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TABLE OF CONTENTS:
Section
Section 1.
Section 2.
Section 3.
3.1.
3.2.
3.3.
3.4.
Section 4.
4.1.
4.2.
4.3.
4.4.
Section 5.
5.1.
5.2.
5.3.
5.4.
5.5.
Section 6.
6.1.
6.2.
6.3.
6.4.
6.5.
Section 7.
7.1
7.2
7.3
7.4
7.5.
7. 6.
Section 8.
8.1.
8.2.
8.3
8.4
8.5.
8.6.
8.7.
Section 9.
Section 10.
Section 11.
Section name
Application
Asset categorization
Rating system
 Assignment of exposures to rating systems
 Definition of default
 Ratings Criteria
 Overrides
PD estimation
 Data
 Methodology
 Calibration
 Accuracy of Estimates
LGD estimation
 Data
 Methodology
 Parameter Estimation
 Accuracy of Estimates
 Downturn LGD
EAD estimation
 Data
 Methodology
 Parameter Estimation
 Accuracy of Estimates
 Downturn EAD
Criteria for the recognition of credit risk mitigation instruments
- On-balance sheet netting
- Collateral
-
Page number
Guarantees
Credit Derivative Instruments
- Maturity Mismatches
- Double default
Process and control environment
 Independent validation
 Controls over the use of models
 Data maintenance
 Credit policy
 Documentation
 Controls relating to overdraft facilities
 Controls relating to unutilised facilities
Use test
Experience test
Stress Testing
2
Duplication of work performed by banks’ internal audit


The long-form review (LFR) currently includes the re-performance of procedures already performed by the banks’ internal audit and independent
validation units.
This Office (SARB) has accordingly requested the external auditors to make every effort to avoid duplicating work. However, substantive and reperformance tests should still be done and reliance may be placed on internal audit and independent validation work performed by the bank to minimise
the duplication of work. The external auditors should apply the International Standard on Auditing 610-principles to assess the level of reliance it can place
on the internal work performed by the bank. The degree of reliance that may be placed on the work done by the bank needs to be agreed on between the
external auditors and the bank. The external auditors should report to both this Office and the bank the level of reliance they have placed on work
performed by internal auditors and independent validation units. This report should include the effectiveness of these functions.
Reliance
Where possible, the attestation should be based on the review of statutory and regulatory audit papers and previous LFR completed which cover similar
processes and controls. Where reliance is placed on statutory or regulatory audits, or previous LFR workings, reference should be made to the audit reports
and/or LFR, and working papers and findings should be included as part of the LFR.
Attest procedure definitions





Obtain
Inspect
Walk through
Discuss
Confirm
: To get or acquire documentation or evidence to address the LFR procedure
: To scrutinize or critically examine a document to address the LFR procedure
: A step-by-step confirmation of the bank’s process or procedure through discussion and inspection to address the LFR procedure
: A conversation to address the LFR procedure
: To communicate with the bank to authenticate the LFR procedure
Sample Size
A random sample consisting of at least five exposures should be used in the relevant LFR attest procedures. However, where a sample of five is not satisfactory,
further testing should be performed, and a larger sample size should be selected to complete the attest procedure. The portfolio size, model segmentation and
the requirements of the attest procedure should be taken into account when selecting the sample size.
3
Regulation
1.
1.1
1.2
1.3
1.4
Application
Subject to the relevant provisions
of
regulation
38(2)
and
subregulation (20), a bank that
wishes to adopt the IRB approach
for the measurement of the bank’s
exposure to credit risk(a) shall obtain the prior written
approval of the Registrar; Should
the Registrar grant his/her
approval, the bank shall in addition
to the minimum requirements
relating to the Internal Ratings
Based (‘IRB’) approach specified in
subregulation
(11)(b)
below,
continuously comply with such
conditions as may be specified in
writing by the Registrar;
(b) shall calculate its exposure to
credit risk, at the discretion of the
bank, either in accordance with
the provisions of Method 1, as set
out in subregulations (11) and (12)
below, or Method 2, as set out in
subregulations (13) and (14)
below, or, subject to such
conditions as may be specified in
writing by the Registrar, a
combination of the said methods.
Criteria
Attest procedures
Model approval has been
obtained by the SARB.
1.1.1 Obtain the SARB approval
letter and document whether
model approval has been
obtained for the specific model
under review.
Bank practice and Findings
Management comments
1.1.2 Inspect the letter of
acceptance and document any
restrictions or limitations
imposed by the SARB.
For those areas for which
model approval has been
obtained (and which are
not excluded from the IRB
approach on the basis of
immateriality
–
see
below), capital for all
exposures is calculated
using the models.
(i) Subject to such conditions as
may be specified in writing by the
Registrar, a bank that adopted the
IRB approach for the calculation of
the bank’s exposure to credit risk
in respect of positions held in the
bank’s banking book shall apply
the said approach in respect of all
the bank’s material asset classes
and business units. (B2 p256) (PP
21 ND46, ND47, ND49, ND50)
Where the bank applies
the IRB approach, it is
applied to all material
asset classes and business
units.
(v) shall apply the IRB approach for
the measurement of the bank’s
exposure
relating
to
a
securitisation scheme, that is, a
bank shall not use the IRB
Where the bank applies
the IRB approach to its
exposure
to
a
securitisation scheme, it
also applies the IRB
The board has approved
asset classes and business
units excluded from the
foundation IRB approach
in accordance with the
approved
materiality
threshold.
1.2.1. For the specific model
under review, inspect the
reconciliation of the exposures
in the banking book (from
source systems) to what gets
rated through the model.
Obtain and document the
reasons for any differences
from management.
1.2.2. Obtain a listing from
management and document
the value of exposures for
which capital should be
determined using the IRB
approach, but which do not
map to the IRB models (i.e.
where capital is determined off
model).
1.3.1. From the inspection of
the reconciliation between
source system exposures to
what gets processed through
the model, and inspection of
board documentation, identify
and document all exposures
which are not subject to the
IRB approach.
1.4.1. Confirm through enquiry
from management that where
the bank applies the IRB
approach to its exposure to a
securitisation scheme, it also
4
Regulation
1.
Criteria
Attest procedures
Bank practice and Findings
Management comments
Application
approach for the measurement of
the bank’s exposure in respect of a
securitisation scheme unless the
bank obtained the prior written
approval of the Registrar to apply
the IRB approach for the
measurement of the bank’s
exposure to underlying credit
exposure, provided that the bank
shall in respect of the said
securitisation exposures comply
with the relevant requirements
specified in paragraph (b)(xii)
below. (B2 p606 to p643) (PP21
ND81, ND82)
approach
underlying
exposure.
to
the
credit
applies the IRB approach to the
underlying credit exposure.
5
Regulation
2
Criteria
Attest procedures
Bank practice and Findings
Management comments
Asset categorisation
6
Regulation
3
Rating system
Rating System Overview:
3.1
3.1.1
Criteria
Assignment of exposures to rating systems
(11)(b)(iv)(A)(i) A Bank that uses The bank has a documented process
multiple systems to support its for determining which exposures are
assessment of credit risk shall duly assigned to which rating systems;
document the rationale for assigning the policy has been consistently
a particular obligor to a particular applied.
rating system;
Where neighbouring models exist,
(11)(b)(iv)(A)(ii) A Bank that uses ensure that the routing rules assign
multiple systems to support its a particular obligor to a rating
assessment of credit risk shall duly system that best represents the
document the specific industries or
characteristics of the obligor and
market segments to which a particular
rating system
rating system applies;
Attest procedures
Bank practice and Findings
3.1.1.1. Confirm with management whether
multiple systems are used to support the
assessment of credit risk within the model
under review. Where applicable, inspect
whether the rationale for assigning a particular
obligor or specific industry / market segment is
duly documented by management and
document.
3.1.1.2. For a sample of exposures, inspect
whether the correct model/system has been
used. Where the incorrect model/system has
been used, inspect whether there is a
documented reason for the incorrect use.
3.1.1.3. Where the incorrect model/system has
been used without rationale, obtain and
document management’s reasons including
the impact of using an incorrect model/system.
3.2
3.2.1
Definition of default
(11)(b)(vi)(A)(iii) Unless specifically
otherwise provided, a bank shall in
the case of exposures to corporate
institutions, sovereigns or banks,
estimate a PD ratio in respect of each
internal borrower grade, which PD
estimate-(ii) shall be based on the
definition of default, specified in
regulation 67;
(13)(b)(v)(C)(iii) Unless specifically
otherwise provided in subregulation
13, a bank that adopted the advanced
IRB approach for the measurement of
the bank’s exposure to credit risk shall
estimate an appropriate LGD ratio in
respect of all relevant facilities and
asset classes, which LGD ratio shall be
based on the definition of default,
specified in regulation 67.
[(13)(b)(v)(D)
Unless
specifically
otherwise provided in sub-regulation
13, a bank that adopted the advanced
IRB approach for the measurement of
the bank’s exposure to credit risk shall
estimate an appropriate EAD amount
in respect of all relevant facilities and
asset classes.]
(vii) The EAD estimate shall be based
The bank calculates risk parameters
relative to a definition of default
that is in compliance with Regulation
67. The definition of default is
consistently applied between PD,
LGD and EAD models.
3.2.1.1. Inspect that the definition of default is
documented for the model under review and
that it meets regulation 67.
3.2.1.2. Through inspection of default flagging
rules confirm that the default definition and
the fields used are consistently applied to PD,
LGD and EAD.
7
Management comments
3
Regulation
Rating system
Criteria
Attest procedures
Bank practice and Findings
on the definition of default, specified
in regulation 67.
3.2.2
3.3
3.3.1
(11)(b)(vi)(D) When the status of a
previously
defaulted
exposure
subsequently changes, and as such no
longer constitutes a defaulted
exposure, the reporting Bank shall
rate the relevant obligor and estimate
the relevant LGD ratio in a manner
similar
to
a
non-defaulted
facility, provided that when the
relevant
exposure
subsequently
triggers one of the criteria relating to
default, which criteria are specified in
regulation 67, the relevant Bank shall
record a second default in respect of
the said exposure.
Rating criteria
(11)(b)(v)(A) Without derogating from
the provisions of subparagraphs (i) to
(iv) above, the rating and risk
estimation systems and processes of a
bank that adopted the IRB approach
for the measurement of the bank’s
exposure to credit risk in respect of
positions held in the bank’s banking
book- shall in the case of exposures to
corporate institutions, sovereigns or
banks, excluding any exposures
relating to specialised lending that
were mapped into the standardised
rating
categories
specified
in
paragraph (d)(iii)(C) below, have
separate and distinct dimensions
relating to188
Documentation
contains
clear
procedures
for
curing.
Circumstances under which curing is
allowed are clearly articulated. The
bank applies the documented curing
procedures consistently for PD, LGD
and EAD calculations in a manner in
line with regulatory requirements.
3.2.2.1. Inspect supporting documentation and
document the bank’s process and the
treatment of cured accounts.
The bank shall consider factors
relating to all of the following when
developing models within the rating
system:
(aa)
the
one
exposure
is
denominated in local currency whilst
the other exposure is denominated
in foreign currency
3.3.1.1. For a sample of obligors with multiple
exposures, inspect and document that a single
rating applies unless one of the following
criteria is met:
(bb) protection was obtained in the
form of a guarantee, which
protection resulted in an adjusted
borrower grade,
in which case separate exposures
may result in multiple grades in
respect of the same obligor.
(bb) protection was obtained in the form of
a guarantee, which protection resulted in an
adjusted borrower grade, in which case
separate exposures may result in multiple
grades in respect of the same obligor.
3.2.2.2. Select a sample of cured accounts and
confirm compliance with the bank’s
documented definition of cures.
3.2.2.3. Obtain a list from management where
counterparties have experienced multiple
defaults. Select a sample of counterparties and
confirm that multiple defaults have been
accurately recorded.
(aa) the one exposure is denominated in
local currency whilst the other exposure is
denominated in foreign currency
(i) the risk of borrower default, that is,
separate exposures to the same
obligor shall be assigned to the same
borrower grade, irrespective of any
differences in the nature of each
specific transaction unless(aa) the one exposure is denominated
in local currency whilst the other
exposure is denominated in foreign
currency; or
(bb) protection was obtained in the
form of a guarantee, which protection
resulted in an adjusted borrower
grade,
in which case separate exposures may
8
Management comments
3
3.3.2
3.3.3
3.4.
3.4.1
Regulation
Criteria
Attest procedures
Bank practice and Findings
Rating system
result in multiple grades in respect of
the same obligor.
(11)(b)(v)(E)(iv) Ratings definitions The set of rating factors and criteria 3.3.2.1 Obtain the criteria used in deal
and criteria shall be consistent with used in the IRB model framework sanctioning and pricing for the exposures
the bank’s internal lending standards.
should be consistent with the included in the model under review.
internal lending standards of the Through inspection of model development
bank. The internal lending standards documentation confirm that the criteria used
include the criteria used to in deal sanctioning and pricing were
differentiate risk of customers and considered for inclusion in the model.
the
criteria
underlying
the
sanctioning process
(11)(b)(v)(E)(vi) Without derogating
from the provisions of subparagraphs
(i) to (iv), the rating and risk
estimation systems and processes of a
bank that adopted the IRB approach
for the measurement of the bank’s
exposure to credit risk in respect of
positions held in the bank’s banking
book – shall make provision for
specific rating definitions and criteria
in order to assign exposures to
relevant risk grades, which definitions
and criteria shall periodically be
reviewed in order to ensure that the
definitions and criteria remain
relevant and current.
Overrides
The bank considers the relevance of
ratings criteria and definitions
periodically as part of their program
of work.
3.3.3.1 Inspect supporting documentation to
confirm that the relevance of ratings criteria
and definitions have periodically been
reviewed.
(11)(b)(v)(G)(viii) Statistical models
and mechanical methods to assign
ratings shall be subject to written
policies and procedures for human
review and judgment provided that
when human judgment is used to
override the model’s output, the bank
shall separately keep track of the
performance
of
the
relevant
exposure.
The bank has a written policy and
keeps track of any override to the
rating assigned. Where management
overrides play a role in the rating
process the bank will separately
track the performance of these
overrides.
3.4.1.1. Inspect supporting documentation and
enquire from management as to the degree to
which the specific rating model allows for
human judgment.
3.4.1.2 Inspect evidence to confirm that the
bank reviews the performance of exposures
that were subject to overrides.
3.4.1.3. Inspect evidence of the bank’s tracking
of the volume or amounts of overrides as well
as evidence of the rationale and implications of
the overrides and document.
3.4.1.4 For a sample of overrides, inspect that
the appropriate override and authorisation
processes have been followed in line with
policies and/or mandates.
9
Management comments
Regulation
4
PD Estimation
Model overview:
4.1
4.1.1
4.1.2
Data
(11)(b)(vi)(A)(i) Unless specifically
otherwise provided, a bank shall in
the case of exposures to corporate
institutions, sovereigns or banks,
estimate a PD ratio in respect of
each internal borrower grade,
which PD estimate - may be based
on one or more of the three
techniques
specified
below,
provided that the underlying
historical observation period shall
be a minimum period of five years
in respect of at least one of the said
techniques.
(11)(b)(vi)(A) Unless specifically
otherwise provided, a bank shall in
the case of exposures to corporate
institutions, sovereigns or banks,
estimate a PD ratio in respect of
each internal borrower grade,
which PD estimate –
(x) shall be based on a sufficient
number of exposures and data
periods that will ensure accurate
and robust PD estimates;
4.2
4.2.1
4.2.2
Methodology
(13)(b)(v)(A) Unless specifically
otherwise
provided
in
this
subregulation (13), a bank that
adopted the advanced IRB approach
for the measurement of the bank’s
exposure to credit risk shall in the
case of exposures to corporate
institutions, sovereigns or banks
estimate a PD ratio in respect of
each internal borrower grade,
which PD estimate shall comply
with the relevant minimum
requirements
specified
in
subregulation (11)(b)(vi)(A) above;
(11)(b)(v)(E)(ii) The rating and risk
estimation systems and processes
of a bank that adopted the IRB
approach for the measurement of
the bank’s exposure to credit risk in
respect of positions held in the
Criteria
Attest procedures
Assess whether the bank applies any
one of the three techniques
specified below:
 Internal default experience
 Mapping to external data
4.1.1.1. Inspect the developmental evidence to
confirm that the primary source of information
for PD estimation is based on internal data
(where available).

