Minimum Capital Requirements for Credit Risk

General Security Agreements, and other forms of floating charge, can provide the lending bank with a registered claim over a company’s assets. In cases where the registered claim includes both assets that are not eligible as collateral under the foundation IRB and assets that are eligible as collateral under the foundation IRB, the bank may recognize the latter. Recognition is conditional on the claims meeting the operational requirements set out in paragraphs 16.127 to 16.143. 68 In exceptional circumstances for well-developed and long-established markets, mortgages on office and/or multi-purpose commercial premises and/or multi-tenanted commercial premises may have the potential to receive recognition as collateral in the corporate portfolio. This exceptional treatment will be subject to very strict conditions. In particular, two tests must be fulfilled, namely that (i) losses stemming from commercial real estate lending up to the lower of 50% of the market value or 60% of loan-to value based on mortgage-lending- value must not exceed 0.3% of the outstanding loans in any given year; and that (ii) overall losses stemming from commercial real estate lending must not exceed 0.5% of the outstanding loans in any given year. This is, if either of these tests is not satisfied in a given year, the eligibility to use this treatment will cease and the original eligibility criteria would need to be satisfied again before it could be applied in the future. Countries applying such a treatment must publicly disclose that these are met. Section 10: Requirements for Recognition of Leasing 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. (2) The residual value will be risk-weighted at 100%. Section 11: Disclosure Requirements 16.147 In order to be eligible for the IRB approach, banks must meet the disclosure requirements set out in Pillar 3 Disclosure Requirements Framework . These are minimum requirements for use of IRB: failure to meet these will render banks ineligible to use the relevant IRB approach. 17. Transition Phase-in for Standardized Approach Treatment of Equity Exposures 17.1 The risk weight treatment described in paragraph 7.50 will be subject to a five-year linear phase-in arrangement from 1 January 2023. For speculative unlisted equity exposures, the applicable risk weight will start at 100% and increase by 60 percentage points at the end of each year until the end of Year 5. For all other equity holdings, the applicable risk weight will start at 100% and increase by 30 percentage points at the end of each year until the end of Year 5. Phase-in for the Removal of the Internal Ratings-Based Approach for Equity Exposures