 8 of Annex X and ensure that the elements
included do not go beyond what is foreseen therein.
For these reasons it is considered, for example, that income from
tangible assets measured using the revaluation and fair value
model (IAS 16.39; IAS 40.76 (d)) should not be included in ‘other
operating income’ when determining the relevant indicator for the
calculation of the operational risk capital requirement.
Area:
2006/48/EC, Annex X, Part 1, points 5 and 6
Issue:
Operational risk income indicator: treatment of dividend income
Question number:
131
Date of question:
1 August 2006
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Publication of answer:
12 October 2006
Question:
According to point 5, credit institutions should calculate the
relevant indicator based on the accounting categories for the profit
and loss account of credit institutions under Article 27 of Directive
86/635/EEC. The relevant indicator shall be expressed as the sum
of the elements listed in Table 1. In the Commission proposal to
the Council and Parliament of July 2004, the table followed
exactly the first seven items of Article 27 of Directive
86/635/EEC. However, the final directive includes changes
introduced by the Parliament, which mean that the table no longer
exactly matches Article 27.
In the final directive, element 3 of the table (“Income from shares
and other variable/fixed-yield securities”) has been changed in two
respects:
(1) The word "fixed" has been introduced. Previously, fixedincome securities were understood as falling under item one of the
table (based on a full reading of Article 27(1) of Directive
86/635/EEC);
(2) The sub-categories of element 3 (based on Article 27(3) of
Directive 86/635/EEC) have been deleted.
Our understanding is that element 3 includes all three items
mentioned in Article 27(3) and part of the item mentioned in
Article 27(1) of Directive 86/635/EEC, and the current wording is
simply a shorter way of including all securities. In other words,
any income (including the share of profit or loss of entities
accounted for using the equity method) in the profit and loss
account from non-consolidated subsidiaries, except that from
insurance companies, should be included.
Could you confirm whether this interpretation is correct?
Answer:
Item 3 in table 1 in Annex X Part 1 only captures letter (a) of item
3 in Article 27 of Directive 86/635/EEC. Of the three items
3. Income from securities:
(a) Income from shares and other variable-yield securities
(b) Income from participating interests
(c) Income from shares in affiliated undertakings
items (b) and (c) are excluded from the calculation of the relevant
indicator for the purposes of operational risk capital requirements.
The reference to income from fixed rate securities now contained
in item 3 is, of course, only relevant where this income is not
already included in item 1.
Area:
Directive 2006/48/EC, Annex X, Part 1, points 5 to 9
Issue:
Operational risk income indicator – use of IFRS/IAS
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Question number:
60
Date of question:
30 March 2006
Publication of answer:
7 July 2006
Question:
According to point 9, when credit institutions apply IFRS and IAS
they should calculate the relevant indicator on the basis of data
that best reflect the definition expressed within the framework
established by the Directive 86/635/EEC. In that context, please
explain what would be the adequate treatment of the following
items:
Answer:
-
realised profits/losses from the sale of financial assets at fair
value through profit and loss account which are not in the
trading book (Fair Value Option);
-
impairments of available-for-sale financial assets;
-
realised profits/losses from derivatives and embedded
derivatives;
-
realised profits/losses from hedging;
-
difference between "revaluation of trading items" mentioned in
paragraph 8 and revaluation of items in the trading book.
The relevant indicator is defined in the Directive as ‘the average
over three years of the sum of the net interest income, and net noninterest income’ (Annex X, Part 1, point 2).
For credit institutions subject to Directive 86/635/EEC as amended
by Directives 2001/65/EC and 2003/51/EC (hereafter referred to
as the Bank Accounts Directive – BAD), point 5 of Annex X, Part
1 specifies that the relevant indicator is the sum of the following
elements (referring to Article 27 of BAD):
1. Interest receivable and similar income;
2. Interest payable and similar charges;
3. Income from shares and other variable/fixed yield securities;
4. Commissions/fees receivable;
5. Commissions/fees payable;
6. Net profit or loss on financial operations;
7. Other operating income.
According to point 9 of Annex X, Part 1, credit institutions that are
subject to an accounting framework different to the one
established by BAD (such as IAS/IFRS) are required to calculate
the relevant indicator on the basis of the data that best reflect the
previous definition.
To this end, institutions may need to map the elements from
accounting frameworks different to the one established by the
BAD, in this case IAS/IFRS, to those listed in Table 1 of Annex
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X, Part 1.
In order to be able to determine the appropriate treatment of the
items listed in the question – which stem from an IAS/IFRS
context – the items of Table 1 of Annex X, Part 1 have been
mapped to the corresponding elements in IAS/IFRS using the
Framework for consolidated financial reporting (FINREP) as a
helpful tool. The mapping table has been included as an
attachment and serves only for illustrative purposes.
As a result of this mapping and in light of the qualifications in
points 7 and 8 of Annex X, Part 1, it is considered that the items
listed in the question should be treated as follows to calculate the
relevant indicator:
-
Realised profits/losses from the sale of
financial assets at fair value through
profit and loss account which are not in
the trading book (Fair Value Option)
No inclusion1
-
Impairments of available-for-sale
financial assets:
No inclusion
-
Realised profits/losses from derivatives
and embedded derivatives
Inclusion
-
Realised profits/losses from hedging
Inclusion
-
Difference between "revaluation of
trading items" mentioned in paragraph 8
and revaluation of items in the trading
book:
Both concepts are
equivalent
Mapping table (included for illustrative purposes only)
It should be clarified that the following table is not intended to provide an interpretation of the
Directive or of IAS/IFRS. In order to determine the appropriate treatment of the items listed in the
question – which stem from an IAS/IFRS context – the Framework for consolidated financial reporting
(FINREP) has been used as a tool to map the items of Table 1 of Annex X, Part 1 and the IFRS
framework. More precisely, the items included in Table 1 were mapped to the items of the line
‘Financial & operating income and expenses’ of the FINREP Consolidated Income Statement.