Statistical default models
Bank practice and Findings
4.1.1.2. Where external data is used assess
management’s motivation for considering
external
data.
4.1.1.3. Through inspection of the data confirm
that historical data or empirical evidence
considers a full economic cycle of no less than
5 years.
PD estimates are based on a
sufficiently large sample size to
allow for a meaningful quantification
and
validation.
Low
default
portfolios:
Consider all available history
(defaulted exposures) should be
used for LDPs.
4.1.2.1. Through inspection of model
development documentation confirm that the
bank has considered whether the number of
exposures in each model segment is sufficient
to allow for a meaningful quantification and
validation of the loss characteristics with
reference to the documented internal
standards.
4.1.2.2 Where not, inspect management’s
justification for the segmentation structure
and document.
In the case of corporate institutions,
sovereigns or banks, the bank
estimates a PD ratio in respect of
each borrower grade.
4.2.1.1. Inspect the model population to
confirm that each borrower grade has a unique
PD estimate.
For each rating model, there is a
clear definition and related set of
ratings criteria (risk factors and
attributes for risk factors including
weightings) for allocation of
exposures
to
risk
grades.
4.2.2.1. Inspect whether the model
documentation contains a clear and objective
definition of the rating criteria used in the
model and the weighting of rating criteria,
where
applicable
and
document.
10
Management comments
4
Regulation
PD Estimation
bank’s banking book shall make
provision for specific rating
definitions and criteria in order to
assign exposures to relevant risk
grades, which definitions and
criteria shall be sufficiently detailed
to allow(aa) persons responsible for
assigning of ratings to consistently
assign borrowers or facilities that
pose similar risk to the same grade;
4.2.3
(bb) third parties such as the
internal audit department or an
equally independent function, and
the Registrar, to understand the
assignment of ratings and to
evaluate the appropriateness of the
grade or pool assignments;
(11)(b)(v)(E) The rating and risk
estimation systems and processes
of a bank that adopted the IRB
approach for the measurement of
the bank’s exposure to credit risk
shall make provision for specific
rating definitions and criteria in
order to assign exposures to
relevant
risk
grades,
which
definitions and criteria-
Criteria
Attest procedures
The set of ratings criteria is
sufficiently detailed and objective to
permit the consistent assignment of
similar borrowers to the same
rating.
4.2.2.2. Inspect whether the documentation is
sufficiently detailed to allow an understanding
of the assignment of ratings and to evaluate
the correctness of grade assignments by third
parties such as the internal audit department
or an equally independent function.
Bank practice and Findings
The set of ratings criteria is
sufficiently detailed and objective to
permit third parties such as the
internal audit department or an
equally independent function, and
the Registrar, to understand the
assignment of ratings and to
evaluate the appropriateness of the
grade or pool assignments
The bank considers a comprehensive
list of risk factors / criteria for
possible inclusion in the PD model.
The process followed by the bank to
select the final risk factors / criteria
included in the PD model ensures
that the risk factors are plausible
and intuitive.
4.2.3.1. Confirm through inspection whether
the process followed to select the risk factors /
criteria included in the model is documented
(e.g. development documentation, validation
documentation,
etc).
4.2.3.2. Confirm that the final risk factors
selected are plausible and intuitive through
inspection of the bank’s motivation for
including these factors in the model.
(i) shall be plausible and intuitive in
order to ensure a meaningful
differentiation of risk
4.2.4
4.2.5
(v) shall take into consideration all
relevant and material Information
(11)(b)(v)(H)(ii) The rating and risk
estimation systems and processes
of a bank that adopted the IRB
approach for the measurement of
the bank’s exposure to credit risk
may include statistical models and
mechanical methods to assign
borrower and facility ratings or
estimate PD ratios, LGD ratios and
EAD amounts, which models and
methods
shall
be
used
appropriately.
(11)(b)(v)(F) The rating and risk
estimation systems and processes
of a bank that adopted the IRB
approach for the measurement of
the bank’s exposure to credit risk in
respect of positions held in the
bank’s
banking
book
shall
incorporate an appropriate time
The bank has followed a robust
mathematical and statistical process
in developing the PD model. The
accuracy of the model output is
supported by appropriate statistical
or
mathematical
processes.
The bank has provided a detailed
outline of the theory, assumptions
and/or mathematical and empirical
basis of the assignment of PD
estimates to exposures.
PD estimates are based on a
sufficiently long time horizon to
represent the borrower’s ability and
willingness to repay despite adverse
economic
conditions
or
the
occurrence of unexpected events
4.2.4.1. Confirm through inspection whether
the mechanical and/ or mathematical and
statistical methodology applied by the bank in
developing the PD model is adequately
documented.
4.2.4.2. Document whether the bank has
considered alternative PD methodologies and
document the bank’s motivation of the final PD
method.
4.2.5.1. Inspect management’s motivation for
the time horizon used and confirm whether
management has adequately motivated that
the time horizon is sufficiently long to
represent the borrower’s ability and
willingness to repay despite adverse economic
conditions or the occurrence of unexpected
events.
11
Management comments
4
4.2.6
4.2.7
4.3
4.3.1
4.3.2
4.3.3
Regulation
PD Estimation
horizon in order to assign a risk
rating to a borrower, which rating
shall be based on a sufficiently long
time
horizon(i) to estimate an obligor’s
probability
of
default;
(ii) to represent the borrower’s
ability and willingness to repay
contractual obligations despite
adverse economic conditions or
the occurrence of unexpected
events;
(11)(b)(v)(H)(vi) The rating and risk
estimation systems and processes
of a bank that adopted the IRB
approach for the measurement of
the bank’s exposure to credit risk
may include statistical models and
mechanical methods to assign
borrower and facility ratings or
estimate PD ratios, LGD ratios and
EAD amounts, which models and
methods shall not contain any
known material biases.
Refer to Regulation (39)(7)
Calibration
(11)(b)(vi)(A) Unless specifically
otherwise provided, a bank shall in
the case of exposures to corporate
institutions, sovereigns or banks,
estimate a PD ratio in respect of
each internal borrower grade,
which
PD
estimate
(iii) shall be based on a population
of exposures that closely matches
or is at least comparable to the
bank’s existing exposures and
lending standards;
(11)(b)(vi)(A)(v) Unless specifically
otherwise provided, a bank shall in
the case of exposures to corporate
institutions, sovereigns or banks,
estimate a PD ratio in respect of
each internal borrower grade,
which PD estimate shall be a longrun average of the one-year default
rates relating to the borrowers in a
particular grade;
(11)(b)(vi)(A)(vi)Unless specifically
otherwise provided, a bank shall in
the case of exposures to corporate
institutions, sovereigns or banks,
Criteria
Attest procedures
Bank practice and Findings
The method used to estimate PD
ratios shall not contain any known
material biases.
4.2.6.1. Inspect the bank’s policy and model
documentation for an assessment of model
bias.
4.2.6.2. Where material (as defined by the
bank’s policy) bias has been identified,
document the bank’s justification.
The final model has been approved
by the Board or its designated subcommittee.
4.2.7.1. Inspect evidence of approval to ensure
that the final model has been approved by the
Board or its designated sub-committee (in
terms of the model approval policy) and
document.
The
calibration
representative of
population.
4.3.1.1. Inspect the developmental evidence to
ensure that the calibration data set is
representative of the bank’s existing exposures
and lending standards.
sample
is
the current
4.3.1.2. Where the data set is not
representative of current exposures and
lending standards, inspect the bank’s
evaluation (e.g. inspect the bank’s justification
or evaluation of the calibration sample) of
whether any differences are sufficiently
significant to result in bias.
Inspect the developmental evidence
to ensure the PD estimate allocated
to each borrower grade is the longrun average of the one year default
rates.
4.3.2.1. Inspect the developmental evidence to
ensure the PD estimate allocated to each
borrower grade is the long-run average of the
one year default rates.
The PD estimates represent the
probability that the borrower will
default over a 12 month horizon.
Model inputs and development data
are reviewed by management to
ensure that all relevant and material
information is incorporated.
4.3.3.1. Obtain the
and sign-off of
development data,
been followed
bank’s process for review
the model input and
and confirm that this has
through inspection of
12
Management comments
4
4.3.5
Regulation
PD Estimation
estimate a PD ratio in respect of
each internal borrower grade,
which PD estimate shall incorporate
all
relevant
and
material
information
(11)(b)(vi)(A)(iv)Unless specifically
otherwise provided, a bank shall in
the case of exposures to corporate
institutions, sovereigns or banks,
estimate a PD ratio in respect of
each internal borrower grade,
which PD estimate- shall be based
on economic and market conditions
that are relevant and current
Criteria
4.3.7
4.3.8
4.3.9
The Bank reviews PD estimates at
least annually or when material new
information is obtained.
4.5.5.1. Confirm through inspection that the
controls and governance around ensuring that
ratings are updated at least annually or when
material new information is obtained. Inspect
the following:
 Banks policy around rating reviews should
be in line with the regulatory
requirements;
 Overdue rating need to be reported to the
correct governance structures;
 Bank needs to define performance
threshold for overdue ratings; and
 Clear guideline need to be put in place
around the age of financial information
used in the rating process.
4.4.5.5.2. Obtain the most recent dataset and
compare it to the PD estimation, to confirm
that the most recent appropriate data
available is used in PD estimation.
Test
the
bank’s
calibration
methodology from the score to the
final capital PD estimate.
4.5.5.3. Where the most recent appropriate
data available has not been used, obtain and
document management’s motivation.
4.3.6.1. Re-perform the bank’s calibration
(including the estimation of the long term PD)
and inspect the bank’s documentation to
ensure that the calibration methodology is
documented.
4.3.6.2 Document whether the bank has
considered
alternative
PD
calibration
methodologies and document the bank’s
motivation of the final PD calibration method.
4.3.7.1 Inspect the bank’s documentation to
ensure that the bank has performed a mapping
analysis against external ratings.
23(11)(b)(vi)(A)(i)(bb)(ii) the bank
shall compare and avoid any biases
or inconsistencies between the
internal and external ratings of any
common borrowers;
The bank shall compare and avoid
any biases or inconsistencies
between the internal and external
ratings of any common borrowers.
23(11)(b)(vi)(A)(i)(bb)(iii)
the
external
institution’s
criteria
underlying quantification shall be
oriented to the risk of borrower
default and shall not reflect
transaction characteristics;
When using an external institution’s
criteria the Bank shall ensure that
the risk is associated to the
borrower default and not the
transaction characteristics.
4.3.7.2 If any material differences exist
document the bank’s rationale.
4.3. 8.1. Inspect the available documentation
to ensure that the underlying quantification
does not incorporate factors relating to the
transaction characteristics, but oriented to the
risk of borrower default.
The bank shall ensure that no bias or
inconsistencies exist between the
definitions used in respect of
4.3.8.2 If any transaction characteristics are
incorporated, then document the bank’s
rationale.
4.3. 8.3. Inspect the available documentation
in terms of the default definitions used
between the Bank’s and the external
23(11)(b)(vi)(A)(i)(bb)(iv) the bank
shall compare and avoid any biases
or inconsistencies between the
Bank practice and Findings
supporting documentation.
(11)(b)(vi)(A)(viii)Unless specifically
otherwise provided, a bank shall in
the case of exposures to corporate
institutions, sovereigns or banks,
estimate a PD ratio in respect of
each internal borrower grade,
which PD estimate- shall be
reviewed on a regular basis but not
less frequently than once a year or
when material new information is
obtained;
4.3.6
Attest procedures
13
Management comments
4
Regulation
PD Estimation
definitions used in respect of
default;
Criteria
Attest procedures
default.
institution’s rating criteria.
4.3.10
23(11)(b)(vi)(A)(i)(bb)(v) the bank
shall document the basis on which
the mapping was done.
The bank shall document the basis
on which the mapping was done.
4.3.11
23(11)(b)(vi)(A)(i)(cc)
Statistical default models, that is,
the bank may use a simple average
of default-probability estimates in
respect of individual borrowers
assigned to a particular grade,
which estimates were generated by
statistical
default
prediction
models, provided that the statistical
model shall comply with the
relevant minimum requirements
specified in subparagraph (v)(G)
above;
In cases where a simple average is
used, the bank must document how
the PD estimate is adjusted to cater
for highly leveraged borrowers, or
borrowers of which the assets
consist predominantly of traded
assets.
4.3.12
23(11)(b)(v)(G) Shall be sufficiently
robust to ensure that all relevant PD
estimates of highly leveraged
borrowers, or borrowers of which
the assets consist predominantly of
traded
assets,
reflect
the
performance of the relevant
underlying assets based on periods
of stressed volatilities;
(11)(b)(v)(B) shall in the case of
exposures to corporate institutions,
sovereigns or banks ensure a
meaningful
distribution
of
exposures across risk grades, that is,
the bank shall not have excessive
concentrations of exposure in any
one of the bank’s borrower rating
or
facility
rating
scales.
As a minimum, a bank that adopted
the
IRB
approach(i) shall in the case of exposures
other than specialised lending
that were mapped into the
standardised rating categories
specified in paragraph (d)(iii)(C)
below, have no less than
seven borrower grades in respect of
borrowers that are not in
default and one grade for
borrowers that have defaulted,
provided
that-
The bank has a meaningful
distribution of exposures across risk
grades; the bank does not have
excessive
concentrations
of
exposures in any one borrower
grade.
Bank practice and Findings
4.3.8.4. Document the bank’s rational for any
