Minimum Capital Requirements for Credit Risk

The guarantee must be evidenced in writing, non-cancellable on the part of the guarantor, in force until the debt is satisfied in full (to the extent of the amount and tenor of the guarantee) and legally enforceable against the guarantor in a jurisdiction where the guarantor has assets to attach and enforce a judgement. The guarantee must also be unconditional; there should be no clause in the protection contract outside the direct control of the bank that could prevent the protection provider from being obliged to pay out in a timely manner in the event that the original counterparty fails to make the payment(s) due. However, under the advanced IRB approach, guarantees that only cover loss remaining after the bank has first pursued the original obligor for payment and has completed the workout process may be recognized. 16.105 In case of guarantees where the bank applies the standardized approach to the covered portion of the exposure, the scope of guarantors and the minimum requirements as under the standardized approach apply. 16.106 A bank must have clearly specified criteria for adjusting borrower grades or LGD estimates (or in the case of retail and eligible purchased receivables, the process of allocating exposures to pools) to reflect the impact of guarantees for regulatory capital purposes. These criteria must be as detailed as the criteria for assigning exposures to grades consistent with paragraphs 16.25 and 16.26 , and must follow all minimum requirements for assigning borrower or facility ratings set out in this document. 16.107 The criteria must be plausible and intuitive, and must address the guarantor’s ability and willingness to perform under the guarantee. The criteria must also address the likely timing of any payments and the degree to which the guarantor’s ability to perform under the guarantee is correlated with the borrower’s ability to repay. The bank’s criteria must also consider the extent to which residual risk to the borrower remains, for example a currency mismatch between the guarantee and the underlying exposure. 16.108 In adjusting borrower grades or LGD estimates (or in the case of retail and eligible purchased receivables, the process of allocating exposures to pools), banks must take all relevant available information into account. Requirements for assessing effect of credit derivatives: standards for corporate and sovereign exposures where own estimates of LGD are used and standards for retail exposures 16.109 The minimum requirements for guarantees are relevant also for single-name credit derivatives. Additional considerations arise in respect of asset mismatches. The criteria used for assigning adjusted borrower grades or LGD estimates (or pools) for exposures hedged with credit derivatives must require that the asset on which the protection is based (the reference asset) cannot be different from the underlying asset, unless the conditions outlined in the foundation approach are met. 16.110 In addition, the criteria must address the payout structure of the credit derivative and conservatively assess the impact this has on the level and timing of recoveries. The bank must also consider the extent to which other forms of residual risk remain. Requirements for assessing effect of guarantees and credit derivatives: standards for banks using foundation LGD estimates 16.111 The minimum requirements outlined in paragraphs 16.99 to 16.110 apply to banks using the foundation LGD estimates with the following exceptions: (1) The bank is not able to use an ‘LGD-adjustment’ option; and (2) The range of eligible guarantees and guarantors is limited to those outlined in paragraph 12.28 . Requirements specific to estimating PD and LGD (or EL) for qualifying purchased receivables 16.112 The following minimum requirements for risk quantification must be satisfied for any purchased receivables (corporate or retail) making use of the top-down treatment of default risk and/or the IRB treatments of dilution risk.