Introduction..........................................................................................................1
Structure of this document...................................................................................6
Part 1: Scope of Application ................................................................................7
I. Introduction........................................................................................................7
II. Banking, securities and other financial subsidiaries ..........................................7
III. Significant minority investments in banking, securities and other financial entities8
IV. Insurance entities ..............................................................................................8
V. Significant investments in commercial entities ....................................................9
VI. Deduction of investments pursuant to this part ..................................................10
Part 2: The First Pillar – Minimum Capital Requirements.......................................12
I. Calculation of minimum capital requirements.........................................................12
A. Regulatory capital ................................................................................................12
B. Risk-weighted assets ...........................................................................................12
C. Transitional arrangements ...................................................................................13
Ia. The constituents of capital....................................................................................14
A. Core capital (basic equity or Tier 1) .....................................................................14
B. Supplementary capital (Tier 2) .............................................................................14
1. Undisclosed reserves..................................................................................14
2. Revaluation reserves ..................................................................................15
3. General provisions/general loan-loss reserves...........................................15
4. Hybrid debt capital instruments...................................................................16
5. Subordinated term debt ..............................................................................16
C. Short-term subordinated debt covering market risk (Tier 3).......................16
D. Deductions from capital.............................................................................17
II. Credit Risk – The Standardised Approach ................................................19
A. Individual claims..........................................................................................19
1. Claims on sovereigns..................................................................................19
2. Claims on non-central government public sector entities (PSEs) ...............20
3. Claims on multilateral development banks (MDBs) ....................................21
4. Claims on banks .........................................................................................21
5. Claims on securities firms ...........................................................................22
6. Claims on corporates..................................................................................23
7. Claims included in the regulatory retail portfolios .......................................23
8. Claims secured by residential property.......................................................24
9. Claims secured by commercial real estate ................................................ 24
10. Past due loans ........................................................................................... 25
11. Higher-risk categories ................................................................................ 25
12. Other assets............................................................................................... 26
13. Off-balance sheet items ............................................................................. 26
B. External credit assessment ...........................................................................27
2. Eligibility criteria ......................................................................................... 27
C. Implementation considerations..................................................................... 28
1. The mapping process................................................................................. 28
2. Multiple assessments................................................................................. 29
3. Issuer versus issues assessment .............................................................. 29
4. Domestic currency and foreign currency assessments.............................. 30
5. Short-term/long-term assessments ............................................................ 30
6. Level of application of the assessment ...................................................... 31
7. Unsolicited ratings...................................................................................... 31
D. The standardised approach ─ credit risk mitigation ................................. 31
1. Overarching issues .................................................................................... 31
2. Overview of Credit Risk Mitigation Techniques.......................................... 32
3. Collateral .................................................................................................... 35
4. On-balance sheet netting........................................................................... 45
5. Guarantees and credit derivatives ............................................................. 46
6. Maturity mismatches .................................................................................. 50
7. Other items related to the treatment of CRM techniques........................... 50
III. Credit Risk – The Internal Ratings-Based Approach ................................. 52
A. Overview ..................................................................................................... 52
B. Mechanics of the IRB approach ............................................................. 52
1. Categorisation of exposures ...................................................................... 52
2. Foundation and advanced approaches...................................................... 59
3. Adoption of the IRB approach across asset classes.................................. 61
4. Transition arrangements ............................................................................ 62
C. Rules for corporate, sovereign, and bank exposures................................. 63
1. Risk-weighted assets for corporate, sovereign, and bank exposures........ 63
2. Risk components........................................................................................ 67
D. Rules for Retail Exposures........................................................................ 76
1. Risk-weighted assets for retail exposures.................................................. 76
2. Risk components........................................................................................ 78
E. Rules for Equity Exposures ................................................................... 79
1. Risk-weighted assets for equity exposures.................................................79
2. Risk components ........................................................................................82
F. Rules for Purchased Receivables ........................................................................83
1. Risk-weighted assets for default risk ..........................................................83
2. Risk-weighted assets for dilution risk..........................................................85