biases or inconsistencies between the
definitions used in respect of default.
4.3. 10.1. Inspect the bank’s documentation to
ensure it includes the basis on which the
mapping of internal to external rating grades
was performed.
4.3.11. 1. Inspect the bank’s documentation
and evaluate the bank’s approach of allocating
the PD to a particular rating grade.
4.3.11.2. Confirm through discussion with
management whether the adjustment for
highly leveraged borrowers or borrowers of
which the assets consist predominantly of
traded assets reflects the performance of the
relevant underlying assets based on periods of
stressed volatilities.
4.3.12.1. Confirm through inspection whether
the bank has assessed the distribution of
exposures
across
borrower
grades.
4.3.12.2. Document management’s motivation
for any concentrations observed.
(aa) the bank shall in the case of
concentrations
within
a
14
Management comments
4
4.3.13
4.4
4.4.1
Regulation
PD Estimation
single grade have empirical
evidence
that(i) the grades cover sufficiently
narrow
PD
bands;
(ii) the default risk posed by
borrowers
in
a
particular
grade falls within the specific band;
(bb) the Registrar may require a
bank with a diverse portfolio
of credit exposure to have more
borrower
grades
than
the
minimum number of borrower
grades
specified
in
this
sub-item (i);
(11)(b)(v)(B)(ii) shall in the case of
exposures relating to specialised
lending, which exposures were
mapped into the standardised
rating categories specified in
paragraph (d)(iii)(C) below, have no
less than four borrower grades in
respect of borrowers that are not in
default and one grade for
borrowers that have defaulted;
Accuracy of Estimates
13(b)(vi)(D) As a minimum, a bank
that adopted the advanced IRB
approach for the measurement of
the bank’s exposure to credit risk
shall have in place sufficiently
robust internal standards to deal
with situations where realised PD
ratios, LGD ratios and EAD amounts
substantially deviate from expected
PD ratios, LGD ratios and EAD
amounts provided that when the
realised values continue to be
higher than the expected values,
the bank shall adjust its estimates
of risk components upward in order
to reflect the appropriate default
and loss experience of the bank.
23(11)(b)(ii) (C) For a minimum
period of three years or such lesser
minimum period as may be
specified in writing by the Registrar,
prior to a bank’s implementation of
the foundation IRB approach for the
measurement of the bank’s
exposure to credit risk, the rating
and risk estimation systems and
processes of the bank should haveprovided materially accurate and
consistent quantitative estimates of
risk;
Criteria
Attest procedures
The bank has no less than four
borrower grades in respect of
borrowers that are not in default
and one grade for borrowers that
have defaulted for the specialised
lending portfolio.
4.3.10.1
Confirm through inspection that the bank has
no less than four borrower grades in respect of
borrowers that are not in default and one
grade for borrowers that have defaulted for
the
specialised
lending
portfolio.
The bank has processes in place to
deal with situations where realised
PD ratios substantially deviate from
expected PD ratio provided that
when the realised values continue to
be higher than the expected values,
the bank shall adjust its estimates of
risk components upward in order to
reflect the appropriate default and
loss experience of the bank.
4.4.1.1. Re-perform the bank’s PD estimate
and document any discrepancies.
Backtesting:
The bank has a
documented backtesting program in
place.
4.4.1.4. Document whether actual versus
expected
comparison
thresholds
are
documented.
The Bank performs comparison of
actual historical PDs against modelpredicted PDs in accordance with
the
documented
backtesting
program.
4.4.1.5. Where actual versus expected tests are
not performed, document management’s
justification for this.
Internal
actual
v
expected
thresholds are established in the
backtesting program.
Bank practice and Findings
4.4.1.2. Inspect evidence that the bank has
processes in place to test the actual versus
expected PDs.
4.4.1.3. Inspect the evidence from the bank
that they perform tests of actual versus
expected PDs (Backtesting) and document.
4.4.1.6. Where actual values have continued to
be higher than expected values, document
management’s action plan.
4.4.1.7. Inspect the evidence from the bank
that they perform comparison (Benchmarking)
of model outputs against internal and external
data (where reasonably available) and
document. Where no benchmarking is
performed,
document
management’s
justification for this.
15
Management comments
4
Regulation
PD Estimation
(11)(b)(vi)(A)(xi) Unless specifically
otherwise provided, a bank shall in
the case of exposures to corporate
institutions, sovereigns or banks,
estimate a PD ratio in respect of
each internal borrower grade,
which PD estimate - shall be based
on an estimation technique that
performs well in out-of-sample tests
Criteria
Attest procedures
Bank practice and Findings
4.4.1.8. Where external data was used to
benchmark / back-test / parameterise the
model, document the justification that the
external data was shown to be consistent with
application range of the model.
23 (11)(b)(v)(H)(v) may include
statistical models and mechanical
methods to assign borrower and
facility ratings or estimate PD ratios,
LGD ratios and EAD amounts, which
models
and
methods
shall
materially be accurate across a
range of borrowers or facilities;
(13) Method 2: Calculation of
credit-risk exposure in terms of the
advanced
IRB
approach
(13)(b) Minimum requirements
(13)(b)(vi)(B) As a minimum, a bank
that adopted the advanced IRB
approach for the measurement of
the bank’s exposure to credit riskshall for each relevant risk grade
regularly compare realised PD
ratios, LGD ratios and EAD amounts
with estimated PD ratios, LGD ratios
and EAD amounts, and demonstrate
to the satisfaction of the Registrar
that the realised risk components
are within the expected range of
risk components for a particular
grade.
16
Management comments
Regulation
5.
LGD estimation
Model overview:
5.1
5.1.1
5.1.2
5.1.3
5.2
5.2.1
Criteria
Attest procedures
Bank practice and Findings
Data
(13)(b)(v)(C)(vii) Unless specifically The bank’s LGD estimates are
5.1.1.1. Inspect developmental evidence and
otherwise provided in subregulation supported by historical recovery
document management’s reasoning as to
13, a bank that adopted the rates and empirical evidence.
whether the LGD estimates are based primarily
advanced IRB approach for the
on historical recovery rates and empirical
measurement of the bank’s
evidence and not simply judgmental estimates
exposure to credit risk shall
or estimated market values.
estimate an appropriate LGD ratio
in respect of all relevant facilities
and asset classes, which LGD ratio
shall be based on historical recovery
rates and empirical evidence and
not, for example, solely on the
estimated
market
value
of
collateral.
(13)(b)(v)(C)(x) Unless specifically LGD estimates are based on a 5.1.2.1. Document management’s assessment
otherwise provided in subregulation sufficiently large sample size to as to whether the number of exposures in each
13, a bank that adopted the produce accurate and robust results. model segment is sufficient to calculate
advanced IRB approach for the
accurate and robust estimates.
measurement of the bank’s
exposure to credit risk shall
5.1.2.2. Where the number is not deemed
estimate an appropriate LGD ratio
sufficient
by
the
bank,
document
in respect of all relevant facilities
management’s justification for this. If possible,
and asset classes, which LGD ratio
inspect justification of any adjustments.
shall be based on a sufficient
number of exposures and data
periods that will ensure accurate
and robust LGD estimates.
13)(b)(v)(C)(xiii)(bb)
Unless The period used for calculating the 5.1.3.1. Inspect the bank’s model data sources
specifically otherwise provided in long run average LGD covers a and document whether the Bank has used a
subregulation 13, a bank that complete economic cycle, but not minimum of 7 years of observed defaults for
adopted the advanced IRB approach less than seven years, for at least LGD estimation.
for the measurement of the bank’s one of the data sources used.
exposure to credit risk shall
5.1.3.2.
Inspect
that
management’s
estimate an appropriate LGD ratio
justification for the choice of the data period
in respect of all relevant facilities
includes a definition of economic cycle with
and asset classes, which LGD ratio
regards to the model.
shall in the case of exposures to
corporate institutions, sovereigns
and banks be based on a minimum
data observation period that covers
a complete economic cycle but
which observation period shall in no
case be less than seven years in
respect of at least one of the bank’s
data sources.
Methodology
LGD methodology should refer to the final LGD used for capital purpose (i.e. down-turn LGD).
(13)(d)(i)(A)(i) Unless specifically The bank estimates a LGD ratio in 5.2.1.1 Obtain a download of all borrower
otherwise
provided
in
the respect of each borrower grade or grades or credit exposures for the exposures
subregulation (13), in order to credit exposure.
that fall within the application of the model
17
Management comments
5.
5.2.2.
Regulation
LGD estimation
calculate its risk-weighted credit
exposure, a bank that adopted the
advanced IRB approach shall in the
case of exposures to corporate
institutions, sovereigns or banks
calculate its own estimates of PD,
LGD, EAD and effective maturity in
respect of each relevant borrower
grade or credit exposure, provided
that the bank shall comply with the
relevant minimum requirements
specified in respect of the said risk
components in subregulations
(11)(b), (11)(d) and (13).
(11)(b)(v)(H)(vi) The rating and risk
estimation systems and processes
of a bank that adopted the IRB
approach for the measurement of
the bank’s exposure to credit risk in
respect of positions held in the
bank’s banking book may include
statistical models and mechanical
methods to assign borrower and
facility ratings or estimate PD ratios,
LGD ratios and EAD amounts, which
models and methods shall not
contain any known material biases.
Criteria
5.2.4.
((11)(b)(v)(H)(ii) The rating and risk
estimation systems and processes
of a bank that adopted the IRB
approach for the measurement of
the bank’s exposure to credit risk
may include statistical models and
mechanical methods to assign
borrower and facility ratings or
estimate PD ratios, LGD ratios and
EAD amounts, which models and
methods
shall
be
used
appropriately.
Definition of “loss”
Bank practice and Findings
and identify any items for which an LGD
estimate is not calculated.
The method used to estimate LGD
ratios shall not contain any known
material biases.
5.2.2.1 Inspect the bank’s policy and model
documentation for an assessment of model
bias.
Zero and negative LGDs are treated
appropriately when calculating LGD
estimates and do not introduce bias
into the model.
5.2.2.2 Where material (as defined in bank’s
policy) bias has been identified, document the
bank’s justification.
The data set used for development
or for the latest model update is
representative of existing exposures
and lending standards.
5.2.2.3 Inspect the development dataset for
negative or zero LGDs and document the
Bank’s reasons for treatment thereof. Reestimate the LGD ratio removing the negative
or zero LGDs and document the impact.
(13)(b)(v)(C)(viii) Unless specifically
otherwise provided in subregulation
13, a bank that adopted the
advanced IRB approach for the
measurement of the bank’s
exposure to credit risk shall
estimate an appropriate LGD ratio
in respect of all relevant facilities
and asset classes, which LGD ratio
shall be based on a population of
exposures that closely matches or is
at least comparable to the bank’s
existing exposures and lending
standards.
5.2.3.
Attest procedures
5.2.2.4 Inspect the developmental evidence for
justification of the development data being
representative of the bank’s existing exposures
and lending standards. Where not, inspect the
bank’s rationale therefore and document.
The bank has followed a robust
mathematical and statistical process
in developing the LGD model. The
accuracy of the model output is
supported by appropriate statistical
or
mathematical
processes.
The bank has provided a detailed
outline of the theory, assumptions
and/or mathematical and empirical
basis of the assignment of LGD
estimates to exposures.
The definition of loss as used in LGD
modelling implies economic loss and
5.2.3.1. Confirm through inspection whether
the mechanical and/ or mathematical and
statistical methodology applied by the bank in
developing the LGD model is adequately
documented.
Document whether the bank has considered
alternative LGD methodologies and document
the bank’s motivation of the final LGD method
5.2.4.1 Inspect the bank’s
development
documentation
policy
that
and
the
18
Management comments
5.
Regulation
LGD estimation
Definitions "economic loss" in
relation to the IRB approach
includes all material discounts and
material
direct and indirect costs associated
with the collection of an exposure
in default
Criteria
takes into account
indirect costs.
Attest procedures
direct
and
5.2.5.
The recovery discount rate should
be greater than the risk free rate
and the recovery discount rate used
should be justified by the bank.
5.2.6.
The Bank documents its choice of
workout period and treatment of
post-write-off recoveries, where
significant.
Where a bank has an explicit writeoff policy, the workout data used to
determine the LGD estimate should
be consistent with it.
5.2.7.
5.2.8.
5..2.9
5.2.10
(13)(b)(v)(C)(v) Unless specifically
otherwise provided in subregulation
13, a bank that adopted the
advanced IRB approach for the
measurement of the bank’s
exposure to credit risk shall
estimate an appropriate LGD ratio
in respect of all relevant facilities
and asset classes, which LGD ratio
shall appropriately incorporate any
potential correlation or dependence
between the risk relating to the
borrower and the collateral,
collateral provider or protection
provider.
(13)(b)(v)(C)(vi) Unless specifically
otherwise provided in subregulation
13, a bank that adopted the
advanced IRB approach for the
Incomplete workouts: The Bank
incorporates results of incomplete
workouts into their LGD estimates,
unless it demonstrates that the
incomplete workouts are not
applicable.
Post-default drawings:
Further
drawings post default should be
taken into account as part of LGD or
EAD.
The LGD incorporates any potential
correlation or dependence between
the risk relating to the borrower and
the collateral, collateral provider or
protection provider.
Bank practice and Findings
definition of loss, as used in LGD modelling,
implies economic loss and takes into account
direct and indirect costs.
5.2.4.2 Inspect the indirect cost methodology
and confirm through inspection that the
indirect costs have been estimated correctly (in
terms of the bank’s policy).
5.2.5.1 Inspect the bank’s policy and
development documentation for choice of
discount rate and confirm through inspection
that it has been applied correctly as at
