Capital Adequacy Framework (Basel II - Risk-Weighted Assets)

497 Pages·2014·2.71 MB·English

Capital Adequacy Framework
(Basel II - Risk Weighted Assets)
Issued on: 27 June 2013
PART A OVERVIEW ........................................................................ 1
A.1 EXECUTIVE SUMMARY .................................................... 1
A.2 APPLICABILITY ................................................................ 3
A.3 LEGAL PROVISION .......................................................... 3
A.4 LEVEL OF APPLICABILITY .............................................. 3
PART B CREDIT RISK .................................................................... 5
B.1 INTRODUCTION ................................................................ 5
B.2 THE STANDARDISED APPROACH FOR CREDIT RISK . 8
B.2.1 EXTERNAL CREDIT ASSESSMENTS .............................. 8
B.2.2 DEFINITION OF EXPOSURES ........................................ 11
Exposures to Sovereigns and Central Banks ................... 12
Exposures to Non-Federal Government Public Sector
Entities (PSEs) ................................................................. 13
Exposures to Multilateral Development Banks (MDBs) .... 14
Exposures to Banking Institutions and Corporates ........... 14
Exposures to Insurance Companies, Securities Firms and
Fund Managers ................................................................ 16
Exposures Included in the Regulatory Retail Portfolio ...... 16
Loans Secured by Residential Properties......................... 17
Defaulted Exposures ........................................................ 19
Higher Risk Assets ........................................................... 20
Other Assets ..................................................................... 21
B.2.3 TREATMENT FOR THE COMPUTATION OF CREDIT
RISK-WEIGHTED ASSETS FOR ISLAMIC CONTRACTS
......................................................................................... 22
MURĀBAHAH .................................................................. 22
BAI’ BITHAMAN AJIL (BBA) AND BAI’ INAH ................... 24
SALAM ............................................................................. 24
ISTISNĀ` .......................................................................... 26
IJĀRAH ............................................................................. 27
MUSHĀRAKAH ................................................................ 29
MUDĀRABAH .................................................................. 32
SUKŪK ............................................................................. 35
QARDH ............................................................................ 36
B.2.4 OFF-BALANCE SHEET ITEMS ....................................... 37
B.2.5 CREDIT RISK MITIGATION ............................................ 39
Minimum Conditions for the Recognition of Credit Risk
Mitigation Techniques....................................................... 40
Credit Risk Mitigation Techniques .................................... 41
Other Aspects of Credit Risk Mitigation ............................ 63
B.3 THE INTERNAL RATINGS BASED APPROACH ........... 66
B.3.1 ADOPTION OF THE IRB APPROACH ............................ 66
Adoption of IRB Across Asset Classes ............................. 66
Adoption of IRB for Islamic Banking Assets ..................... 69
Implementation Timelines and Transition Period .............. 70
Determination of Capital Requirements under the IRB
approach .......................................................................... 72
B.3.2 CATEGORIES OF EXPOSURES .................................... 73
Definition of Corporate Exposures, including Specialised
Lending ............................................................................. 73
Definition of Bank Exposures ........................................... 77
Definition of Retail Exposures .......................................... 78
Definition of Equity Exposures .......................................... 80
Definition of Purchased Receivables Exposures .............. 82
B.3.3 RISK COMPONENTS ...................................................... 84
Risk Components for Corporate, Sovereign and Bank
Exposures ........................................................................ 84
Risk Components for Retail Exposures ............................ 92
Risk Components for Equity Exposures ........................... 94
B.3.4 CREDIT RISK MITIGATION (CRM) ................................. 95
Minimum Conditions for the Recognition of Credit Risk
Mitigation Techniques....................................................... 96
Collateralised Transactions .............................................. 97
Guarantees and Credit Derivatives ................................ 109
On-Balance Sheet Netting .............................................. 118
Other Aspects of Credit Risk Mitigation .......................... 118
