Minimum Capital Requirements for Credit Risk

A bank may use the net exposure of loans and deposits as the basis for its capital adequacy calculation in accordance with the formula in paragraph 9.46 , when the bank: (1) Has a well-founded legal basis for concluding that the netting or offsetting agreement is enforceable in each relevant jurisdiction regardless of whether the counterparty is insolvent or bankrupt; (2) Is able at any time to determine those assets and liabilities with the same counterparty that are subject to the netting agreement; (3) Monitors and controls its roll-off risks; and (4) Monitors and controls the relevant exposures on a net basis, 9.68 When calculating the net exposure described in the paragraph above, assets (loans) are treated as exposure and liabilities (deposits) as collateral. The haircuts are zero except when a currency mismatch exists. A 10-business day holding period applies when daily mark-to-market is conducted. For on-balance sheet netting, the requirements in paragraphs 9.49, 9.58 and 9.10 to 0 must be applied. Guarantees and Credit Derivatives Operational requirements for guarantees and credit derivatives 9.69 If conditions set below are met, banks can substitute the risk weight of the counterparty with the risk weight of the guarantor. 9.70 A guarantee (counter-guarantee) or credit derivative must satisfy the following requirements: (1) it represents a direct claim on the protection provider; (2) it is explicitly referenced to specific exposures or a pool of exposures, so that the extent of the cover is clearly defined and incontrovertible; (3) other than non-payment by a protection purchaser of money due in respect of the credit protection contract it is irrevocable; (4) there is no clause in the contract that would allow the protection provider unilaterally to cancel the credit cover, change the maturity agreed ex post, or that would increase the effective cost of cover as a result of deteriorating credit quality in the hedged exposure; (5) it must 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 underlying counterparty fails to make the payment(s) due. 9.71 In the case of maturity mismatches, the amount of credit protection that is provided must be adjusted in accordance with paragraphs 9.10 to 0. Specific operational requirements for guarantees 9.72 In addition to the legal certainty requirements in paragraph 9.9 , in order for a guarantee to be recognized, the following requirements must be satisfied: (1) On the qualifying default/non-payment of the counterparty, the bank may in a timely manner pursue the guarantor for any monies outstanding under the documentation governing the transaction. The guarantor may make one lump sum payment of all monies under such documentation to the bank, or the guarantor may assume the future payment obligations of the counterparty covered by the guarantee. The bank must have the right to receive any such payments from the guarantor without first having to take legal action in order to pursue the counterparty for payment. (2) The guarantee is an explicitly documented obligation assumed by the guarantor. (3) Except as noted in the following sentence, the guarantee covers all types of payments the underlying counterparty is expected to make under the documentation governing the transaction, for example notional amount, margin payments, etc. Where a guarantee covers payment of principal only, interests and other uncovered payments must be treated as an unsecured amount in accordance with the rules for proportional cover described in paragraph 9.79. Specific operational requirements for credit derivatives