3. Treatment of purchase price discounts for receivables ..............................85
4. Recognition of credit risk mitigants .............................................................86
G. Treatment of Expected Losses and Recognition of Provisions............................86
1. Calculation of expected losses ...................................................................86
2. Calculation of provisions.............................................................................87
3. Treatment of EL and provisions ..................................................................88
H. Minimum Requirements for IRB Approach...........................................................88
1. Composition of minimum requirements ......................................................89
2. Compliance with minimum requirements ....................................................89
3. Rating system design..................................................................................90
4. Risk rating system operations.....................................................................94
5. Corporate governance and oversight..........................................................97
6. Use of internal ratings .................................................................................98
7. Risk quantification.......................................................................................99
8. Validation of internal estimates.................................................................109
9. Supervisory LGD and EAD estimates.......................................................110
10. Requirements for recognition of leasing ...................................................114
11. Calculation of capital charges for equity exposures..................................114
12. Disclosure requirements ...........................................................................119
IV. Credit Risk — Securitisation Framework.....................................................................120
A. Scope and definitions of transactions covered under the securitisation framework120
B. Definitions and general terminology...................................................................120
1. Originating bank........................................................................................120
2. Asset-backed commercial paper (ABCP) programme..............................121
3. Clean-up call.............................................................................................121
4. Credit enhancement..................................................................................121
5. Credit-enhancing interest-only strip ..........................................................121
6. Early amortisation .....................................................................................121
7. Excess spread ..........................................................................................122
8. Implicit support..........................................................................................122
9. Special purpose entity (SPE) ....................................................................122
C. Operational requirements for the recognition of risk transference .....................122
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1. Operational requirements for traditional securitisations ........................... 122
2. Operational requirements for synthetic securitisations ............................ 123
3. Operational requirements and treatment of clean-up calls ...................... 124
D. Treatment of securitisation exposures............................................................... 125
1. Calculation of capital requirements .......................................................... 125
2. Operational requirements for use of external credit assessments ........... 125
3. Standardised approach for securitisation exposures ............................... 126
4. Internal ratings-based approach for securitisation exposures.................. 133
V. Operational Risk ......................................................................................................... 144
A. Definition of operational risk .............................................................................. 144
B. The measurement methodologies..................................................................... 144
1. The Basic Indicator Approach .................................................................. 144
2. The Standardised Approach, .................................................................... 146
3. Advanced Measurement Approaches (AMA)........................................... 147
C. Qualifying criteria............................................................................................... 148
1. The Standardised Approach .................................................................... 148
2. Advanced Measurement Approaches (AMA)........................................... 149
D. Partial use ......................................................................................................... 156
VI. Market Risk................................................................................................................. 157
A. The risk measurement framework..................................................................... 157
1. Scope and coverage of the capital charges ............................................. 157
2. Prudent valuation guidance...................................................................... 160
3. Methods of measuring market risks ......................................................... 162
4. Treatment of counterparty credit risk in the trading book......................... 164
5. Transitional arrangements ....................................................................... 165
B. The capital requirement..................................................................................... 166
1. Definition of capital................................................................................... 166
C. Market risk – The standardised measurement method ..................................... 166
1. Interest rate risk ....................................................................................... 166
2. Equity position risk ................................................................................... 176
3. Foreign exchange risk.............................................................................. 179
4. Commodities risk...................................................................................... 182
5. Treatment of options ................................................................................ 186
D. Market Risk – The Internal Models Approach ................................................... 191
1. General criteria......................................................................................... 191
2. Qualitative standards ............................................................................... 191
3. Specification of market risk factors .......................................................... 193
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4. Quantitative standards ..............................................................................195
5. Stress testing ............................................................................................197
6. External validation.....................................................................................198
7. Combination of internal models and the standardised methodology ........199
8. Treatment of specific risk ..........................................................................199
9. Model validation standards .......................................................................202
Part 3: The Second Pillar – Supervisory Review Process ....................................................204