Items in Table 1
Corresponding FINREP items
Treatment for the calculation of the
relevant indicator
1. Interest receivable and Interest income
similar income
Inclusion2
2. Interest payable and
similar charges
Inclusion2
1
2
Interest expenses
Expenses on share capital repayable No inclusion
on demand
Nevertheless Annex X, Part 1, point 8 establishes: “When Article 36(2) of Directive 86/635/EEC is
applied, revaluation booked in the profit and loss account should be included.”
In considering the treatment set out in the table, it should be borne in mind that further adjustments may
need to be applied to reflect the qualifications in points 7 and 8 of Annex X, Part 1 or to ensure that the
elements included do not go beyond what is foreseen in the Directive.
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3. Income from shares and Dividend income
other variable/fixed yield
securities
Inclusion
4. Commissions/fees
receivable;
Fee and commission income
Inclusion
5. Commissions/fees
payable;
(Fee and commission expenses)
Inclusion
6. Net profit or loss on
financial operations
Realised gains (losses) on financial Partial inclusion, if included in
assets & liabilities not measured at regulatory trading book23
fair value through profit or loss, net
7. Other operating
income.
Gains (losses) on financial assets
and liabilities held for trading, net
Inclusion
Gains (losses) on financial assets
and liabilities designated at fair
value through profit or loss, net
Partial inclusion, if included in
regulatory trading book23
Gains (losses) from hedge
accounting, net
Inclusion
Exchange differences, net
Inclusion4
Gains (losses) on derecognition of
assets other than held for sale, net
No inclusion5
Other operating income
Inclusion26
Other operating expenses
No inclusion7
Area:
Directive 2006/48/EC, Annex X, Part 1, points 6-8
Issue:
Income indicator: insurance activities
Question number:
73
Date of question:
5 May 2006
Publication of answer:
1 June 2006
Question:
The question refers to insurance activities: If commissions are
received from an external insurance broker, are these revenues
considered as "Commissions Receivable" or as "Income derived
from Insurance".
Answer:
Commissions of the sort described in the question should be
included in the calculation of the relevant income indicator, as
‘Commissions receivable’.
Please also see the answer to Q22, published on 12 April 2006.
3
4
5
6
7
See BAD Article 32(1) and Annex X, Part 1, point 8.
See BAD Article 32(2)
See BAD Article 27 and Annex X, Part 1, point 8.
See Annex X, Part 1, point 8b) and c).
See Annex X, Part 1, points 6 and 7.
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Area:
Directive 2006/48/EC, Annex X, Part 1, point 7
Issue:
Calculation of the indicator for the Basic Indicator Approach to
operational risk
Question number:
81
Date of question:
29 May 2006
Publication of answer:
8 August 2006
Question:
According to the provisions of Annex X, Part 1, point 7: "The
indicator shall be calculated before the deduction of any
provisions and operating expenses. […]”.
Please provide us guidance regarding the meaning of the term
"operating expenses”, namely if it includes any of the elements
mentioned at point 6 of Annex X, Part 1 (for instance
"commissions/fees payable”).
In case of an affirmative answer, would you consider correct the
following implementation of the aforementioned provisions: "The
indicator shall be calculated before the deduction of any
provisions and operating expenses, other than those mentioned at
point 6 […]”?
Answer:
Annex X, Part 1, point 6 sets out how the sum of net interest and
net non-interest income is calculated for credit institutions subject
to Directive 86/635/EEC. Operating expenses is a term not used in
that Directive but should be considered to comprise all expenses
and charges not mentioned in point 6. Note however the
particularity of fees payable for outsourcing services.
Fees payable for outsourcing services are however summed with
their negative sign as long as the outsourcing is rendered by a third
party which is:
- a parent or subsidiary of the credit institution or a subsidiary of a
parent which is also the parent of the credit institution; or
- subject to supervision under, or equivalent to, the Directive.
Area:
2006/48/EC, Annex X, Part 1, point 8(c)
Issue:
Meaning of “income derived from insurance”
Question number:
22
Date of question:
20 February 2006
Publication of answer:
12 April 2006
Question:
According to point 8, income derived from insurance shall not be
used in the calculation of the indicator. What does this item cover:
i) Ancillary activities of banks in terms of insurance brokerage?
ii) Income arising from insurance damage policies?
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Answer:
The purpose of point 8 is to exclude items which are not 'normal
business' for the firm in question, so that the income indicator
more properly reflects the business of the firm.
Ancillary activities of the firm, such as insurance broking, are part
of the normal activities and so should be included in the income
indicator.
On a consolidated basis, where there are insurance activities in
other legal entities in the group, premiums receivable for insurance
cover written should not be included (consistent with the fact that
insurance business is not one of the identified business lines in
Part 2 of Annex X) in the consolidated income indicator.
Payments receivable as a result of claims under insurance policies
purchased by the firm (including those policies to cover
operational risk losses) should not be included in the income
indicator.
