Minimum Capital Requirements for Credit Risk

Effectiveness of systems for controlling collateral, credit availability, and cash: the bank must have clear and effective policies and procedures governing the control of receivables, credit, and cash. In particular: (1) Written internal policies must specify all material elements of the receivables purchase programme, including the advancing rates, eligible collateral, necessary documentation, concentration limits, and how cash receipts are to be handled. These elements should take appropriate account of all relevant and material factors, including the seller’s/servicer’s financial condition, risk concentrations, and trends in the quality of the receivables and the seller’s customer base. (2) Internal systems must ensure that funds are advanced only against specified supporting collateral and documentation (such as servicer attestations, invoices, shipping documents, etc.). 16.119 Compliance with the bank’s internal policies and procedures: given the reliance on monitoring and control systems to limit credit risk, the bank should have an effective internal process for assessing compliance with all critical policies and procedures, including: (1) Regular internal and/or external audits of all critical phases of the bank’s receivables purchase programme. (2) Verification of the separation of duties: (a) between the assessment of the seller/servicer and the assessment of the obligor; and (b) between the assessment of the seller/servicer and the field audit of the seller/servicer. 16.120 A bank’s effective internal process for assessing compliance with all critical policies and procedures should also include evaluations of back office operations, with particular focus on qualifications, experience, staffing levels, and supporting systems. 65 Banks are not required to produce their own estimates of PD for exposures subject to the supervisory slotting approach. 66 A specific type of CCF, where predicted additional drawings in the lead- up to default are expressed as a percentage of the undrawn limit that remains available to the obligor under the terms and conditions of a facility, ie EAD=B0=Bt+ULF[Lt –Bt], where B0 = facility balance at date of default; Bt = current balance (for predicted EAD) or balance at reference date (for observed EAD); Lt = current limit (for predicted EAD) or limit at reference date (for realized/observed EAD). 67 A limit factor (LF) is a specific type of CCF, where the predicted balance at default is expressed as a percentage of the total limit that is available to the obligor under the terms and conditions of a credit facility, ie EAD=B0= LF[Lt], where B0 = facility balance at date of default; Bt = current balance (for predicted EAD) or balance at reference date (for observed EAD); Lt = current limit (for predicted EAD) or limit at reference date (for realized/observed EAD). A balance factor (BF) is a specific type of CCF, where the predicted balance at default is expressed as a percentage of the current balance that has been drawn down under a credit facility, i.e. EAD=B0=BF[Bt]. An additional utilization factor (AUF) is a specific type of CCF, where predicted additional drawings in the lead-up to default are expressed as a percentage of the total limit that is available to the obligor under the terms and conditions of a credit facility, i.e. EAD = B0 = Bt + AUF[Lt]. Section 8: Validation of Internal Estimates 16.121 Banks must have a robust system in place to validate the accuracy and consistency of rating systems, processes, and the estimation of all relevant risk components. A bank must demonstrate to its supervisor that the internal validation process enables it to assess the performance of internal rating and risk estimation systems consistently and meaningfully.