I. Importance of supervisory review................................................................................204
II. Four key principles of supervisory review ...................................................................205
1. Board and senior management oversight ..........................................................205
2. Sound capital assessment .................................................................................206
3. Comprehensive assessment of risks .................................................................206
4. Monitoring and reporting ....................................................................................208
5. Internal control review ........................................................................................209
1. Review of adequacy of risk assessment ............................................................210
2. Assessment of capital adequacy........................................................................210
3. Assessment of the control environment .............................................................210
4. Supervisory review of compliance with minimum standards..............................210
5. Supervisory response ........................................................................................211
III. Specific issues to be addressed under the supervisory review process .....................212
A. Interest rate risk in the banking book .................................................................212
B. Credit risk ...........................................................................................................213
1. Stress tests under the IRB approaches ....................................................213
2. Definition of default ...................................................................................213
3. Residual risk .............................................................................................213
4. Credit concentration risk ...........................................................................214
5. Counterparty credit risk.............................................................................215
C. Operational risk ..................................................................................................217
D. Market risk..........................................................................................................217
1. Policies and procedures for trading book eligibility ...................................217
2. Valuation...................................................................................................218
3. Stress testing under the internal models approach...................................218
4. Specific risk modelling under the internal models approach.....................218
IV. Other aspects of the supervisory review process........................................................219
A. Supervisory transparency and accountability.....................................................219
B. Enhanced cross-border communication and cooperation..................................219
V. Supervisory review process for securitisation .............................................................219
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A. Significance of risk transfer ............................................................................... 220
B. Market innovations ............................................................................................ 221
C. Provision of implicit support............................................................................... 221
D. Residual risks .................................................................................................... 222
E. Call provisions ................................................................................................... 222
F. Early amortisation.............................................................................................. 223
Part 4: The Third Pillar – Market Discipline.......................................................... 226
I. General considerations..................................................................................... 226
A. Disclosure requirements.................................................................................... 226
B. Guiding principles.............................................................................................. 226
C. Achieving appropriate disclosure ...................................................................... 226
D. Interaction with accounting disclosures............................................................. 227
E. Materiality .......................................................................................................... 227
F. Frequency ......................................................................................................... 228
G. Proprietary and confidential information............................................................ 228
II. The disclosure requirements ................................................................... 228
A. General disclosure principle .............................................................................. 228
B. Scope of application .......................................................................................... 229
C. Capital ............................................................................................................... 230
D. Risk exposure and assessment ........................................................................ 231
1. General qualitative disclosure requirement.............................................. 232
2. Credit risk ................................................................................................. 232
3. Market risk................................................................................................ 240
4. Operational risk ........................................................................................ 241
5. Equities .................................................................................................... 242
6. Interest rate risk in the banking book ....................................................... 242
Annex 1: The 15% of Tier 1 Limit on Innovative Instruments ........................................... 243
Annex 1a: Definition of Capital Included in the Capital Base.............................................. 244
Annex 2: Standardised Approach – Implementing the Mapping Process......................... 248
Annex 3: Capital Treatment for Failed Trades and Non-DvP Transactions...................... 252
Annex 4: Treatment of Counterparty Credit Risk and Cross-Product Netting .................. 254
Annex 5: Illustrative IRB Risk Weights ............................................................................. 278
Annex 6: Supervisory Slotting Criteria for Specialised Lending........................................ 280
Annex 7: Illustrative Examples: Calculating the Effect of Credit Risk Mitigation under
Supervisory Formula ......................................................................................... 298
Annex 8: Mapping of Business Lines ............................................................................... 302
Annex 9: Detailed Loss Event Type Classification ........................................................... 305
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Annex 10: Overview of Methodologies for the Capital Treatment of Transactions Secured
by Financial Collateral under the Standardised and IRB Approaches ..............308
Annex 10a: Supervisory Framework for the Use of “Backtesting” in Conjunction with the Internal Models A
Annex 11: The Simplified Standardised Approach..............................................................322 | 