Area:
Directive 2006/48/EC, Annex X, Part 2
Issue:
Allocation of income to business lines for operational risk
Question number:
101
Date of question:
12 June 2006
Publication of answer:
11 September 2006
Question:
In the published answer to Q22, you answered that: ""The purpose
of paragraph 8 is to exclude items which are not 'normal business'
for the firm in question, so that the income indicator more properly
reflects the business of the firm. Ancillary activities of the firm,
such as insurance broking, are part of the normal activities and so
should be included in the income indicator. On a consolidated
basis, where there are insurance activities in other legal entities in
the group, premiums receivable for insurance cover written should
not be included (consistent with the fact that insurance business is
not one of the identified business lines in Part 2 of Annex X) in the
consolidated income indicator. Payments receivable as a result of
claims under insurance policies purchased by the firm (including
those policies to cover operational risk losses) should not be
included in the income indicator."
Following the question and the answer, firstly we assume that
income derived from insurance as ancillary activities such as
insurance brokerage should be considered:
1.) in the retail banking business line if the transaction is realised
with a counterparty that is regarded as being in the regulatory
retail portfolio; or
2.) in the commercial banking business line if the transaction is
realised with a counterparty that is regarded as being in the
corporate portfolio; or
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3.) in the agency services business line.
Is this interpretation in line with the CRD? Which option is
enforced by CRD?
Answer:
As evidenced by the answer to Q22, ancillary activities of a firm,
such as insurance brokerage, should be included in the income
indicator. The classification in the appropriate business line
depends on the type of clients:
-
if the transaction is with a client eligible for the retail portfolio
under Article 86(4) or 79(2), the related income should be
mapped into the retail banking business line;
-
if the transaction is with a client who does not fall within the
retail portfolio, the related income should be mapped into the
commercial banking business line.
The agency services business line is limited in scope and refers to
“safekeeping and administration of financial instruments for the
account of clients, including custodianship and related services
such as cash / collateral management”. Consequently, ancillary
activities income, such as insurance brokerage income, should not
be included in this business line.
Area:
2006/48/EC, Annex X, Part 2
Issue:
Allocation of income to business lines for operational risk
Question number:
103
Date of question:
12 June 2006
Publication of answer:
15 January 2007
Question:
We think that the CRD is silent for which one of the business lines
dividend income from subsidiaries (listed on a stock exchange or
not) should be mapped. We assume that corporate finance may not
be the business line to map. Or is it more suitable to map to
commercial banking business line? Is this interpretation in line
with the CRD?
Answer:
The answer to Q131 makes clear that income that is categorised as
‘income from participating interests’ and ‘income from shares in
affiliated undertakings’ is excluded from the calculation of the
relevant indicator for the purposes of operational risk capital
requirements.
However, at group level, when the subsidiaries are consolidated,
their income is also consolidated, i.e., the calculation of the
relevant indicator is based on the consolidated P&L statement. For
calculation of the relevant indicator on group level in the
Standardised Approach, the elements of consolidated income
deriving from the subsidiary would be mapped into one of the
business lines mentioned in Annex X, Table 2, according to the
underlying activity of the subsidiary, and in line with the mapping
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principles stated in Annex X, Part 2, point 4.
Area:
Directive 2006/48/EC, Annex X, Part 2, point 1
Issue:
Standardised Approach – relevant indicators when banks cease
operations
Question number:
267
Date of question:
4 September 2007
Publication of answer:
14 November 2007
Question:
According to point 1 of Annex 10, Part 2, “Under the Standardised
Approach, the capital requirement for operational risk is the
average over three years of the risk-weighted relevant indicators
calculated each year across the business lines referred to in Table
2.” “The three-year average is calculated on the basis of the last
three twelve-monthly observations at the end of the financial year.
When audited figures are not available, business estimates may be
used.”
In case of a credit institution ceasing operations in one or several
businesses, how should the relevant indicator be calculated?
Should a capital requirement for operational risk still be calculated
as regards a business that does not exist anymore?
How would the relevant indicator for 2007 be calculated in the
case of operations ceasing in 2007? Should observations in
relation to this particular business (i.e. observations in 2005, 2006
and 2007) still be taken into account? Or should they be excluded?
Regarding the calculation of the indicator in 2008 and 2009,
would observations related to this business still be included? If
relevant, on which criteria would a selection between included and
excluded observations be based?
Answer:
Annex X, Part 2, point 2 requires the use of the last three 12monthly observation at the end of the financial year. This includes
all activities carried out in the course of this year.
When a firm ceases a given activity in year X, the relevant
indicator for the financial year X shall include this activity so that
still affects the capital charge in years X, X+1 and X+2.
Exceptional circumstances leading to a major overestimation shall
be discussed with competent authorities in accordance with CEBS
GL 10 (paragraph 485 and 486).
Area:
2006/48/EC, Annex X, Part 2, (old) points 1 to 5
Issue:
Calculation of income indicator for the Standardised approach to
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Operational Risk
Question number:
16
Date of question:
14 January 2006
Publication of answer:
23 May 2006
Question:
According to points 2 to 5, the capital requirement for each
business line should be calculated as a certain percentage of the
average over three years of the sum of net interest income and net
non–interest income. The capital requirement for operational risk
is the sum of the capital requirements calculated for each of the
business lines.
Sentences 2 and 3 in point 1 define how to calculate the capital
requirement for operational risk if the calculated capital
requirement for any business line in any of the last three years is
negative. They state that the capital requirement for each business
line should be calculated for each of the last three years separately,
which is in conflict with the defined calculating requirements in
points 2 to 5.
How should the requirements in sentences 2 and 3 of point 1 be
applied when calculating capital requirements as defined in points
2 to5, if the sum of net interest income and net non–interest
income of a business line in any of the last three years is negative?
Answer:
The amendments introduced to point 1 during the CRD
negotiations - intended to make clear the treatment of negative
income – unfortunately introduced further confusion on this issue.
