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Application of the LTA and MBA to Banks Using the IRB Approach
No: 44047144
Date(g): 27/12/2022 | Date(h): 4/6/1444
Status: In-Force
24.15
Equity investments in funds that are held in the banking book must be treated in a consistent manner based on 24.1 to Error! Reference source not found., as adjusted by Error! Reference source not found. to Error! Reference source not found.
24.16
Under the LTA:
(1)
Banks using an IRB approach must calculate the IRB risk components (i.e. PD of the underlying exposures and, where applicable, LGD and EAD) associated with the fund’s underlying exposures (except where the underlying exposures are equity exposures, in respect of which the standardized approach must be used as required by 10.34).
(2)
Banks using an IRB approach may use the standardized approach for credit risk (chapter 7) when applying risk weights to the underlying components of funds if they are permitted to do so under the provisions relating to the adoption of the IRB approach set out in chapter 10 in the case of directly held investments. In addition, when an IRB calculation is not feasible(e.g. the bank cannot assign the necessary risk components to the underlying exposures in a manner consistent with its own underwriting criteria), the methods set out in Error! Reference source not found. below must be used.
(3)
Banks may rely on third-party calculations for determining the risk weights associated with their equity investments in funds (i.e. the underlying risk weights of the exposures of the fund) if they do not have adequate data or information to perform the calculations themselves. In this case, the third party must use the methods set out in Error! Reference source not found. below, with the applicable risk weight set 1.2 times higher than the one that would be applicable if the exposure were held directly by the bank.
24.17
In cases when the IRB calculation is not feasible (Error! Reference source not found. (2) above), a third-party is performing the calculation of risk weights (Error! Reference source not found. (3) above) or when the bank is using the MBA the following methods must be used to determine the risk weights associated with the fund’s underlying exposures:
(1)
For securitization exposures, the Securitization External-ratings-based approach (SEC-ERBA) set out in chapter 20; the Standardized approach (SEC-SA) set out in chapter 19, if the bank is not able to use the SECERBA; or a 1250% risk weight where the specified requirements for using the SEC-ERBA or SEC-SA are not met; and
(2)
The standardized approach (chapter 7) for all other exposures.
