Section 10: Requirements for Recognition of Leasing
No: 44047144
Date(g): 27/12/2022 | Date(h): 4/6/1444
Status: In-Force
16.145
Leases other than those that expose the bank to residual value risk (see paragraph 16.146) will be accorded the same treatment as exposures collateralized by the same type of collateral. The minimum requirements for the collateral type must be met (commercial or residential real estate or other collateral). In addition, the bank must also meet the following standards:
(1)
Robust risk management on the part of the lessor with respect to the location of the asset, the use to which it is put, its age, and planned obsolescence;
(2)
A robust legal framework establishing the lessor’s legal ownership of the asset and its ability to exercise its rights as owner in a timely fashion; and
(3)
The difference between the rate of depreciation of the physical asset and the rate of amortization of the lease payments must not be so large as to overstate the credit risk mitigation attributed to the leased assets.
16.146
Leases that expose the bank to residual value risk will be treated in the following manner. Residual value risk is the bank’s exposure to potential loss due to the fair value of the equipment declining below its residual estimate at lease inception.
(1)
The discounted lease payment stream will receive a risk weight appropriate for the lessee’s financial strength (PD) and supervisory or own-estimate of LGD, whichever is appropriate.