B.3.5 RISK-WEIGHTED ASSETS ........................................... 122
Risk-Weighted Assets for Corporate, Sovereign and Bank
Exposures ...................................................................... 122
Risk-Weighted Assets for Retail Exposures ................... 126
Risk-Weighted Assets for Equity Exposures .................. 128
Risk-Weighted Assets for Purchased Receivables ......... 132
Risk-Weighted Assets for Leasing .................................. 137
B.3.6 CALCULATION OF MINIMUM CAPITAL REQUIREMENT
....................................................................................... 138
Regulatory Capital .......................................................... 138
Calculation of Expected Losses ..................................... 139
Calculation of Provisions ................................................ 140
Risk-Weighted Assets .................................................... 141
Parallel Calculation ......................................................... 141
Prudential Capital Floor .................................................. 141
B.3.7 MINIMUM REQUIREMENTS FOR THE IRB APPROACH
....................................................................................... 143
Rating System Design .................................................... 144
Rating System Operation ............................................... 156
Risk Estimation ............................................................... 161
Governance, Oversight and Use of Internal Ratings ...... 189
Validation of Rating Systems and Internal Estimates ..... 194
B.3.8 QUALIFICATION ........................................................... 202
Overview of Approval and Review Process .................... 202
General Qualification Process ........................................ 202
Home-Host Supervisory Issues ...................................... 204
Changes to IRB Implementation and Adoption ............... 205
PART C OPERATIONAL RISK .................................................... 207
C.1 INTRODUCTION ............................................................ 207
C.1.1 SOUND PRACTICES FOR OPERATIONAL RISK
MANAGEMENT ............................................................. 207
C.1.2 TOTAL OPERATIONAL RISK CAPITAL CHARGE ...... 208
C.2 THE BASIC INDICATOR APPROACH (BIA) ................ 209
C.3 THE STANDARDISED APPROACH AND ALTERNATIVE
STANDARDISED APPROACH ..................................... 212
C.3.1 THE STANDARDISED APPROACH (TSA) ................... 212
C.3.2 THE ALTERNATIVE STANDARDISED APPROACH
(ASA) ............................................................................. 216
PART D MARKET RISK .............................................................. 219
D.1 INTRODUCTION ............................................................ 219
Scope of the Capital Charges ......................................... 219
Approaches of Measuring Market Risks ......................... 220
Standardised Approach .................................................. 220
Internal Models Approach ............................................... 220
D.1.1 PRUDENT VALUATION GUIDANCE ............................ 221
Systems and Controls .................................................... 221
Valuation Methodologies ................................................ 222
Independent Price Verification ........................................ 223
Valuation Adjustments .................................................... 224
D.1.2 CLASSIFICATION OF FINANCIAL INSTRUMENTS .... 224
Trading Book Policy Statement ...................................... 224
Definition of Trading Book .............................................. 226
Classification of Specific Financial Instruments .............. 228
D.1.3 TREATMENT OF MONEY MARKET INSTRUMENTS IN
TRADING BOOK ........................................................... 228
Controls to Prevent Regulatory Capital Arbitrage ........... 229
Treatment of Hedging Positions ..................................... 230
D.1.4 TREATMENT OF COUNTERPARTY CREDIT RISK IN
THE TRADING BOOK ................................................... 232
Credit Derivatives ........................................................... 233
D.2 THE STANDARDISED MARKET RISK APPROACH.... 234
D.2.1 INTEREST/PROFIT RATE RISKS ................................. 234
Specific Risk ................................................................... 235
Specific Risk Capital Charges for Issuer Risk ................ 235
Specific Risk Capital Charges for Positions Hedged by
Credit Derivatives ........................................................... 237
General Interest/Profit Rate Risk .................................... 239
Offsetting of Matched Positions ...................................... 240
Maturity Method .............................................................. 240
Vertical Disallowance ..................................................... 241
Horizontal Disallowance ................................................. 241