development.
5.2.6.1 Inspect the bank’s policy and
development documentation for treatment of
post-write-off recoveries and the bank’s choice
of workout period and justification thereof.
Confirm through inspection this has been
estimated correctly in accordance with the
bank’s policy.
5.2.6.2
Inspect
the
development
documentation and hold discussions with
management and document whether they
have considered the impact of any changes in
the Bank’s write-off policy on the LGD
estimates.
5.2.7.1. Inspect the bank’s policy and
development documentation for justification
of treatment of incomplete workouts and
confirm through inspection it has been
estimated correctly.
5.2.8.1 Inspect the LGD and EAD calculations
and document whether post-default drawings
are included in either the LGD or EAD
estimation.
5.3.2.1 If applicable to the portfolio rated by
the model, inspect the development
methodology and/or wrong-way risk policy for
treatment of correlation or dependence
between the risk relating to the borrower and
the collateral, collateral provider or protection
provider and document.
5.3.2.2 Where applicable and not explicitly
allowed for in the model, document
management’s justification for this.
The bank incorporates the effect of
currency
mismatches
when
estimating an LGD relating to
collateral denominated in a different
5.2.14.1 If applicable to the portfolio rated by
the model, inspect the development
methodology and/or bank’s policy for
treatment of currency mismatches and
19
Management comments
5.
5.2.9
5.2.9.
5.3
5.3.1
5.3.2
5.3.3
Regulation
LGD estimation
measurement of the bank’s
exposure to credit risk shall
estimate an appropriate LGD ratio
in respect of all relevant facilities
and asset classes, which LGD ratio
shall incorporate the effect of a
currency mismatch between the
underlying obligation and the
collateral obtained.
(13)(b)(v)(C)(xiii)(aa)
Unless
specifically otherwise provided in
subregulation 13, a bank that
adopted the advanced IRB approach
for the measurement of the bank’s
exposure to credit risk shall
estimate an appropriate LGD ratio
in respect of all relevant facilities
and asset classes, which LGD ratio
shall in the case of defaulted assets
reflect the possibility that the bank
may have to recognise additional,
unexpected losses during the
recovery period.
Refer to Regulation (39)(7)
Parameter Estimation
(13)(b)(v)(C)(i) Unless specifically
otherwise provided in subregulation
13, a bank that adopted the
advanced IRB approach for the
measurement of the bank’s
exposure to credit risk shall
estimate an appropriate LGD ratio
in respect of all relevant facilities
and asset classes, which LGD ratio
shall incorporate all relevant and
material data and information,
including conditions relating to an
economic downturn when such
information is necessary to duly
capture the relevant risk.
(13)(b)(v)(C)(ix) Unless specifically
otherwise provided in subregulation
13, a bank that adopted the
advanced IRB approach for the
measurement of the bank’s
exposure to credit risk shall
estimate an appropriate LGD ratio
in respect of all relevant facilities
and asset classes, which LGD ratio
shall be based on economic and
market conditions that are relevant
and current.
(13)(b)(v)(C)(xii) Unless specifically
Criteria
Attest procedures
currency to the underlying.
document.
Bank practice and Findings
5.2.14.2 Where applicable and not explicitly
allowed for in the model, document
management’s justification for this.
When quantifying LGD estimates on
defaulted assets, the LGD reflects
the possibility that the bank may
have to recognise additional,
unexpected losses during the
recovery period.
5.2.9.1 Inspect the bank’s documentation and
confirm whether defaulted assets’ LGDs reflect
the possibility that the bank may have to
recognise additional, unexpected losses during
the recovery period through comparison with
BEEL.
Refer to the BA 200 and statutory audit for the
findings.
The final model has been approved
by the Board or its designated subcommittee.
5.2.9.1 Inspect evidence of approval to ensure
that that the final model has been approved by
the Board or its designated sub-committee (in
terms of the model approval policy) and
document.
Model inputs and development data
are reviewed by management to
ensure that all relevant and material
data
and
information
is
incorporated.
5.3.1.1 Inspect the relevant documentation
with regards to the bank considering the use of
all relevant and material data and information.
The LGD estimate is based on
economic and market conditions
that are relevant and current.
5.3.2.1 Inspect the relevant documentation
and document the consideration of the
recency and relevance of model inputs.
5.3.2.2 Inspect the justification for any data
exclusions and adjustments and document.
5.3.3.2 Obtain the most recent dataset and
compare it to the LGD estimation, to confirm
that the most recent appropriate data
available is used in LGD estimation.
The Bank reviews LGD estimates at
5.3.3.3 Where the most recent appropriate
data available has not been used, obtain and
document management’s motivation.
5.3.3.1 Inspect the Bank’s policy for identifying
20
Management comments
5.
5.4
5.4.1
Regulation
LGD estimation
otherwise provided in subregulation
13, a bank that adopted the
advanced IRB approach for the
measurement of the bank’s
exposure to credit risk shall
estimate an appropriate LGD ratio
in respect of all relevant facilities
and asset classes, which LGD ratio
shall be reviewed on a regular basis
but not less frequently than once a
year, or when material new
information is obtained.
Accuracy of estimates
13(b)(vi)(D) As a minimum, a bank
that adopted the advanced IRB
approach for the measurement of
the bank’s exposure to credit risk
shall have in place sufficiently
robust internal standards to deal
with situations where realised PD
ratios, LGD ratios and EAD amounts
substantially deviate from expected
PD ratios, LGD ratios and EAD
amounts provided that when the
realised values continue to be
higher than the expected values,
the bank shall adjust its estimates
of risk components upward in order
to reflect the appropriate default
and loss experience of the bank.
(11)(b)(ii)(C) The rating and risk
estimation systems and processes
of the bank should have provided
materially accurate and consistent
quantitative estimates of risk.
(11)(b)(v)(H)(ix) The rating and risk
estimation systems and processes
of a bank that adopted the IRB
approach for the measurement of
the bank’s exposure to credit risk in
respect of positions held in the
bank’s banking book may include
statistical models and mechanical
methods to assign borrower and
facility ratings or estimate PD ratios,
LGD ratios and EAD amounts, which
models and methods shall be
subject to regular backtesting.
Criteria
Attest procedures
least annually or when material new
information is obtained. (This refers
to the application of updated
estimates to exposures rather than
to updating of the LGD model).
material new information that requires an
update to LGD estimates and document.
Bank practice and Findings
5.3.9.2Inspect the bank’s governance process
for adherence to policy and document.
For a sample of out-of-cycle LGD estimates,
document the bank’s reasons for the updates.
The bank has processes in place to
deal with situations where realised
LGD ratios substantially deviate from
expected LGD ratio provided that
when the realised values continue to
be higher than the expected values,
the bank shall adjust its estimates of
risk components upward in order to
reflect the appropriate default and
loss experience of the bank.
The bank performs tests of actual
LGD against expected LGDs.
Actual versus expected thresholds
are documented.
Where reasonably available, the
bank compares its outputs against
internal and external data.
5.4.1.1. Re-perform the bank’s LGD estimate
and document any discrepancies.
5.4.1.2. Inspect evidence that the bank has
processes in place to test the actual versus
expected LGDs.
5.4.1.3. Inspect the evidence from the bank
that they perform tests of actual versus
expected LGDs (Backtesting) and document.
5.4.1.4. Document whether actual versus
expected
comparison
thresholds
are
documented.
5.4.1.5. Where actual versus expected tests are
not performed, document management’s
justification for this.
5.4.1.6. Where actual values have continued to
be higher than expected values, document
management’s action plan.
5.4.1.7. Inspect the evidence from the bank
that they perform comparison (Benchmarking)
of model outputs against internal and external
data (where reasonably available) and
document. Where no benchmarking is
performed,
document
management’s
justification for this.
5.4.1.8. Where external data was used to
benchmark / back-test / parameterise the
model, document the justification that the
external data was shown to be consistent with
application range of the model.
(13)(b)(vi) (B) A bank that adopted
the advanced IRB approach for the
measurement of the bank’s
exposure to credit risk shall for each
relevant risk grade regularly
compare realised LGD ratios with
estimated
LGD
ratios
and
21
Management comments
5.
Regulation
LGD estimation
demonstrate to the satisfaction of
the Registrar that the realised risk
components are within
the
expected range of risk components
for a particular grade.
Criteria
Attest procedures
The bank compares its estimate of
dLGD with the long run default
weighted average LGD; the dLGD
estimate is not less than the long
run average.
5.5.1.1 Document the Bank’s comparison of
the dLGD estimate used to calculate regulatory
capital and the actual long run defaultweighted average LGD, calculated using the
formula specified in the regulations.
The
long-run
default-weighted
average LGD is calculated using the
formula specified in the regulations,
being:
5.5.1.2 Re-calculate the actual long run
default-weighted average LGD and compare
with management’s result.
Bank practice and Findings
(13)(b)(v)(C)(xi) Unless specifically
otherwise provided in subregulation
13, a bank that adopted the
advanced IRB approach for the
measurement of the bank’s
exposure to credit risk - shall
estimate an appropriate LGD ratio
in respect of all relevant facilities
and asset classes, which LGD ratio
shall be based on an estimation
technique that performs well in `sample tests.
5.5
5.5.1
Downturn LGD
(13)(b)(v)(C)(ii) Unless specifically
otherwise provided in subregulation
13, a bank that adopted the
advanced IRB approach for the
measurement of the bank’s
exposure to credit risk shall
estimate an appropriate LGD ratio
in respect of all relevant facilities
and asset classes, which LGD ratio
shall not be less than the long-run
default-weighted average loss rate
given default, based on the average
economic loss of all observed
defaults within the data source for a
particular type of facility, which
default-weighted average loss rate
given default shall be calculated in
accordance with the formula
specified below:
LGD (%) = (1/n) Σ(Economic
lossi/Amount at defaulti)
LGD (%) = (1/n) Σ(Economic
lossi/Amount at defaulti)
5.5.2
(13)(b)(v)(C)(iv) Unless specifically
otherwise provided in subregulation
13, a bank that adopted the
advanced IRB approach for the
measurement of the bank’s
exposure to credit risk shall
estimate an appropriate LGD ratio
in respect of all relevant facilities
and asset classes, which LGD ratio
may be based on averages of loss
severities observed during periods
of high credit losses, obtained from
internal and / or external data,
provided that the data shall be
The bank has a rigorous and welldocumented process for assessing
the effects, if any, of economic
downturn conditions on recovery
rates and for producing LGD
estimates consistent with downturn
conditions.
5.5.2.1 Inspect the bank’s developmental
evidence and document whether it contains
the bank’s process for assessing the effects of
downturn conditions on recovery rates and for
calculating the downturn LGD (This may be
done on the basis of internal and/or external
data).
5.5.2.2 Where sufficient assessment data is
available, inspect that the Bank has quantified
adverse dependencies between default rates
and recovery rates and document. Where
insufficient data is available, inspect that the
Bank has considered a qualitative adjustment
22
Management comments
5.
Regulation
LGD estimation
representative
experience.
Criteria
of
long
run
Attest procedures
Bank practice and Findings
and document.
(13)(b)(v)(C)(i) Unless specifically
otherwise provided in subregulation
13, a bank that adopted the
advanced IRB approach for the
measurement of the bank’s
exposure to credit risk shall
estimate an appropriate LGD ratio
in respect of all relevant facilities
and asset classes, which LGD ratio
shall incorporate conditions relating
to economic downturn when such
information is necessary to duly
capture the relevant risk.
23
Management comments
Regulation
6
EAD Estimation
Model overview:
6.1
6.1.1
6.1.2
6.1.3
6.1.4
Data
(13)(b)(v)(D) Unless specifically
otherwise
provided
in
subregulation 13, a bank that adopted
the advanced IRB approach for the
measurement of the bank’s
exposure to credit risk shall
estimate an appropriate EAD
amount in respect of all relevant
facilities and asset classes].
(xiii) The EAD ratio shall be based on
historical data and empirical
evidence.
[(13)(b)(v)(D) Unless specifically
otherwise
provided
in
subregulation 13, a bank that adopted
the advanced IRB approach for the
measurement of the bank’s
exposure to credit risk shall
estimate an appropriate EAD
amount in respect of all relevant
facilities and asset classes.]
(xii) The EAD estimate may take into
account data from external sources,
including pooled data, provided
that the EAD estimates shall
represent long-run experience.
(13)(b)(v)(D) Unless specifically
otherwise
provided
in
subregulation 13, a bank that adopted
the advanced IRB approach for the
measurement of the bank’s
exposure to credit risk shall
estimate an appropriate EAD
amount in respect of all relevant
facilities and asset classes].
(x) The EAD estimate shall be based
on a sufficient number of exposures
and data periods that will ensure
accurate and robust estimates of
EAD amounts.
[(13)(b)(v)(D) Unless specifically
otherwise
provided
in
subregulation 13, a bank that adopted
the advanced IRB approach for the
measurement of the bank’s
exposure to credit risk shall
estimate an appropriate EAD
amount in respect of all relevant
facilities and asset classes.]
Criteria
Attest procedures
The Bank’s EAD estimates are
supported by historical experience
and empirical evidence.
6.1.1.1. Inspect the developmental evidence
and confirm that EAD estimates are based on
historical data and empirical evidence and not
simply judgmental estimates.
Externally sourced data may be used
in the modelling of EAD provided
that the EAD estimates represent
long-run experience.
6.1.2.1. Inspect the developmental evidence in
order to identify whether externally sourced
data was used in the modelling of EAD. Where
this is the case, confirm through inspection of
the developmental evidence that the use of
the data is justified by the bank. Confirm that
the EAD estimates represent long-run
experience.
EAD estimates are based on a
