Overview of Credit Risk Mitigation Techniques
| No: 44047144 | Date(g): 27/12/2022 | Date(h): 4/6/1444 | Status: In-Force |
Effective from Jan 01 2023 - Dec 31 2022
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Collateralized Transactions
| 9.16 | A collateralized transaction is one in which: | |
| (1) | banks have a credit exposure or a potential credit exposure; and | |
| (2) | that credit exposure or potential credit exposure is hedged in whole or in part by collateral posted by a counterparty or by a third party on behalf of the counterparty. | |
| 9.17 | Where banks take eligible financial collateral, they may reduce their regulatory capital requirements through the application of CRM techniques40. | |
| 9.18 | Banks may opt for either: | |
| (1) | The simple approach, which replaces the risk weight of the counterparty withthe risk weight of the collateral for the collateralized portion of the exposure(generally subject to a 20% floor); or | |
| (2) | The comprehensive approach, which allows a more precise offset of collateral against exposures, by effectively reducing the exposure amount bya volatility-adjusted value ascribed to the collateral. | |
| 9.19 | Detailed operational requirements for both the simple approach and comprehensive approach are given in paragraph 9.32 to 9.64.Banks may operate under either, but not both, approaches in the banking book. | |
| 9.20 | For collateralized OTC transactions, exchange traded derivatives and long settlement transactions, banks may use the standardized approach for counterparty credit risk (chapter 6) or the internal models method (chapter 7) in The Counterparty Credit Risk (CCR) Framework to calculate the exposure amount, in accordance with paragraphs 9.65 to 9.66. | |
On-Balance Sheet Netting
| 9.21 | Where banks have legally enforceable netting arrangements for loans and deposits that meet the conditions in 9.67 and 9.68 they may calculate capital requirements on the basis of net credit exposures as set out in that paragraph. | |||
Guarantees and Credit Derivatives
| 9.22 | Where guarantees or credit derivatives fulfil the minimum operational conditions set out in paragraphs 9.69 to 9.71, banks may take account of the credit protection offered by such credit risk mitigation techniques in calculating capital requirements. | |||
| 9.23 | A range of guarantors and protection providers are recognized and a substitution approach applies for capital requirement calculations. Only guarantees issued by or protection provided by entities with a lower risk weight than the counterparty lead to reduced capital charges for the guaranteed exposure, since the protected portion of the counterparty exposure is assigned the risk weight of the guarantor or protection provider, whereas the uncovered portion retains the risk weight of the underlying counterparty. | |||
| 9.24 | Detailed conditions and operational requirements for guarantees and credit derivatives are given in paragraphs 9.69 to 9.83. | |||
40 Alternatively, banks with appropriate supervisory approval may instead use the internal models method in the Counterparty Credit Risk (CCR) Framework to determine the exposure amount, taking into account collateral.