Duration Method ............................................................. 243
Treatment of Interest/Profit Rate Derivatives, Repo and
Reverse Repo Transactions ........................................... 244
Example 1: Calculation of General Risk (Maturity Method)
for Interest/Profit Rate Related Financial Instruments .... 250
D.2.2 EQUITY POSITION RISK .............................................. 253
Specific and General Risk .............................................. 253
Specific Risk ................................................................... 253
General Risk ................................................................... 254
Treatment of Equity Derivatives ..................................... 256
Offsetting of Matched Equity Derivative Positions .......... 256
Arbitrage ......................................................................... 257
Example 2: Calculation of Equity Risk for Equity Arbitrage
Strategies ....................................................................... 258
D.2.3 FOREIGN EXCHANGE RISK (INCLUDING GOLD AND
SILVER POSITIONS) ..................................................... 260
The Treatment of Structural Positions ............................ 260
Measuring the Exposure in a Single Currency ............... 261
The Treatment of Interest/Profit, Other Income and
Expenses in Foreign Currency ....................................... 262
Measuring the Foreign Exchange Risk in a Portfolio of
Foreign Currency Positions ............................................ 263
D.2.4 COMMODITIES RISK .................................................... 264
Simplified Approach........................................................ 266
Maturity Ladder Approach .............................................. 266
Models for Measuring Commodities Risk ....................... 268
Example 3: Maturity Ladder Approach for Commodities
Risk ................................................................................ 269
D.2.5 TREATMENT OF OPTIONS .......................................... 272
Underlying Position Approach ........................................ 272
Simplified Approach........................................................ 274
Delta-Plus Method .......................................................... 275
Scenario Approach ......................................................... 278
Example 4: Delta-Plus Methods for Options ................... 280
Example 5: The Scenario Approach for Options ............ 286
D.3 INTERNAL MODELS APPROACH................................ 290
D.3.1 COMBINATION OF INTERNAL MODELS AND THE
STANDARDISED MARKET RISK MEASUREMENT
APPROACH ................................................................... 291
D.3.2 QUALITATIVE STANDARDS ........................................ 293
D.3.3 QUANTITATIVE STANDARDS ..................................... 296
D.3.4 SPECIFICATION OF MARKET RISK FACTORS .......... 298
D.3.5 MODELLING OF SPECIFIC RISK ................................. 301
D.3.6 STRESS TESTING......................................................... 305
D.3.7 MODEL VALIDATION STANDARDS ............................ 308
D.3.8 MODEL REVIEW ........................................................... 310
D.3.9 FRAMEWORK FOR THE USE OF BACK TESTING..... 310
PART E LARGE EXPOSURE RISK REQUIREMENTS ............... 319
E.1 LERR FOR BANKING INSTITUTIONS .......................... 319
E.2 LERR FOR INVESTMENT BANKS ............................... 320
PART F SECURITISATION FRAMEWORK ................................ 321
F.1 INTRODUCTION ............................................................ 321
F.2 OPERATIONAL REQUIREMENTS FOR CAPITAL
RELIEF ........................................................................... 323
F.2.1 Operational Requirements for Traditional
Securitisations .............................................................. 324
F.2.2 Operational Requirements for Synthetic Securitisations
....................................................................................... 325
F.3 STANDARDISED APPROACH FOR SECURITISATION
EXPOSURES ................................................................. 327
F.3.1 TREATMENT OF ON-BALANCE SHEET
SECURITISATION EXPOSURES .................................. 327
F.3.2 TREATMENT OF OFF-BALANCE SHEET
SECURITISATION EXPOSURES .................................. 329
F.3.3 TREATMENT OF OVERLAPPING EXPOSURES ......... 330
F.3.4 TREATMENT OF COUNTERPARTY CREDIT RISK FOR
SECURITISATION EXPOSURES .................................. 330
F.3.5 TREATMENT OF SECURITISATION OF REVOLVING
UNDERLYING EXPOSURES WITH EARLY
AMORTISATION PROVISIONS .................................... 331
F.3.6 TREATMENT OF CREDIT RISK MITIGATION FOR
SECURITISATION EXPOSURES .................................. 336
F.4 INTERNAL RATINGS-BASED APPROACH FOR
SECURITISATION EXPOSURES .................................. 337
F.5 OTHER OPERATIONAL REQUIREMENTS .................. 338
F.5.1 OPERATIONAL REQUIREMENTS AND TREATMENT OF