sufficiently large sample size to
produce accurate and robust results.
6.1.3.1 Document management’s assessment
as to whether the number of exposures in each
model segment is sufficient to calculate
accurate and robust estimates.
Bank practice and Findings
6.1.3.2. Where the number is not deemed
sufficient
by
the
bank,
document
management’s justification for this. If possible,
inspect justification of any adjustments.
The Bank uses a minimum of 7 years
of observed defaults for EAD
estimation.
Where 7 years does not cover the
full economic cycle, the bank uses a
longer period of data.
EAD estimates are based on a
default-weighted average and not a
time-weighted average.
6.1.4.1. Confirm through inspection of the final
modelling data set that the Bank has used a
minimum of 7 years of observed defaults for
EAD estimation.
6.1.4.2. Confirm through inspection of the
model developmental evidence that the bank
has determined the length of an economic
cycle. Where this is longer than 7 years, inspect
the model documentation and confirm that the
24
Management comments
Regulation
Criteria
(i)(dd) The EAD estimate shall, in
the case of exposures to corporate
institutions, sovereigns or banks be
based on a complete economic
cycle provided that:
Methodology
(13)(d)(i)(A)(i) Shall in the case of
exposures to corporate institutions,
sovereigns or banks calculate its
own estimates of EAD in respect of
each relevant borrower grade or
credit exposure provided the bank
can meet the minimum standards
out lined in subregulation 11(b) and
11(d)
6.2.2
6.2.3
Bank practice and Findings
6.1.4.3. If the length (history used) is less than
7 years or the length of the economic cycle
(whichever is longer) document management’s
justification / allowances why the EAD level is
still appropriate.
(i) The time period on which the
EAD amount is based shall in no
case be less than seven years;
(ii) The EAD estimates shall be
based on a default-weighted
average and not a time-weighted
average;
6.2
6.2.1
Attest procedures
data used covers a full economic cycle as
defined by the bank.
6.1.4.4. Confirm through inspection of the
model documentation that EAD estimates are
based on a default-weighted average and not a
time-weighted average.
The bank estimates an EAD ratio in
respect of each relevant borrower
grade or credit exposure.
6.2.1.1. Determine through inspection of the
model documentation whether an EAD
estimate is calculated for each relevant
borrower grade or credit exposure.
(11)(b)(v)(G)(ii) The rating and risk
estimation systems and processes
of a bank that adopted the IRB
approach for the measurement of
the bank’s exposure to credit risk
may include statistical models and
mechanical methods to assign
borrower and facility ratings or
estimate PD ratios, LGD ratios and
EAD amounts, which models and
methods
shall
be
used
appropriately.
The bank has followed a robust
mathematical and statistical process
in developing the EAD model. The
accuracy of the model output is
supported by appropriate statistical
or mathematical processes.
6.2.2.1. Confirm through inspection whether
the mechanical and/ or mathematical and
statistical methodology applied by the bank in
developing the EAD model is adequately
documented.
(13)(b)(v)(D) Unless specifically
otherwise
provided
in
subregulation 13, a bank that adopted
the advanced IRB approach for the
measurement of the bank’s
exposure to credit risk shall
estimate an appropriate EAD
amount in respect of all relevant
facilities and asset classes]
EAD estimates shall be based on a
long-run default-weighted average
EAD amount in respect of similar
facilities and borrowers over a
sufficiently long period of time
6.2.3.1 Re-perform the default-weighted EAD
and confirm that EAD estimates are not less
than the long-run default-weighted average
EAD amount in respect of similar facilities and
borrowers over a sufficiently long period of
time.
In respect of all on-balance sheet
exposures, the EAD amount applied
is a minimum of the current
outstanding balance.
6.2.4.1. On a sample of exposures confirm
through inspection that the EAD amount
applied is greater than or equal to the drawn
balance.
The bank has provided a detailed
outline of the theory, assumptions
and/or mathematical and empirical
basis of the assignment of EAD
estimates to exposures.
6.2.2.2. Document whether the bank has
considered alternative EAD methodologies and
document the bank’s motivation of the final
EAD method
(ii) Shall be an estimate of long-run
default-weighted average EAD
amount in respect of similar
facilities and borrowers over a
sufficiently long period of time
6.2.4
(13)(b)(v)(D) Unless specifically
otherwise provided in subregulation
13, a bank that adopted the
advanced IRB approach for the
25
Management comments
Regulation
measurement of the bank’s
exposure to credit risk shall
estimate an appropriate EAD
amount in respect of all relevant
facilities and asset classes.]
6.2.5
6.2.6
6.2.7
6.3
6.3.1
(i)(aa) The EAD amount shall, in the
case of on-balance sheet exposures,
be no less than the current drawn
amount after the effect of set-off in
terms of the provisions of
regulation 13 has been taken into
consideration.
(i) The EAD amount shall, in the
case of:
(aa) on-balance sheet exposures,
excluding derivative instruments, be
based on the Bank’s internal
estimates for each pool, provided
the said estimates shall incorporate
the possibility that further amounts
may be drawn by the obligor up to
and after the time of default.
(bb) off-balance sheet exposures,
excluding derivative instruments, be
based on the Bank’s internal
estimates for each facility type,
provided the said internal estimates
shall incorporate the possibility that
further amounts may be drawn by
the obligor up to and after the time
of default.
(11)(b)(v)(G)(vi) The rating and risk
estimation systems and processes
of a bank that adopted the IRB
approach for the measurement of
the bank’s exposure to credit risk
may include statistical models and
mechanical methods to assign
borrower and facility ratings or
estimate PD ratios, LGD ratios and
EAD amounts, which models and
methods shall not contain any
known material biases.
Refer to Regulation (39)(7)
Parameter Estimation
[(13)(b)(v)(D) Unless specifically
otherwise
provided
in
subregulation 13, a bank that adopted
the advanced IRB approach for the
measurement of the bank’s
exposure to credit risk shall
estimate an appropriate EAD
amount in respect of all relevant
Criteria
Attest procedures
EAD estimates incorporate the
possibility that further amounts may
be drawn by the obligor up to and
after the time of default.
6.2.5.1. Inspect the Bank’s developmental
evidence to confirm that it allows for draw
downs up to the point of default.
Bank practice and Findings
6.2.5.2. Confirm through inspection of the
bank’s developmental evidence that draw
downs after the point of default is allowed for
in either LGD or EAD estimate (where
applicable).
The method used to estimate EAD
ratios shall not contain any known
material biases.
6.2.6.1. Inspect the bank’s policy and model
documentation for an assessment of model
bias.
6.2.6.2. Where material (as defined by the
bank’s policy) bias has been identified,
document the bank’s justification.
The final model has been approved
by the Board or its designated subcommittee.
6.2.7.1 Inspect evidence of approval to ensure
that the final model has been approved by the
Board or its designated sub-committee (in
terms of the model approval policy) and
document.
The data set used for development
or for the latest model update is
representative of existing exposures
and lending standards.
6.3.1.1. Inspect the developmental evidence
for justification of the development data being
representative of the bank’s existing exposures
and lending standards. Where not, inspect
rationale therefore.
26
Management comments
6.3.2
6.3.3
6.3.4
6.3.5.
Regulation
facilities and asset classes]
(viii) which EAD amount – shall be
based on a population of exposures
that closely matches or is at least
comparable to the bank’s existing
exposures and lending standards.
[(13)(b)(v)(D) Unless specifically
otherwise
provided
in
subregulation 13, a bank that adopted
the advanced IRB approach for the
measurement of the bank’s
exposure to credit risk shall
estimate an appropriate EAD
amount in respect of all relevant
facilities and asset classes]
(vi) which EAD amount shall
appropriately
take
into
consideration all relevant and
material information.
[(13)(b)(v)(D) Unless specifically
otherwise
provided
in
subregulation 13, a bank that adopted
the advanced IRB approach for the
measurement of the bank’s
exposure to credit risk shall
estimate an appropriate EAD
amount in respect of all relevant
facilities and asset classes]
(xiv) The EAD estimate shall be
reviewed on a regular basis but not
less frequently than once a year or
when material new information is
obtained.
(13)(b)(v)(D) Unless specifically
otherwise
provided
in
subregulation 13, a bank that adopted
the advanced IRB approach for the
measurement of the bank’s
exposure to credit risk shall
estimate an appropriate EAD
amount in respect of all relevant
facilities and asset classes]
(v) Shall be based on Criteria that
are plausible and intuitive
[(13)(b)(v)(D) Unless specifically
otherwise
provided
in
subregulation 13, a bank that adopted
the advanced IRB approach for the
measurement of the bank’s
exposure to credit risk shall
estimate an appropriate EAD
amount in respect of all relevant
facilities and asset classes]
(ix) Shall be based on economic and
market conditions that are relevant
and current;
Criteria
Attest procedures
Model inputs and development data
have been adequately documented
to ensure that all relevant and
material data and information is
incorporated.
6.3.2.1. Inspect the relevant documentation
with regards to the bank considering the use of
all relevant and material data and information.
Inspect the justification for any data exclusions
and adjustments.
The Bank reviews EAD estimates at
least annually or when material new
information is obtained. (This refers
to the application of updated
estimates to exposures rather than
to updating of the EAD model).
6.3.3.1. Inspect the Bank’s policy for identifying
material new information that requires an
update to EAD estimates and document.
6.3.3.2. Inspect governance
adherence to policy
Bank practice and Findings
process
for
6.3.3.3. For a sample of out-of-cycle EAD
estimates, document the bank’s reasons for
the updates.
The EAD estimate is based on
criteria that are plausible and
intuitive
6.3. 4.1. Inspect the bank’s development
evidence and document the management’s
motivation for the inclusion of criteria in the
model used to produce EAD estimates is
plausible and intuitive.
The EAD estimation is based on
economic and market conditions
that are relevant and current.
6.3. 5.1. Inspect the relevant documentation
and document the consideration of the
recency and relevance of model inputs.
6.3.5.2. Obtain the most recent dataset and
compare it to the EAD estimation, to confirm
that the most recent appropriate data
available is used in EAD estimation.
6.3.5.3. Where the most recent appropriate
data available has not been used, obtain and
document management’s motivation.
27
Management comments
6.4
6.4.1
Regulation
Accuracy of estimates
13(b)(vi)(D) As a minimum, a bank
that adopted the advanced IRB
approach for the measurement of
the bank’s exposure to credit risk
shall have in place sufficiently
robust internal standards to deal
with situations where realised PD
ratios, LGD ratios and EAD amounts
substantially deviate from expected
PD ratios, LGD ratios and EAD
amounts provided that when the
realised values continue to be
higher than the expected values,
the bank shall adjust its estimates
of risk components upward in order
to reflect the appropriate default
and loss experience of the bank.
Criteria
Attest procedures
The bank performs tests of actual
EAD against expected EADs.
6.4.1.1. Re-perform the bank’s EAD estimate
and document any discrepancies.
Actual versus expected thresholds
are documented.
6.4.1.2. Inspect evidence that the bank has
processes in place to test the actual versus
expected EADs.
Where reasonably available, the
bank compares its outputs against
internal and external data.
6.4.1.5. Where actual versus expected tests are
not performed, document management’s
justification for this.
6.4.1.6. Where actual values have continued to
be higher than expected values, document
management’s action plan.
6.4.1.7. Inspect the evidence from the bank
that they perform comparison (Benchmarking)
of model outputs against internal and external
data (where reasonably available) and
document. Where no benchmarking is
performed,
document
management’s
justification for this.
[(13)(b)(v)(D)(xi) Unless specifically
otherwise
provided
in
subregulation 13, a bank that adopted
the advanced IRB approach for the
measurement of the bank’s
exposure to credit risk shall
estimate an appropriate EAD
amount in respect of all relevant
facilities and asset classes.]
6.5
6.5.1
6.4.1.3. Inspect the evidence from the bank
that they perform tests of actual versus
expected EADs (Backtesting) and document.
6.4.1.4. Document whether actual versus
expected
comparison
thresholds
are
documented.
(13)(b)(vi) (B) As a minimum, a Bank
that adopted the advanced IRB
approach for the measurement of
the Bank’s exposure to credit riskshall for each relevant risk grade
regularly compare realised PD
ratios, LGD ratios and EAD amounts
with estimated PD ratios, LGD ratios
and EAD amounts and demonstrate
to the satisfaction of the Registrar
that the realised risk components
are within the expected range of
risk components for a particular
grade.
The EAD estimate shall be based on
an estimation technique that
performs well in out-of-sample
tests.
Downturn EAD
[(13)(b)(v)(D)Unless
specifically
otherwise
provided
in
subregulation 13, a bank that adopted
the advanced IRB approach for the
measurement of the bank’s
exposure to credit risk shall
estimate an appropriate EAD
amount in respect of all relevant
facilities and asset classes.]
(iii) The EAD amount shall
incorporate
any
correlation
between the default frequency and
the extent of EAD amounts.
Bank practice and Findings
6.4.1.8. Where external data was used to
benchmark / back-test / parameterise the
model, document the justification that the
external data was shown to be consistent with
application range of the model.
The effects, if any, of changes in the
cycle (i.e. when default frequencies
change, including under downturn)
on EAD estimates are assessed, and
EAD estimates are produced to
ensure consistency with downturn
conditions.
6.5.1.1. Confirm through inspection of the
bank’s developmental evidence whether the
Bank’s EAD model is accurate under downturn
conditions.
28
Management comments
Regulation
(iv) The EAD shall reflect the effects
of downturns in the economy i.e.
the risk drivers of the Bank’s
internal model or the Bank’s
internal data or external data shall
incorporate the cyclical nature of
each facility.
Criteria
Attest procedures
Bank practice and Findings
29
Management comments
7
7.1
7.1.1
7.1.2
Regulation
Criteria
Attest procedures
Bank practice and Findings
Management comments