This confusion has been resolved during the work of the
lawyer/linguists to finalise the text of the CRD. The agreed text
now clarifies the method for the calculation.
The amended text of Annex X, Part 2, point 1 is as follows, with
points 2 to 4 of the old text now having been deleted:
"Under the Standardised Approach, the capital requirement for
operational risk is the average over three years of the riskweighted relevant indicators calculated each year across the
business lines referred to in Table 2. In each year, a negative
capital requirement in one business line, resulting from a negative
relevant indicator may be imputed to the whole. However, where
the aggregate capital charge across all business lines within a
given year is negative, then the input to the average for that year
shall be zero."
Area:
2006/48/EC, Annex X, Part 2, points 2 to 4
Issue:
Relevant indicator in the Standardised approach
Question number:
153
Date of question:
4 October 2006
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Publication of answer:
28 November 2006
Question:
In the final published version of the CRD, in Annex X Part 2,
paragraphs numbered in previous versions as 2 to 4 have been
deleted. In the absence of these paragraphs there seems to be no
definition of 'relevant indicator' for the Standardised approach. It
is not clear how to proceed. What should the 'relevant indicator'
for the Standardised approach be?
Answer:
These paragraphs were deleted as part of the lawyer-linguists
review of the CRD because they were at odds with paragraph 1.
The elements used to calculate the relevant indicator, as provided
for in Part 1, points 5 to 9 for the BIA apply also to the TSA, but
with the supplementary step of calculating an annual risk-weighted
relevant indicator aggregated across all business lines in each year.
Under the TSA, the relevant indicator is calculated each year for
each business lines, multiplied by the appropriate betas before
adding them together within each year, compensating for negative
values where they exist, and credit institutions use this annual riskweighted relevant indicator for calculating capital requirements,
which is the average over three years of the risk-weighted relevant
indicators.
Area:
2000/12/EC, Annex X, Part 2, Table 2
Issue:
Meaning of retail brokerage when applying operational risk
requirements under Article 2(1) of 2006/49/EC
Question number:
49
Date of question:
8 March 2006
Publication of answer:
7 July 2006
Question:
When applying the Standardised approach for Operational Risk
(e.g., in case of investment firms as considered from the reference
stated above), there is a need to separate the Retail Brokerage from
Trading and Sales. The criterion for this separation is set as
follows: "Activities with a (sic!) individual physical persons or
with small and medium sized entities meeting the criteria set out in
Article 79 for the retail exposure class."
However Article 79 of 2006/48/EC says nothing about SMEs.
Even in the Definitions (Article 4 of 2006/48) the criteria for SME
cannot be found. What criteria should then be applied? Should it
be criteria from other Directives?
And one additional linguistic question: what is the meaning of
"mutatis mutandis", in Article 2(1) of Directive 2006/49/EC?
Answer:
The text says that the Retail brokerage business line includes
“Activities with small and medium sized entities meeting the
criteria set out in Article 79 for the retail exposure class”. The type
of activities covered is set out in the second column of Table 2.
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Article 79(2) defines the retail exposure class, but of course this
definition is geared towards credit risk. The intention of the
Standardised approach business lines in Table 2 of Annex X, Part
2 is to delineate groups of activities with a comparable operational
risk profile. Firms must develop their own specific policies and
criteria for mapping their activities into these business lines in
compliance with the Principles for business line mapping in
Annex X, Part 2, point 4. More concretely, for the purposes of
distinguishing between small and medium sized entities, the
criteria (a) to (c) in Article 79(2) should be applied as follows:
(a)
the client relationship must be with a small or medium
sized entity;
(b)
the client relationship must be one of a significant number
of client relationships with similar characteristics such that the
operational risks associated with them are substantially reduced;
and
(c)
order volumes of each client relationship should be similar
and relatively low.
In the context of Article 2(1), mutatis mutandis means that the
provisions of Directive 2006/48/EC quoted there apply to
investment firms as if those firms were credit institutions.
Area:
Directive 2006/48/EC, Annex X, Part 2, point 4(e)
Issue:
Mapping of business lines in the Standardised approach to
operational risk
Question number:
83
Date of question:
29 May 2006
Publication of answer:
11 September 2006
Question:
According to the text: "the mapping of activities into business
lines for operational risk capital purposes must be consistent with
the categories used for credit and market risks”.
Please provide us with guidance as to how the consistency
between the business lines outlined in Table 2 of Annex X, Part 2
and the categories used for credit risk and market risk can be
achieved.
Answer:
This question is similar to Q49, where the answer makes reference
to mapping activities into Retail Brokerage.
First, that answer also contains some guidelines concerning which
business fall into the business line “trading and sales”.
Secondly, there is the general consistency requirement. However,
it has to be considered that market risk types, credit risk exposure
classes, and operational risk regulatory business lines, cannot be
matched in a simple way.
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The internal business lines are the foundation for consistent
processes how to deal with specific activities, products or
customers, e.g., retail customers, and inherent risks. Therefore,
these internal business lines have different operational risk
profiles, and the mapping of activities into regulatory business
lines could be derived from these internal business lines. However,
the institution has to make sure that the mapping into the business
lines for retail and commercial banking, as well as retail brokerage
and trading and sales, is consistent with the criteria used in credit
and market risk, thus avoiding regulatory arbitrage.
In this way, the criteria used in credit risk for the definition of
retail exposure class (Articles 79 and 86) could be applied for
operational risk purposes, for mapping into retail banking or
commercial banking, and respectively retail brokerage or trading
and sales, as follows:
(a)
the client relationship must be with a natural person or a
small or medium sized entity;
(b)
the client relationship must be one of a significant number
of client relationships with similar characteristics such that the
operational risks associated with them are substantially reduced;
and
(c)
order volumes - the volume of banking services of each
client relationship should be similar and relatively low. The value
of these volumes should be lower than those in the commercial
banking and trading and sales business lines.