CLEAN-UP CALLS ........................................................ 338
F.5.2 TREATMENT FOR IMPLICIT SUPPORT ...................... 339
F.5.3 ELIGIBLE OFF-BALANCE SHEET SECURITISATION
EXPOSURES ................................................................. 341
F.5.4 REQUIREMENTS FOR USE OF EXTERNAL RATINGS
....................................................................................... 343
APPENDICES 346
Appendix I Areas of National Discretion ....................................... 346
Appendix II Eligibility Criteria for External Credit Assessment
Institution (ECAI) Recognition .................................... 353
Appendix III Risk Weights and Rating Categories .......................... 359
Appendix IV Summary of Risk Weights for Loans Secured by
Residential Mortgages ................................................. 363
Appendix V Definition of Default ..................................................... 364
Appendix Va Diagrammatic Illustration of Re-ageing via
Restructuring ............................................................ 367
Appendix VI Illustration on Risk-Weighted Asset (RWA) Calculation
for Defaulted Exposures and Exposures Risk-Weighted
at 150% .......................................................................... 368
Appendix VII Minimum Requirements on Supervisory Slotting
Criteria Method .......................................................... 370
Appendix VIIa Supervisory Slotting Criteria for Specialised
Lending/Financing Exposures ............................... 375
Appendix VIII Counterparty Credit Risk and Current Exposure
Method ...................................................................... 395
Appendix VIIIa Sample Computation of the Capital Requirement
and Exposure at Default (EAD) for a Portfolio of
Derivative Contracts .............................................. 403
Appendix VIIIb “Add-on” Factors for Derivatives Contracts ...... 404
Appendix VIIIc Example for Calculation of Residual Maturity (for
Forward Rate Agreements and Over-The-Counter
Interest Rate Contracts of Similar Nature which are
Settled in Cash on Start Date) ............................... 407
Appendix VIIId Discount Factor and Range of Residual Maturity
408
Appendix IX Capital Treatment for Failed Trades and Non-DvP
Transactions ................................................................. 409
Appendix X List of Recognised Exchanges* .................................. 413
Appendix XI Recognition Criteria for Physical Collateral Used For
Credit Risk Mitigation Purposes of Islamic Banking
Exposures ..................................................................... 415
Appendix XII Summary Table of Gross Income Computation ..... 421
Appendix XIII Mapping of Business Lines ..................................... 423
Appendix XIV Illustration of the Offsetting Rules Between Negative
and Positive OR Capital Charge in Any Business
Lines ......................................................................... 424
Appendix XV Illustration of Computation of Exposures with Credit
Risk Mitigation Effects ............................................. 425
Appendix XVI Information Requirements for Application to Adopt
the Internal Ratings Based Approach for Credit Risk
.................................................................................. 430
Appendix XVII Information Requirements for Application to Adopt
the Internal Models Approach for Market Risk .... 433
Appendix XVIII Illustration of Computation of Large Exposure Risk
Requirement ........................................................... 439
Appendix XIX Capital Treatment for Sell and Buyback Agreement
(SBBA)/ Reverse SBBA Transactions .................... 441
Appendix XX Securitisation Framework – Definitions and General
Terminology .............................................................. 444
Appendix XXI Legal and Regulatory Requirements ..................... 450
Appendix XXII IRB Coverage .......................................................... 454
Appendix XXIII Assessment of Credit Risk based on Shariah
Contracts ................................................................ 456
Appendix XXIV The “Look-Through” Approach for Specific and
Loss-Bearing Fund Placement ............................. 468
Appendix XXV Transitional Arrangements and Approval Process ...
................................................................................. 471
Appendix XXVI Credit Conversion Factors for Off-Balance Sheet
Items under the IRB Approach ............................. 476
Appendix XXVII Illustrative IRB Risk Weights ............................... 478
Appendix XXVIII Potential Evidence of Likely Compliance with the
Use Test ............................................................... 481
Appendix XXIX Data-Enhancing and Benchmarking Tools ......... 482
Appendix XXX Illustration on the treatment of underwriting
exposures ............................................................... 486