Criteria for the recognition of credit risk mitigation instruments
Where possible, the attestation should be based on the review of statutory and regulatory audit papers and previous LFR completed which cover similar processes and controls. Where reliance is placed on statutory or regulatory audits, or previous LFR workings, reference should be
made to the audit reports and/or LFR, and working papers and findings should be included as part of the LFR.
On-balance sheet netting
(14)(a) When a bank that adopted The bank's credit policy specifies the 7.1.1.1. Inspect the bank's credit policy for the
the advanced IRB approach for the minimum requirements for on- appropriate inclusion of the minimum
measurement of the bank’s balance
sheet
netting
per requirements and related procedures for onexposure to credit risk in respect of subregulations (7)(a), (9()b) and balance sheet netting per subregulations (7)(a)
positions held in the bank’s banking (9)(e) as well as the procedures to be
and (9)(b).
book enters into a netting followed in order to achieve
agreement in respect of loans and compliance with these minimum
deposits, the bank may recognise requirement.
the effect of such a netting
agreement
when
the
bank
calculates the EAD amount of the (9)(e) is equivalent to (14)(e) which is
relevant exposure provided that the covered under 7.5 below.
bank(i) shall at all times comply with
the relevant conditions specified
in subregulation (7)(a) above;
(ii) shall recognise the effect of
any currency mismatch in
accordance with the relevant
requirements
specified
in
subregulation (9)(b) above;
(iii) shall recognise the effect of
a
maturity
mismatch
in
accordance with the relevant
requirements
specified
in
subregulation (9)(e) above.
(7)(a) On-balance-sheet netting
7.1.2.1. On a sample of netted exposures,
When a client maintains both debit
and credit balances with a bank and
the bank enters into a netting
agreement in respect of the
relevant loans and deposits with the
said counterparty, the bank may in
the calculation of the bank's risk
exposure regard the exposure as a
collateralised
exposure
in
accordance with the provisions of
paragraph (b) below, provided that
the bank-
assess compliance through discussion with the
bank’s legal department and evidence how
they have complied with the four criteria of the
regulations.
(i) shall have a well-founded
legal basis for concluding that
the netting or offsetting
agreement is enforceable in
each
relevant
jurisdiction,
regardless
whether
the
counterparty is insolvent or
bankrupt;
(ii) shall at any time be able to
determine the loans and
deposits
with
the
same
counterparty that are subject to
30
7
Regulation
Criteria
Attest procedures
Bank practice and Findings
Management comments
Criteria for the recognition of credit risk mitigation instruments
Where possible, the attestation should be based on the review of statutory and regulatory audit papers and previous LFR completed which cover similar processes and controls. Where reliance is placed on statutory or regulatory audits, or previous LFR workings, reference should be
made to the audit reports and/or LFR, and working papers and findings should be included as part of the LFR.
the netting agreement;
(iii) shall monitor and control
any potential roll-off risk in
respect of the said debit and
credit balances;
7.1.3
7.2
7.2.1
(iv) shall monitor and control
the relevant exposures on a net
basis.
(9)(b) The regulation specifies that
the value of collateral should be
adjusted for currency mismatch
through the use of a haircut.
According to the regulations: ”The
haircut that relates to currency risk
shall be 8 per cent, based on a ten
business day holding period and
daily mark-to-market.”
7.1.3.1. On a sample of netted exposures with
currency mismatch (if available), recalculate to
confirm that a currency mismatch haircut is
applied.
Collateral
14)(b)(i) Unless specifically provided
otherwise in this subregulation (14),
a bank that adopted the AIRB
approach for the measurement of
the bank's exposure to credit risk
shall in addition to the minimum
requirements specified below,
comply
with
the
relevant
requirements
specified
in
subregulation (7)(b)(iii)
14)(b)(ii) Risk weighting
When a bank that adopted the
advanced IRB approach for the
measurement of the bank's
exposure to credit risk obtains
collateral in respect of the bank's
exposure to corporate institutions,
sovereigns or banks the bank may
calculate its own LGD ratios in
respect of the said protected
exposure, provided that-
The bank's credit policy specifies the
minimum
requirements
for
collateral per subregulation (7)(b)(iii)
as well as the procedures to be
followed in order to achieve
compliance with these minimum
requirements.
Irrespective of its credit rating, a
resecuritisation instrument shall in
no case constitute an eligible
instrument for risk mitigation
purposes.
7.2.1.1. Inspect the bank's credit policy for the
appropriate inclusion of the minimum
requirements and related procedures for
collateral in line with subregulation (7)(b)(iii)
7.2.1.2.
Confirm
by
discussion
with
management and inspection of policy that a
resecuritisation instrument is not an eligible
instrument for risk mitigation purposes.
Sections A, B and C of (14) (b) (ii) are
relevant to specific components of
the risk rating system and are not
covered here.
(A) the bank shall comply with the
relevant
minimum
conditions
specified
in
subregulation
(13)(b)(v)(C) above, provided that
when the bank is unable to comply
with
the
said
minimum
requirements relating to the use of
the bank's own estimates of LGD,
the bank shall calculate the relevant
exposure's LGD ratios in accordance
with the relevant requirements of
31
7
Regulation
Criteria
Attest procedures
Bank practice and Findings
Management comments
Criteria for the recognition of credit risk mitigation instruments
Where possible, the attestation should be based on the review of statutory and regulatory audit papers and previous LFR completed which cover similar processes and controls. Where reliance is placed on statutory or regulatory audits, or previous LFR workings, reference should be
made to the audit reports and/or LFR, and working papers and findings should be included as part of the LFR.
the foundation IRB approach
specified in subregulation (11)(d)(ii)
above;
(B) the bank shall measure the LGD
ratio as a percentage of the
exposure's EAD amount;
(C) when the bank wishes to
recognise the effect of a master
netting agreement in respect of
repurchase and resale agreements
concluded
with
corporate
institutions, sovereigns or banks,
the bank shall calculate an adjusted
exposure (E*) in accordance with
the relevant requirements specified
in subregulation (9)(b)(ix) above,
which adjusted exposure shall be
deemed
to
represent
the
exposure's EAD amount, provided
that the bank may calculate its own
estimate of LGD in respect of the
relevant unsecured portion of the
relevant exposure;
7.2.3
(D) irrespective of its credit rating, a
resecuritisation instrument shall in
no case constitute an eligible
instrument for risk mitigation
purposes in terms of these
Regulations.
Minimum
requirements
per
subregulation (7)(b)(iii)
7.2.3.1. For a sample of obligors secured by
different collateral types inspect relevant
supporting documentation to determine
whether the bank has complied with the
requirements specified in subregulation
(7)(b)(iii).
General requirements:
A reduction in the risk exposure of a
bank shall be allowed to the extent7.2.4
(i) that such collateral was not
already taken into account in the
calculation of the reporting bank’s
risk exposure. For example, no
reduction in the risk exposure of the
reporting bank shall be allowed in
respect of an exposure for which an
issue specific rating was issued,
which rating already reflects the
effect of the risk mitigation;
7.2.5
(ii) that the bank complies with the
relevant requirements relating to
7.2.4.1. Obtain an understanding of the bank’s
process through discussion with management
and re-perform for a sample of obligors /
exposures the allocation of collateral to the
obligors/exposures.
Blank – move regulation text to
regulation column.
7.2.5.1. Inspect the bank’s policy and
document the treatment of relevant regulatory
32
7
Regulation
Criteria
Attest procedures
Bank practice and Findings
Management comments
Criteria for the recognition of credit risk mitigation instruments
Where possible, the attestation should be based on the review of statutory and regulatory audit papers and previous LFR completed which cover similar processes and controls. Where reliance is placed on statutory or regulatory audits, or previous LFR workings, reference should be
made to the audit reports and/or LFR, and working papers and findings should be included as part of the LFR.
disclosure, prescribed in regulation
disclosure requirements.
43
43 (2)(e)(i)(D)(i)(bb) the bank’s
policies and processes relating to
the valuation and management of
collateral, including a description of
the main types of collateral
accepted by the bank;
(2)(e)(i)(D)(ii)(aa) eligible financial
collateral, after the effect of any
haircuts has been taken into
consideration;
(2)(e)(i)(D)(ii)(bb) other eligible IRB
collateral, that is, collateral that
qualifies as eligible collateral in
terms of the IRB approach in
addition to eligible financial
collateral, after the effect of any
haircuts or adjustments to the
exposure has been taken into
consideration;
(2)(e)(i)(E)(i)(bb) the bank’s policies
in order to secure collateral and to
establish adequate credit reserves;
7.2.6
7.2.7
(2)(e)(i)(E)(i)(dd) the estimated
amount of collateral the bank
would have to provide in the case of
a credit rating downgrade.
(iii) that the bank is able to establish
title to the collateral in order to
liquidate it;
(iv) that such collateral can be
realised by the reporting bank
under normal market conditions,
that is, the value at which the
collateral can be realised in the
market does not materially differ
from its book value, provided that a
bank shall maintain an appropriate
margin of collateral in excess of the
amount in respect of which a
reduction in the risk exposure is
allowed in order to provide for
fluctuations in the market value of
the relevant collateral.
7.2.6.1. Hold discussions with the Bank’s legal
department and document the Bank’s
procedures that ensure it is able to establish
title to the collateral.
7.2.7.1. Inspect the bank’s policy with regards
to valuation of collateral and confirm through
re-performance on a sample of collateralised
exposures that haircuts to the value of
collateral are applied in practice.
33
7
7.2.8
Regulation
Criteria
Attest procedures
Bank practice and Findings
Management comments
Criteria for the recognition of credit risk mitigation instruments
Where possible, the attestation should be based on the review of statutory and regulatory audit papers and previous LFR completed which cover similar processes and controls. Where reliance is placed on statutory or regulatory audits, or previous LFR workings, reference should be
made to the audit reports and/or LFR, and working papers and findings should be included as part of the LFR.
7.2.8.1. Hold discussions with the Bank’s legal
Specific requirements
department and document the Bank’s process
to obtain legal certainty.
(i) Legal certainty
Collateral is effective only when the
legal process by which collateral is
given is robust and ensures that the
reporting bank has clear rights over
the collateral, and may liquidate or
retain it in the event of a default,
insolvency or bankruptcy (or an
otherwise defined credit event set
out
in
the
transaction
documentation) of the obligor and,
where applicable, the custodian
holding the collateral.
A bank shall take all steps necessary
to fulfill contractual requirements in
respect of the enforceability of
security interest, for example, by
registering a security interest with
an issuer or a registrar. When the
collateral is held by a custodian, the
bank shall seek to ensure that the
custodian
ensures
adequate
segregation of the collateral
instruments and the custodian's
own assets.
In cases of uncertainty, a bank shall
obtain legal certainty by way of
legal opinions confirming the
enforceability of the collateral
arrangements in all relevant
jurisdictions, and that the bank’s
rights are legally well founded.
Legal opinions shall be updated at
appropriate intervals in order to
ensure continued enforceability.
7.2.8
(ii) Documentation
The collateral arrangements shall be
duly documented with a clear and
robust procedure in place for the
timely liquidation of collateral. A
bank's
procedures
shall
be
sufficiently robust to ensure that
any legal conditions required for
7.2.8.1. Hold discussions with the Bank’s legal
department and document the Bank’s
procedure for liquidation of collateral.
34
7
Regulation
Criteria
Attest procedures
Bank practice and Findings
Management comments
Criteria for the recognition of credit risk mitigation instruments
Where possible, the attestation should be based on the review of statutory and regulatory audit papers and previous LFR completed which cover similar processes and controls. Where reliance is placed on statutory or regulatory audits, or previous LFR workings, reference should be
made to the audit reports and/or LFR, and working papers and findings should be included as part of the LFR.
declaring the default of the client
and liquidating the collateral are
observed.
7.2.9
(iii) Low correlation with exposure
In order for collateral to provide
effective protection, the credit
quality of the obligor and the value
of the collateral shall not have a
material positive correlation.
7.2.10
(iv) Mismatches
7.2.11
No currency mismatch shall exist
between the underlying exposure
and the collateral. Collateral
obtained by the bank as security
against an exposure of the bank
shall be pledged as security for the
full duration of the bank's exposure.
(v) Rating
The rating issued in respect of the
collateral instrument shall not
relate only to the principal amount.
7.2.12
(vi)
Robust
process
risk-management
While collateral reduces credit risk;
it simultaneously increases other
risks to which a bank is exposed,
such as legal risk, operational risk,
liquidity risk and market risk.
Therefore, a bank shall employ
robust procedures and processes to
control all material risks.
As a minimum, a robust riskmanagement process relating to
collateral management shall include
the fundamental elements specified
below.
7.2.9.1. Inspect the bank’s documentation for
treatment of correlation between borrower
and mitigant.
7.2.9.2. On a sample of transactions where
correlation was identified, re-perform the
adjustment to the collateral value.
7.2.10.1. Inspect the bank’s documentation for
treatment of currency mismatches.
7.2.10.2. On a sample of transactions where
currency mismatch was identified, re-perform
the adjustment to the collateral value.
7.2.11.1. On a sample of transactions inspect
the assigned rating in respect of the collateral
instrument and confirm that it does not relate
only to the principal amount.
7.2.12.1. Through discussion with management
and legal and inspection of bank’s supporting
documentation confirm that:

Collateral strategy is documented

Borrower’s
creditworthiness
is
considered

Collateral is regularly revalued, but
not less than every six months

Clear policies and procedures in
respect of collateral management
exist.

A collateral management system
exists and is capable of tracking the
location and status of posted
collateral

Treatment of concentration risk is
detailed in policy and includes
purchased credit protection.
(aa) Strategy
A duly articulated strategy for the
use of collateral shall form an
intrinsic part of a bank's general
credit strategy and overall liquidity
strategy.
(bb) Focus on underlying credit
35
7
Regulation
Criteria
Attest procedures
Bank practice and Findings
Management comments
Criteria for the recognition of credit risk mitigation instruments
Where possible, the attestation should be based on the review of statutory and regulatory audit papers and previous LFR completed which cover similar processes and controls. Where reliance is placed on statutory or regulatory audits, or previous LFR workings, reference should be
made to the audit reports and/or LFR, and working papers and findings should be included as part of the LFR.
A bank shall continue to assess a
collateralised exposure on the basis
of the borrower's creditworthiness.
A bank shall obtain and analyse
sufficient financial information to
determine the obligor's risk profile
and its risk-management and
operational capabilities.
(cc) Valuation
A bank shall mark its collateral to
market and revalue its collateral at
regular intervals but not less
frequently than once every six
months.
(dd)
Policies
and
procedures
Clear policies and procedures shall
be established and maintained in
respect of collateral management,
including:
(i) the terms of collateral
agreements, types of collateral and
enforcement of collateral terms (for
example, waivers of posting
deadlines);
(ii) the management of legal risks;
(iii)
the
administration
agreements; and
of
(iv) the prompt resolution of
disputes, such as valuation of
collateral or positions, acceptability
of collateral, fulfillment of legal
obligations and the interpretation
of contract terms.
A bank shall regularly review its
policies and procedures in order to
ensure that the said policies and
procedures remain appropriate and
effective.
(ee) Systems
36
7
Regulation
Criteria
Attest procedures
Bank practice and Findings
Management comments
Criteria for the recognition of credit risk mitigation instruments
Where possible, the attestation should be based on the review of statutory and regulatory audit papers and previous LFR completed which cover similar processes and controls. Where reliance is placed on statutory or regulatory audits, or previous LFR workings, reference should be
made to the audit reports and/or LFR, and working papers and findings should be included as part of the LFR.
A bank's policies and procedures
shall be supported by collateral
management systems capable of
tracking the location and status of
posted collateral.
(ff) Concentration risk
A bank shall have in place a duly
defined policy with respect to the
amount of concentration risk that it
is prepared to accept, that is, a
policy in respect of the taking as
collateral of large quantities of
instruments issued by the same
obligor.
7.3
7.3.1
A bank shall take into account
collateral and purchased credit
protection when it assesses the
potential concentrations in its credit
portfolio,
including
when
determining its concentration risk in
terms of section 73 of the Act.
Guarantees
(14)(c)(i) As a minimum, a bank that
adopted the advanced IRB approach
for the recognition of risk mitigation
in respect of guarantees(A) shall comply with the relevant
requirements
specified
in
subregulations (7)(c)(iv), (11)(b)(v)
and (11)(b)(vi) above;
The bank's credit policy specifies the
minimum
requirements
for
guarantees
per
subregulations
(7)(c)(iv), (11)(b)(v) and (11)(b)(vi)
as well as the procedures to be
followed in order to achieve
compliance with these minimum
requirements.
7.3.1.1. Attestation procedures are individually
listed in below sections.
The
requirements
per
subregulations (7)(c)(iv), (11)(b)(v)
and (11)(b)(vi) are listed in the
Regulation column below.
7.3.2
(7)(c)(iv) Minimum requirements
relating to guarantees
(A) General requirements
A reduction in the risk weight of a
bank's exposure to the risk weight
applicable to the relevant guarantor
shall be allowed only to the extent-
7.3.2.1. Hold discussions with the Bank’s legal
department and document:

the bank’s process of allocation of
guarantees
to
the
obligors/exposures.

whether the guarantee may be
realised by the reporting bank under
normal market conditions.
(i) that such guarantee was not
already taken into account in the
calculation of the reporting bank's
risk exposure. For example, no
reduction in the risk exposure of the
reporting bank shall be allowed in
37
7
7.3.3
Regulation
Criteria
Attest procedures
Bank practice and Findings
Management comments
Criteria for the recognition of credit risk mitigation instruments
Where possible, the attestation should be based on the review of statutory and regulatory audit papers and previous LFR completed which cover similar processes and controls. Where reliance is placed on statutory or regulatory audits, or previous LFR workings, reference should be
made to the audit reports and/or LFR, and working papers and findings should be included as part of the LFR.
respect of an exposure for which an
issue specific rating was issued,
which rating already reflects the
effect of the guarantee;
(ii) that such guarantee may be
realised by the reporting bank
under normal market conditions;
(B) Specific requirements
(i) The guarantee shall be an
explicitly documented obligation
assumed by the guarantor.
7.3.4
(ii) The guarantee shall be legally
enforceable
in
all
relevant
jurisdictions and the bank’s rights in
terms of the guarantee shall be
legally well founded.
7.3.3.1. On a sample of transactions, confirm
through
inspection
of
the
bank’s
documentation whether guarantees constitute
explicitly documented obligations by the
guarantor.
7.3.4.1. Hold discussions with the Bank’s legal
department and document the Bank’s process
to obtain legal certainty.
Legal opinions shall be updated at
appropriate intervals in order to
ensure continued enforceability of
the bank’s rights in terms of the
guarantee.
7.3.5
(iii) Direct
The guarantee shall constitute a
direct claim on the guarantor.
When a qualifying default or nonpayment by the obligor occurs, the
reporting bank shall pursue the
guarantor for amounts outstanding
under the loan, rather than having
to continue to pursue the obligor.
7.3.5.1. Hold discussions with the Bank’s legal
department and document the Bank’s process
to ensure guarantees constitute a direct claim
on the guarantor.
7.3.5.2. On a sample of transactions, inspect
the risk rating system parameters and confirm
where guarantees are less than the exposure
that only partial mitigation is allowed.
When the guarantee provides only
for the payment of principal
amounts, any interest amount and
other unprotected payments shall
be regarded as unsecured amounts.
Payment by the guarantor in terms
of the guarantee may grant the
guarantor the right to pursue the
obligor for amounts outstanding
under the loan.
7.3.6
(iv) Explicit
The guarantee shall be linked to
7.3.6.1. Hold discussions with the Bank’s legal
department and document the Bank’s process
to ensure the extent of cover is duly defined
and incontrovertible.
38
7
Regulation
Criteria
Attest procedures
Bank practice and Findings
Management comments
Criteria for the recognition of credit risk mitigation instruments
Where possible, the attestation should be based on the review of statutory and regulatory audit papers and previous LFR completed which cover similar processes and controls. Where reliance is placed on statutory or regulatory audits, or previous LFR workings, reference should be
made to the audit reports and/or LFR, and working papers and findings should be included as part of the LFR.
specific exposures, so that the
extent of the cover is duly defined
and incontrovertible.
7.3.7
(v) Irrevocable
7.3.8
Other than the reporting bank's
non-payment of money due in
respect of the guarantee, there
shall be no clause in the contract
that would allow the guarantor
unilaterally to cancel the guarantee
or increase the effective cost of the
protection
as
a
result
of
deterioration in the credit quality of
the protected exposure.
(vi) Unconditional
There shall be no clause in the
guarantee that could prevent the
guarantor from being obliged to pay
out, in a timely manner, in the
event of the original obligor failing
to make the payment(s) due.
7.3.9
(vii)
Robust
process
risk-management
While guarantees reduce credit risk,
they simultaneously increase other
risks to which a bank is exposed,
such as legal and operational risks.
Therefore a bank shall employ
robust procedures and processes to
control the aforesaid risks.
As a minimum, a robust riskmanagement process relating to
guarantees shall include the
fundamental elements specified
below.
7.3.7.1. Hold discussions with the Bank’s legal
department and document the Bank’s process
to ensure no clause in the contract that would
allow the guarantor unilaterally to cancel the
guarantee or increase the effective cost of the
protection as a result of deterioration in the
credit quality of the protected exposure.
7.3.8.1. Hold discussions with the Bank’s legal
department and document the Bank’s process
to ensure no clause in the guarantee that could
prevent the guarantor from being obliged to
pay out, in a timely manner, in the event of the
original obligor failing to make the payment(s)
due.
7.3.9.1. Through discussion with management
and legal and inspection of bank’s supporting
documentation confirm that:

Guarantee strategy is documented

Borrower’s
creditworthiness
is
considered

A guarantee management system
exists and is capable of tracking the
location and status of guarantees

Treatment of concentration risk is
detailed in policy and the Bank
mitigates its concentration risk
through monitoring general trends
affecting relevant guarantors.

