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  • 8. Purchased Receivables

    • 8.1. Definition of Eligible Purchased Receivables

      Eligible purchased receivables1 are divided into retail and corporate receivables as defined below.

      Retail receivables

      Purchased retail receivables, provided the purchasing bank complies with the IRB rules for retail exposures, are eligible for the top-down approach as permitted within the existing standards for retail exposures (i.e. estimation of risk components on a pooled basis). The banks should also apply the minimum operational requirements as set out in Section 8.2 below and “Minimum Requirements for Risk Quantification under IRB Approach”.

      Corporate receivables

      In general, for purchased corporate receivables, banks are expected to assess the default risk of individual obligors as specified in subsection 4.1 of the IRB approaches consistent with the treatment of other corporate exposures. Banks are not allowed to use the top-down approach.


      1 Such receivables include both self-liquidating debit arising from the sale of goods or services linked to a commercial transaction and general amounts owned by buyers, suppliers, renters, governmental authorities, or other non-affiliated parties not related to the sale of goods or services linked to a commercial transaction. Eligible receivables do not include those associated with securitisations.

    • 8.2. Rules for Purchased Receivables

      Risk-weighted assets for default risk

      For receivables belonging unambiguously to one asset class, the risk weight for default risk is based on the risk-weight function applicable to that particular exposure type, as long as banks can meet the qualification standards for this particular risk-weight function. For example, if banks cannot comply with the standards for QRRE (defined in paragraph 2.5.7 of section 5.0 above), they should use the risk-weight function for other retail exposures. For hybrid pools containing a mixture of exposure types, if the purchasing bank cannot separate the exposures by type, the risk-weight function producing the highest capital requirements for the exposure types in the receivable pool applies.

      Purchased retail receivables

      For purchased retail receivables, the purchasing bank should meet the risk quantification standards for retail exposures but can utilize external and internal reference data to estimate the PDs and LGDs. The estimates for PD and LGD (orEL) should be calculated for the receivables on a stand-along basis; that is, without regard to any assumption of recourse or guarantees from the seller or other parties.

      Foundation IRB Treatment (FIRB)

      If the purchasing bank is unable to decompose EL into its PD and LGD components in a reliable manner, the risk weight is determined from the corporate risk-weight function using the following specifications: if the bank can demonstrate that the exposures are exclusively senior claims to corporate borrowers, an LGD of 45% can be used. PD will be calculated by dividing the EL using this LGD. EAD will be calculated as the outstanding amount minus the capital charge for dilution prior to credit risk mitigation (KDilution). Otherwise, PD is the bank’s estimate of EL; LGD will be 100%; and EAD is the amount outstanding minus KDilution. EAD for a revolving purchase facility is the sum of the current amount of receivables purchased plus 75% of any undrawn purchase commitments minus KDilution. If the purchasing bank is able to estimate PD in a reliable manner, the risk weight is determined from the corporate risk-weight functions according to the specifications for LGD, M and the treatment of guarantees under the foundation approach as given in paragraphs 287 to 296, 299, 300 to 305, and 318, International Convergence of Capital Measurement and Capital Standards – June 2006.

      (Refer para 366, International Convergence of Capital Measurement and Capital Standards – June 2006)

      Advance IRB Treatment (AIRB)

      If the purchasing bank can estimate either the pool’s default-weighted average loss rates given default (as defined in paragraph 468) or average PD in a reliable manner, the bank may estimate the other parameter based on an estimate of the expected long-run loss rate. The bank may (i) use an appropriate PD estimate to infer the long-run default-weighted average loss rate given default, or (ii) use a long-run default-weighted average loss rate given default to infer the appropriate PD. In either case, it is important to recognize that the LGD used for the IRB capital calculation for purchased receivables cannot be less than the long-run default-weighted average loss rate given default and must be consistent with the concepts defined in paragraph 468. The risk weight for the purchased receivables will be determined using the bank‘s estimated PD and LGD as inputs to the corporate risk-weight function. Similar to the foundation IRB treatment, EAD will be the amount outstanding minus KDilution. EAD for a revolving purchase facility will be the sum of the current amount of receivables purchased plus 75% of any undrawn purchase commitments minus KDilution (thus, banks using the advanced IRB approach will not be permitted to use their internal EAD estimates for undrawn purchase commitments).

      (Refer para 367, International Convergence of Capital Measurement and Capital Standards – June 2006)

      For drawn amounts, M will equal the pool’s exposure-weighted average effective maturity (as defined in paragraphs 320 to 324, International Convergence of Capital Measurement and Capital Standards – June 2006). This same value of M will also be used for undrawn amounts under a committed purchase facility provided the facility contains effective covenants, early amortization triggers, or other features that protect the purchasing bank against a significant deterioration in the quality of the future receivables it is required to purchase over the facility‘s term. Absent such effective protections, the M for undrawn amounts will be calculated as the sum of (a) the longest-dated potential receivable under the purchase agreement and (b) the remaining maturity of the purchase facility.

      (Refer para 368, International Convergence of Capital Measurement and Capital Standards – June 2006)

      Purchased corporate receivables

      For purchased corporate receivables, the purchasing bank should apply the risk quantification standards for corporate exposures under the bottom-up approach.

      Dilution risk and treatment of purchase price discounts.

      For the treatment of dilution risk and purchase price discounts under Basel II, please refer to Sections 369 to 372 to Basel II document of June, 2004.