Minimum Capital Requirements for Credit Risk

For collateralized OTC transactions, exchange traded derivatives and long settlement transactions, banks may use the standardized approach for counterparty credit risk ( chapter 6 ) or the internal models method (chapter 7) in The Counterparty Credit Risk (CCR) Framework to calculate the exposure amount, in accordance with paragraphs 9.65 to 9.66 . On-Balance Sheet Netting 9.21 Where banks have legally enforceable netting arrangements for loans and deposits that meet the conditions in 9.67 and 9.68 they may calculate capital requirements on the basis of net credit exposures as set out in that paragraph. Guarantees and Credit Derivatives 9.22 Where guarantees or credit derivatives fulfil the minimum operational conditions set out in paragraphs 9.69 to 9.71 , banks may take account of the credit protection offered by such credit risk mitigation techniques in calculating capital requirements. 9.23 A range of guarantors and protection providers are recognized and a substitution approach applies for capital requirement calculations. Only guarantees issued by or protection provided by entities with a lower risk weight than the counterparty lead to reduced capital charges for the guaranteed exposure, since the protected portion of the counterparty exposure is assigned the risk weight of the guarantor or protection provider, whereas the uncovered portion retains the risk weight of the underlying counterparty. 9.24 Detailed conditions and operational requirements for guarantees and credit derivatives are given in paragraphs 9.69 to 9.83 . 40 Alternatively, banks with appropriate supervisory approval may instead use the internal models method in the Counterparty Credit Risk (CCR) Framework to determine the exposure amount, taking into account collateral. Collateralized Transactions General requirements 9.25 Before capital relief is granted in respect of any form of collateral, the standards set out below in paragraphs 9.26 ,9.31 must be met, irrespective of whether the simple or the comprehensive approach is used. Banks that lend securities or post collateral must calculate capital requirements for both of the following: (i) the credit risk or market risk of the securities, if this remains with the bank; and (ii) the counterparty credit risk arising from the risk that the borrower of the securities may default. 9.26 The legal mechanism by which collateral is pledged or transferred must ensure that the bank has the right to liquidate or take legal possession of it, in a timely manner, in the event of the default, insolvency or bankruptcy (or one or more otherwise-defined credit events set out in the transaction documentation) of the counterparty (and, where applicable, of the custodian holding the collateral). Additionally, banks must take all steps necessary to fulfil those requirements under the law applicable to the bank’s interest in the collateral for obtaining and maintaining an enforceable security interest, e.g. by registering it with a registrar, or for exercising a right to net or set off in relation to the title transfer of the collateral. 9.27 Banks must have clear and robust procedures for the timely liquidation of collateral to ensure that any legal conditions required for declaring the default of the counterparty and liquidating the collateral are observed, and that collateral can be liquidated promptly.