If the criteria (a), (b) or (c) are not applicable to a client, activities
have to be mapped into commercial banking or trading and sales.
Area:
Directive 2006/48/EC, Annex X, Part 2, point 4(g) & 12(a); & Part
3, point 19
Issue:
Review of operational risk management
Question number:
92
Date of question:
31 May 2006
Publication of answer:
12 October 2006
Question:
When calculating the capital charge for operational risk under the
Standardised approach, credit institutions must meet some risk
management standards. According to the Directive, the mapping
process to business lines as well as the overall operational risk
management system shall be “subject to regular independent
review”. Should this independent review be done by internal audit,
or independent external auditor, or supervisory authority?
The same question arises regarding AMA. In that case credit
institutions besides other key elements shall use relevant external
data and make sure that external data is “subject to periodic
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independent review”. Should this requirement be applied to other
elements of the operational risk management system (internal data,
scenario analysis, etc.) as well?
Answer:
Should this independent review be done by internal audit, or
independent external auditor, or supervisory authority?
At a minimum, the requirement of an independent review implies
that an activity and the review of it cannot be performed by the
same person. In more general terms, Annex V, point 1 requires the
management body of a credit institution to provide for segregation
of duties and the prevention of conflicts of interests, this being
subject to the requirements of robustness and proportionality set
out in Article 22.
Where the Directive requires that a review must be performed by
internal or external audit or by the competent authorities,
respectively, it says so explicitly (e.g., Annex X, Part 3, point 6
and in Article 124(1)).
Should this requirement be applied to other elements of the
operational risk management system (internal data, scenario
analysis, etc.) as well?
Annex X, Part 3, point 6 determines that the “operational risk
management processes and measurement systems” as a whole be
“subject to regular reviews performed by internal and/or external
auditors”. This includes the use of internal data, external data,
scenario analysis, business environment and internal control
factors in measuring and managing operational risk. Besides this,
the requirement for "periodic independent review" is explicit in the
context of external data (point 19 in Annex X, Part 3). This
"periodic independent review" is distinct from the regular review
by internal and/or external auditors though it is also required to be
executed by persons distinct from those carrying out the activity
concerned. Even though not explicit for internal data, scenario
analysis and business environment/control factors, it appears
logical that the review, re-assessment and validation required in
points 20 and 24 should be performed independently as well, i.e.,
by a person not in charge of the activity itself.
Area:
2006/48/EC, Annex X, Part 2, points 5 and 6
Issue:
Operational risk – alternative indicators for certain business lines
Question number:
11
Date of question:
9 December 2005
Publication of answer:
9 March 2006
Question:
As a total nominal amount of loans and advances shall be used for
the determination of the relevant (alternative) indicator for the
business lines "retail banking and commercial banking", the exact
way of determining that indicator is in question. For this purpose a
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due date would be self-evident.
For determining the due date is it acceptable to use an annual final
value or several due dates, e.g. quarter due dates? In regard of the
latter could an average value of several quarters due dates or a
moving average value also be a possible solution?
Answer:
It is suggested that the same approach should be taken as for the
Basic Indicator Approach and Standardised Approach to
operational risk. This would involve taking three observations for
the volume of loans at twelve month intervals, at the same due
dates as for firms using the BIA or STA.
Area:
Annex X, Part 2, points 6 and 7
Issue:
Operational risk: alternative standardised approach
Question number:
141
Date of question:
10 August 2006
Publication of answer:
26 October 2006
Question:
According to point 6, the relevant indicators for retail banking and
commercial banking business lines should be calculated as average
over three years of the total nominal amount of loans and advances
multiplied by 0.035. That means that there will be only one figure
for each of these business lines which should be multiplied by
appropriate percentage for this business line and that will be the
capital requirement for this business line. According to changes
made to the CRD by lawyers/linguists in points 1 and 2, for other
business lines in accordance with Standardised approach the
capital requirement should be calculated as average over three
years of the sum of the aggregate capital charge calculated each
year across the business lines.
Do we understand correctly that the capital requirement, under the
Alternative standardised approach, is the sum of the capital
requirements calculated according to point 6 for retail banking and
commercial banking business lines and of the capital requirement
calculated according to points 1 and 2 for other business lines?
Answer:
The text sets out how in certain circumstances an alternative
"relevant indicator" can be used. Point 6 sets out how the
alternative "relevant indicator" is calculated and the result is then
used as the "relevant indicator" for the business line(s) in question
as set out in point 1.
Note that point 6 refers to the three-year average of loans and
advances in error as according to the algorithm prescribed in point
1, the "relevant indicators" are first risk weighted, then summed
across the business lines and only finally these yearly sums are
averaged over three years while negative yearly sums are set to
zero.
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Area:
Annex X, Part 2, points 6 and 7
Issue:
Operational risk: alternative standardised approach
Question number:
142
Date of question:
10 August 2006
Publication of answer:
26 October 2006
Question:
Is it correct if we say that the total drawn amount of loans and
advances for every last three years should be calculated as simple
summation of outstanding loans and advances at the end of the
year, which are net of any of accrued interest and commissions?
Answer:
The "alternative relevant indicator" is indeed to be taken from the
balance sheet as "loans and advances", mapped to the relevant
business lines. Additionally, Annex X, Part 2, point 7 requires that
securities held in the non-trading book shall be included in the
commercial banking business line. The value of each business line
is then multiplied by 0.035. Commissions and interest accrued
count towards the "alternative relevant indicator" to the extent that
they have been recognised under this balance sheet item.
Please see also the answer to Q141 concerning how the
"alternative relevant indicator" is reflected in the operational risk
capital requirement.
Area:
2006/48/EC, Annex X, Part 2, point 10
Issue:
Operational risk – income indicator for the Alternative
Standardised Approach
Question number:
55
Date of question:
16 March 2006
Publication of answer:
11 September 2006
Question:
Annex X, Part 2, paragraph 10 restricts the use of ASA to those
credit institutions overwhelmingly active in retail and/or
commercial banking activities, which shall account for at least
90% of its income.
Is the 90% amount referring to the relevant indicator (the three
years average of income) or to each of the three annual sums of
income produced by retail and/or commercial banking activities
included in the relevant indicator calculation?
Answer:
The answer to Q11 suggests using a three-year average to assess
the ASA qualification criteria.
It follows that this average should be above the qualification
threshold, i.e., 90%, at all times.
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Area:
Directive 2006/48/EC, Annex X, Parts 2 and 3
Issue:
Consistency of allocation of income and loss events to business
lines for operational risk
Question number:
102
Date of question:
12 June 2006
Publication of answer:
28 November 2006
Question:
There can be leasing and factoring subsidiaries of the bank and
there can be commissions receivable from the subsidiaries for
providing the service of subsidiaries to bank's customers.
We assume that the business lines used to classify gross income
are the same while recording and classifying loss events for loss
database. So we assume that loss events that occurred during
transactions of leasing and factoring should be recorded as per the
counterparties whether they are retail or corporate. Or is the
agency services business line appropriate?
Answer:
This question raises two issues:
1. How should income arising from leasing and factoring be
treated by institutions when calculating their Standardised
approach ('TSA') gross income by business line?
2. Should the same business lines be used to map historic internal
loss data as are used to map the relevant indicator?
The CRD lists eight business lines that are to be used by TSA
institutions to map their relevant indicator. Annex X, Part 2, point
4 provides principles of business line mapping an institution has to
fulfil. It would, therefore, be possible for an institution to classify
leasing and factoring income as either commercial banking or
retail banking, depending on the nature of the obligor.
In line with the mapping principles, gross income derived from the
collection of claims in respect of activities, such as debt recovery
services (so the collection is only a service provided and does not
constitute lending to clients), could be assigned to either the
business line commercial or retail banking, as these activities
usually can be regarded as if it is a supporting functions to these
business lines.
While TSA institutions are not specifically required by the CRD to
map their historical internal loss data into business lines, AMA
institutions must be able to do so. They are allowed to collect the
losses according to their own individual business lines but must be
able to map the data into the regulatory business lines as described
in the requirements for the TSA.
Area:
Directive 2006/48/EC, Annex X, Part 3, points 9, 16, 29
Issue:
Operational risk modelling – Net/gross loss amounts
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Question number:
360
Date of question:
23 September 2008
Publication of answer:
11 December 2008
Question:
Regarding operational risk modelling under the AMA Approach,
the Directive stipulates four key elements in Annex X, Part 3,
point 9 regarding the sound AMA model. However, the CRD does
not specify, whether the “net loss amounts” or “gross loss
amounts” (i.e. no recoveries are considered) shall be used as a
basis for capital calculations. It is noteworthy that the CRD has
mentioned “recoveries” only generally in Annex X, Part 3, point
16; as particular examples of recoveries one can refer to recoveries
from employees of credit institutions, recoveries from various
third parties, insurance recoveries, operational risk derivatives
recoveries etc. We would like to ask for the clarification of the
CRD. Moreover, if the answer to the first question were that the
recoveries might be recognised, how should the single types of
recoveries/risk transfer mechanism (please see the examples
mentioned above) be treated for this purpose with respect to
Annex X, Part 3, point 29.? (Note: The proposal for point 29 after
the CRD revision: “The capital alleviation from the recognition of
insurances and other risk transfer mechanisms shall not exceed
20% of the capital requirement for operational risk before the
recognition of risk mitigation techniques.”) Could you please
clarify and explain these very important issues?
Answer:
Gross or net losses may be used for AMA calculation purposes.
Internal loss data may include recoveries. It must be noted that a
model based on net losses including risk transfer mechanism will
implicitly recognise risk mitigation techniques. As capital
alleviation is limited to 20%, banks shall be able to compare
model results using net losses and net losses gross of insurance
recoveries.
Area:
Directive 2006/48/EC, Annex X, Part 3, point 15
Issue:
Internal loss data for the AMA
Question number:
82
Date of question:
29 May 2006
Publication of answer:
11 September 2006
Question:
According to the text: "The credit institution's internal loss data
must be comprehensive in that it captures all material activities
and exposures from all appropriate sub-systems and geographic
locations.[…]”.
Please indicate the meaning of the term "sub-systems” and, to this
end, provide examples of the kind(s) of sub-systems referred to by
the Directive.
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Answer:
The most important consideration is that credit institutions capture
all material activities and exposures, and are able to justify that
any excluded activities or exposures would not have a material
impact on the overall risk estimates.
"Sub-systems", in this context may be seen as a general abstraction
of the functional organisation of activities within the credit
institution. Hence, “sub-system” may refer to a business process or
to an organisational entity. Accordingly, these sub-systems will
vary from credit institution to credit institution and it is for a credit
institution to determine those people, processes, systems and
external events that are material to them, and to document and be
able to explain and justify those decisions to the competent
authority.
A strict definition of the term "sub-system" may also result in
firms incorrectly excluding internal losses from their loss database
on the grounds that they do not meet an arbitrary definition.
Area:
Directive 2006/48/EC, Annex X, Part 3, point 26
Issue:
Insurance recognition under the AMA
Question number:
95
Date of question:
6 June 2006
Publication of answer:
8 August 2006
Question:
Point 26 says: "The provider is authorised to provide insurance or
re-insurance and the provider has a minimum claims paying ability
rating by an eligible ECAI which has been determined by the
competent authority to be associated with credit quality step 3 or
above under the rules for the risk weighting of exposures to credit
institutions under Articles 78 to 83".
To our understanding, step 3 quality for credit institutions starts at
BBB- and Baa3 (notations follow methodology by Standard &
Poor's and Moody's). Does the CRD decrease "the minimum
claims paying ability required" to BBB- from A (Basel II
paragraph 678)?
Answer:
If – as the outcome of the mapping process according to Article
82(1) – credit quality step 3 would cover a credit assessment by
Standard and Poor's or Moody's of BBB- or Baa3 respectively, an
insurance provider with such a credit assessment would be eligible
under Annex X, Part 3, point 26.
Please note that so far, this mapping has not been finalised.
Area:
Directive 2006/48/EC, Annex X, Part 3, point 27
Issue:
Recognition of insurance under the AMA
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Question number:
80
Date of question:
29 May 2006
Publication of answer:
8 August 2006
Question:
According to the provisions of Annex X Part 3 pt. 27, for the
credit institution to benefit from the capital alleviation effects of
an insurance policy, the risk covered by the insurance should be
transferred to a third party entity. Moreover, according to let (e)
“[…] In the case of insurance through captives and affiliates, the
exposure has to be laid off to an independent third party entity, for
example through re-insurance, that meets the eligibility criteria”.
Given that the directive does not mention the particular case of
risk transferred to the parent-company of the credit institution by
means of an insurance policy, could we assume that such a risk
transfer generates a capital relief for the credit institution?
Answer:
The term affiliate – as opposed to subsidiary – used in Annex X,
Part 3, point 27 (e) also comprises the parent undertaking. The
purpose of the provision is to ensure risk transfer outside of the
group. To obtain capital relief, a parent undertaking acting as
protection provider would have to lay off the exposure to an
independent third-party entity.
Area:
Directive 2006/48/EC, Annex X, Part 3, point 28(b)
Issue:
Recognition of insurance policies under the AMA
Question number:
79
Date of question:
29 May 2006
Publication of answer:
8 August 2006
Question:
The text says: "a policy's cancellation terms, where less than one
year”.
We have identified the following possible meanings of the term
"cancellation terms”:
(i) the period during which the insurance policy can be cancelled;
(ii) the residual term of the insurance policy.
Is either of the aforementioned meanings the one envisaged by the
Directive, or is there other meaning we should consider?
Answer:
Annex X, Part 3, point 28(b) must be read in conjunction with
point 28(a): (a) is a requirement to reflect the residual term of the
policy while (b) is a requirement to reflect the ability of the insurer
or the credit institution to cancel the insurance cover at less than a
year's notice.
Area:
2006/48/EC, Annex X, Part 5
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Issue:
Operational risk: loss event type classification
Question number:
144
Date of question:
15 August 2006
Publication of answer:
12 October 2006
Question:
One Level 1 event-type loss category is Execution, Delivery &
Process Management (EDPM). The definition of this loss category
reads as follows: "Losses from failed transaction processing or
process management, from relations with trade counterparties".
Do EDPM losses only apply to those incurred "from relations with
trade counterparties and vendors" as the comma in the description
suggests? Or do I assume a broader definition in so far as EDPM
losses can occur both internally and externally regardless of
whether trade counterparties and vendors were involved or not?
Answer:
The comma in the definition should be read as "and" meaning that
event-type category execution, delivery and process management
comprises both loss events that result from internal processing and
process management and from relations with the mentioned third
parties.
Area:
2006/48/EC, Annex XII, Part 1, point 5
Issue:
Scope of application of disclosure requirements
Question number:
232
Date of question:
17 April 2007
Publication of answer:
24 May 2007
Question:
In accordance with Annex XII, Part 1, point 5, the disclosure
requirements in Part 2, points 3 and 4 of Annex XII for significant
subsidiaries of EU parent credit institutions (EU parent financial
holding companies) "shall be provided pursuant to Article 72(1)
and (2)" i.e. on an individual or sub-consolidated basis. The 1st
question is whether it means that all other disclosure requirements
need to be made on an individual or sub-consolidated basis, or
does it mean that all other disclosure requirements need to be
made only on the basis of consolidated financial situation of EU
parent credit institutions or EU parent financial holding company?
The 2nd question is: Could it be possible to extend the above
mentioned disclosure requirements (which are limited only to Part
2, points 3 and 4 of Annex XII) to one or more of the disclosure
requirements in Part 1 to 3 of Annex XII?
Answer:
Significant subsidiaries of EU parent credit institutions are subject
to the disclosure requirements in Annex XII, Part 2, point 3 and 4
either on an individual or sub-consolidated basis. All other
disclosure requirements have to be met by the EU parent on a
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consolidated level unless the waiver in Article 72(3) applies.
Area:
2006/48/EC, Annex XII, Part 2, point 2(d)
Issue:
Disclosure
Question number:
7
Date of question:
9 December 2005
Publication of answer:
27 January 2006
Question:
In accordance with Annex XII, Part 2, paragraph 2(d), credit
institutions are expected to disclose “the aggregate amount by
which the actual own funds are less than the required minimum in
all subsidiaries not included in the consolidation, and the name or
names of such subsidiaries”.
We understand that:
(i) this provision refers to the prudential – and not the accounting –
consolidation perimeter;
(ii) it targets subsidiaries excluded from the consolidation, but
which fall within the scope of supervision of competent authorities
(i.e., which should comply with the CRD);
(iii) being said that, this would especially cover institutions that
are excluded from the consolidation given their low significance.
Such institutions could be captured by supervision on a solo basis:
accordingly, their own funds should in principle not be less than
the required minimum.
Answer:
The proposed interpretation is in principle correct. However, some
further clarifications are needed:
(i) this provision refers to the prudential – and not the accounting –
consolidation perimeter;
(ii) it targets subsidiaries excluded from the consolidation, but
which fall within the scope of consolidated supervision of
competent authorities (i.e., which should comply with the CRD on
a consolidated basis);
(iii) having said that, this would especially cover institutions that
are excluded from the consolidation (including, but not limited to,
those of low significance). For example, such institutions are
captured by supervision on a solo basis and accordingly, their own
funds should in principle not be less than the required minimum.
Moreover they could also include insurance companies if they are
deducted.
Area:
2006/48/EC, Annex XII, Part 2, point 5(b)
Issue:
Disclosure – meaning of "credit reserves"
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Question number:
183
Date of question:
8 December 2006
Publication of answer:
15 January 2007
Question:
We are not sure what is meant by "credit reserves" in Annex XII,
part 2, item 5 (b) in the context of the counterparty risk. What item
of Balance Sheet or Income Statement does refer to it?
Answer:
The term 'credit reserves' in this context refers to credit revaluation
reserves or value adjustments that are held to cover counterparty
credit deterioration in relation to exposures subject to counterparty
risk. This is a prudential concept rather than an accounting item.
For trading book exposures, further detail on valuation
reserves/adjustments is set out in Annex VII, Part B of Directive
2006/49/EC. This section refers to reserves that may be
established not just for credit deterioration, but also for other
elements including model or liquidity risk. Point 15 indicates that
these valuation adjustments/reserves may in some cases exceed
those made under the accounting framework to which the
institution is subject.
Area:
Directive 2006/48/EC, Annex XII, Part 2, point 6 (c)
Issue:
Offsets related to credit and dilution risk
Question number:
346
Date of question:
16 July 2008
Publication of answer:
11 December 2008
Question:
According to Annex XII, Part 2, point 6(c) of the Directive
2006/48/EC credit institutions shall disclose the total (and
average) amount of exposures to credit and dilution risk after
accounting offsets and without taking into account the effects of
credit risk mitigation. Could you specify the provisions of the
CRD to which the term "offsets" in the context of credit risk
exposure is related to? In other words, what kind of offsets should
or can be taken into account when disclosing exposures to credit
and dilution risk?
Answer:
A distinction must be made, on the one hand, between the
valuation basis of exposure and, on the other hand, the
determination of the capital requirements. The valuation basis is
determined by reference to the applicable accounting framework
and, in this context, another distinction must be made between
accounting offsets and value adjustments. The capital
requirements are determined by reference to CRD specifications.
a) The accounting framework
In the cases where IFRS is the relevant accounting framework,
reference should be made to IAS 1. IAS 1 (endorsed by Regulation
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(EC) 2238/2004) which sets out that “assets and liabilities, and
income and expenses, shall not be offset unless required or
permitted by a Standard or Interpretation.”
Offset is therefore, in principle, prohibited under IFRS. Exceptions
to this principle can, for instance, be found in IAS 32.42 which
recognises the possibility to offset financial assets and liabilities
and present the net amount in the balance sheet subject to the
following conditions:
a) the entity currently has a legally enforceable right to set off
the recognised amounts, and
b) it intends either to settle on a net basis, or to realise the
asset and settle the liability simultaneously.
Value adjustment refers to a different set of accounting
measurement and recognition principles/rules. Under IFRS, value
adjustments are required in specific circumstances, including
obsolescence allowances on inventories or doubtful debts
allowances (see IAS1.33), but also depreciations, impairment, …,.
Deduction of required/permitted allowances under IFRS leads to
the determination of net amounts recognised on balance sheets.
b) Capital requirements
Capital requirements are determined in accordance with CRD with
due consideration of the amount of assets and liabilities as
calculated in accordance with applicable accounting standards (see
above). These amounts are those that need to be disclosed in
accordance with annex XII, Part 2, point 6(c) of the Directive
2006/48/EC
Beyond this, other elements are considered for the calculation of
capital requirements in the standardised approaches (e.g.
additional provisioning or credit risk mitigation techniques) or, as
the case may be, in the Internal Ratings Based Approach.
Area:
Directive 2006/48/EC, Annex XII, Part 2, point 7(c)
Issue:
Disclosure of use of credit assessments
Question number:
139
Date of question:
10 August 2006
Publication of answer:
12 October 2006
Question:
According to Annex XII, Part 2, point 7(c) the credit institutions
calculating the risk-weighted exposure amounts in accordance
with Articles 78 to 83 should disclose for each of the exposure
classes a description of process used to transfer the issuer and
issue credit assessments onto items not included in the trading
book.
We are wondering what kind of information should be disclosed
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according to this provision? Is this disclosure connected to the
provision laid down in Annex VI, Part 3, point 9? If not, please
specified to which provision(s) of the Standardised approach for
credit risk is it (i.e., the provision of disclosure laid down in
Annex XII, Part 2, point 7(c)) connected to?
Answer:
The disclosure includes the provision in Annex VI, Part 3, point 9,
but is broader. The credit institution must also disclose how it has
actually gone about the task of allocating credit assessments to
items in general.
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