The Bank monitors and controls its
roll-off risk.
(aa) Strategy
A duly articulated strategy for
guarantees shall form an intrinsic
part of a bank's general credit
strategy and overall liquidity
strategy.
(bb) Focus on underlying credit
A bank shall continue to assess a
guaranteed exposure on the basis
39
7
Regulation
Criteria
Attest procedures
Bank practice and Findings
Management comments
Criteria for the recognition of credit risk mitigation instruments
Where possible, the attestation should be based on the review of statutory and regulatory audit papers and previous LFR completed which cover similar processes and controls. Where reliance is placed on statutory or regulatory audits, or previous LFR workings, reference should be
made to the audit reports and/or LFR, and working papers and findings should be included as part of the LFR.
of the borrower's creditworthiness.
A bank shall obtain and analyse
sufficient financial information to
determine the obligor's risk profile
and its risk-management and
operational capabilities.
(cc) Systems
A bank's policies and procedures
shall be supported by management
systems capable of tracking the
location and status of guarantees. A
bank shall regularly review its
policies and procedures in order to
ensure that the said policies and
procedures remain appropriate and
effective.
(dd) Concentration risk
A bank shall have in place a duly
defined policy with respect to the
amount of concentration risk that it
is prepared to accept.
A bank shall take guaranteed
positions into account when
assessing
the
potential
concentrations
in
its
credit
portfolio,
including
when
determining its concentration risk in
terms of section 73 of the Act. In
order to mitigate its concentration
risk a bank shall monitor general
trends
affecting
relevant
guarantors.
7.3.10
(ee) Roll-off risks
When a bank obtains guarantees
that differ in maturity from the
underlying credit exposure, the
bank shall monitor and control its
roll-off risks, that is, the fact that
the bank will be exposed to the full
amount of the credit exposure
when the guarantee expires. The
bank may be unable to obtain
further guarantees or to maintain
its capital adequacy when the
guarantee expires.
(11)(b)(v) Without derogating from
the provisions of subparagraphs (i)
to (iv) above, the rating and risk
estimation systems and processes
7.3.10.1. Through discussion with management
and legal department, and inspection of bank’s
documentation, document the Bank’s process
for assigning ratings to obligors and
40
7
Regulation
Criteria
Attest procedures
Bank practice and Findings
Management comments
Criteria for the recognition of credit risk mitigation instruments
Where possible, the attestation should be based on the review of statutory and regulatory audit papers and previous LFR completed which cover similar processes and controls. Where reliance is placed on statutory or regulatory audits, or previous LFR workings, reference should be
made to the audit reports and/or LFR, and working papers and findings should be included as part of the LFR.
of a bank that adopted the IRB
guarantors.
approach for the measurement of
the bank's exposure to credit risk in
7.3.10.2. For a sample of obligors, re-perform
respect of positions held in the
the process for assigning ratings to obligors
bank's banking bookand guarantors (where applicable).
(A) shall in the case of exposures to
corporate institutions, sovereigns or
banks, excluding any exposures
relating to specialised lending that
were mapped into the standardised
rating categories specified in
paragraph (d)(iii)(C) below, have
separate and distinct dimensions
relating to(i) the risk of borrower default,
that is, separate exposures to
the same obligor shall be
assigned to the same borrower
grade, irrespective of any
differences in the nature of
each specific transaction unless(bb)
protection
was
obtained in the form of a
guarantee, which protection
resulted in an adjusted
borrower grade,
in
which
case
separate
exposures may result in multiple
grades in respect of the same
obligor.
(B) shall in the case of exposures to
corporate institutions, sovereigns or
banks
ensure
a
meaningful
distribution of exposures across risk
grades, that is, the bank shall not
have excessive concentrations of
exposure in any one of the bank's
borrower rating or facility rating
scales. As a minimum, a bank that
adopted the IRB approach(iii) shall assign a rating to each
obligor
and
all
eligible
guarantors, which rating shall
be reviewed or approved by a
person who does not directly
benefit from the extension of
credit;
(11)(b)(vi) Risk quantification
7.3.11
No mention of guarantees or
guarantor treatment
(14)(c)(i)(B) As a minimum, a bank
No attest procedure
The bank assigns to all obligors and
7.3.11.1.
Inspect
the
bank's
supporting
41
7
7.3.12
7.3.13
Regulation
Criteria
Attest procedures
Bank practice and Findings
Management comments
Criteria for the recognition of credit risk mitigation instruments
Where possible, the attestation should be based on the review of statutory and regulatory audit papers and previous LFR completed which cover similar processes and controls. Where reliance is placed on statutory or regulatory audits, or previous LFR workings, reference should be
made to the audit reports and/or LFR, and working papers and findings should be included as part of the LFR.
that adopted the advanced IRB eligible guarantors a borrower rating documentation (including policies) and
approach for the recognition of risk and own LGD estimate.
document whether the Bank:
mitigation in respect of guarantees

Specifies the criteria for adjusting
shall assign to all relevant obligors The bank’s credit policy specifies the
the borrower grades and LGD
and eligible guarantors a borrower criteria for adjusting the borrower
estimates to account for eligible
rating and calculate its own grades and LGD estimates to
guarantees.
estimates of LGD in respect of the account for eligible guarantees.
bank's various exposures, provided
that the bank shall have in place These criteria incorporate the
duly specified criteriaguarantor’s ability and willingness to
honour its commitment in terms of
(i) to adjust its borrower grades;
the guarantee, any correlation
between the guarantor’s ability to
(ii) to adjust its LGD estimates;
honour its commitment and
obligor’s ability to repay any
amounts due, as well as the effect of
any residual risks between the
guarantee and the underlying
exposure.
(14)(c)(i)(C) a bank that adopted the The adjusted risk weight relating to 7.3.12.1. For a sample of guaranteed
advanced IRB approach for the a particular exposure shall not be exposures, confirm through comparison that
recognition of risk mitigation in less than that of a comparable direct the risk weight relating to a particular exposure
respect of guarantee shall not in the exposure to the relevant guarantor, is not less than that of a comparable direct
calculation of the bank's risk- unless the bank takes into account exposure to the relevant guarantor, unless the
weighted exposure reflect the the effect of double default in line bank takes into account the effect of double
effect of double default otherwise with the relevant regulations.
default in line with the relevant regulations
than in accordance with the
relevant requirements specified in
paragraph (f) below, that is, the
adjusted risk weight relating to a
particular exposure shall not be less
than a comparable direct exposure
to the relevant guarantor unless the
bank calculates the said adjusted
risk weight in accordance with the
relevant requirements specified in
paragraph (f) below, provided that
whenever a guarantee obtained in
respect of an exposure results in a
higher capital requirement for the
reporting bank than before the
recognition of such guarantee, the
reporting bank may ignore the
effect of the said guarantee.
(14)(c)(ii) Eligible guarantors
The bank’s credit policy specifies the 7.3.13.1. Inspect the bank's credit policy and
criteria in respect of the types of document whether it specifies criteria in
A bank that adopted the advanced guarantors acceptable to the bank respect of the types of guarantors acceptable
IRB approach for the recognition of
for risk mitigation purposes.
to the bank for risk mitigation purposes.
risk
mitigation
relating
to
guarantees may recognise the
effect of a guarantee obtained from
any guarantor, provided that(A) the guarantee shall comply with
the
relevant
minimum
42
7
7.3.14
Regulation
Criteria
Attest procedures
Bank practice and Findings
Management comments
Criteria for the recognition of credit risk mitigation instruments
Where possible, the attestation should be based on the review of statutory and regulatory audit papers and previous LFR completed which cover similar processes and controls. Where reliance is placed on statutory or regulatory audits, or previous LFR workings, reference should be
made to the audit reports and/or LFR, and working papers and findings should be included as part of the LFR.
requirements
specified
in
subregulation (7)(c)(iv) above;
(B) the bank shall have in place a
comprehensive policy and criteria in
respect of the types of guarantors
acceptable to the bank for risk
mitigation purposes;
(14)(c)(iii) Risk weighting
When a bank that adopted the
advanced IRB approach for the
measurement of the bank's riskweighted credit exposure obtains-
7.3.15
(A) protection from a guarantor in
respect of the bank's credit
exposure to a corporate institution,
sovereign or bank, the bank(i) shall reflect the risk
mitigation
effect
of
the
guarantee by way of an
adjustment either to the PD
ratio or LGD ratio of the
relevant exposure provided that
the bank shall apply the
adjustments to the PD ratio or
LGD ratio in a consistent
manner; or
(ii) may reflect the risk
mitigation
effect
of
the
guarantee in accordance with
the
relevant
requirements
relating to the recognition of
guarantees in terms of the
foundation
IRB
approach
prescribed in subregulation
(12)(d) above.
(C) protection against dilution risk
in respect of purchased receivables,
the bank may apply the double
default approach specified in
paragraph (f) below in order to
calculate the required risk-weighted
asset amount for dilution risk
provided that the bank
shall comply with the relevant
requirements
specified
in
subregulation (12)(d)(iii)(D).
(12)(d)(iii) Risk weighting
When a bank that adopted the
foundation IRB approach for the
measurement of the bank's riskweighted credit exposure obtains-
The bank's credit policy specifies the
risk weighting treatment for
guarantees specified in subregulation
(14)(c)(iii).
7.3.14.1. Inspect the bank's credit policy and
document whether procedures to ensure
compliance with the requirements specified in
subregulation (14)(c)(iii)(A) and (14)(c)(iii)(C)
have been specified.
7.3.14.2. For a sample of guaranteed
exposures, confirm through inspection of the
relevant supporting documentation that the
risk mitigation effect of the guarantee is
reflected by way of an adjustment either to the
PD ratio or LGD ratio under AIRB approach, or
both the PD and LGD ratios using the
foundation-IRB approach (using FIRB LGDs).
On a sample basis, where
foundation IRB is used, check that
the requirements of in subregulation (12)(d)(iii) are complied
with.
7.3.15.1. Where the foundation IRB approach
is adopted, inspect the bank's credit policy and
document whether procedures to ensure
compliance with the requirements specified in
subregulation (12)(d)(iii)(A) and (12)(d)(iii)(C)
has been specified.
43
7
Regulation
Criteria
Attest procedures
Bank practice and Findings
Management comments
Criteria for the recognition of credit risk mitigation instruments
Where possible, the attestation should be based on the review of statutory and regulatory audit papers and previous LFR completed which cover similar processes and controls. Where reliance is placed on statutory or regulatory audits, or previous LFR workings, reference should be
made to the audit reports and/or LFR, and working papers and findings should be included as part of the LFR.
(A) protection from an eligible
7.3.15.2. For a sample of guaranteed
guarantor in respect of the bank's
exposures, inspect relevant supporting
credit exposure to a corporate
documentation to determine whether the
institution, sovereign or bank the
bank has complied with the requirements
bankspecified in subregulation (12)(d)(iii) (A) and
(I) shall divide the relevant
(12)(d)(iii)(C).
exposure into a protected
portion and an unprotected
portion;
(ii) shall in respect of the
protected portion apply(aa) the risk-weight function
relating to the relevant
guarantor; and
(bb) the PD ratio relating to
the relevant guarantor, or a
higher PD ratio relating to a
risk grade between the
underlying obligor and the
relevant guarantor when
the bank deems a complete
substitution
approach
inappropriate,
provided that, based on its
seniority or any collateralization
of a guaranteed commitment,
the bank may replace the LGD
ratio
of
the
underlying
transaction with the relevant
LGD ratio relating to the said
guaranteed position;
(iii) shall in respect of the
unprotected portion, apply the
risk weight relating to the
underlying obligor;
(iv) shall in the case of(aa) proportional protection
comply with the relevant
requirements specified in
subregulation
(9)(c)(v)
above;
(bb) a currency mismatch
between the underlying
obligation
and
the
protection obtained comply
with
the
relevant
requirements specified in
subregulation
(9)(c)(vi)
above.
(C) protection in the form of a
guarantee in respect of purchased
receivables, the bank shall in the
case of a guarantee44
7
7.4
7.4.1
Regulation
Criteria
Attest procedures
Bank practice and Findings
Management comments
Criteria for the recognition of credit risk mitigation instruments
Where possible, the attestation should be based on the review of statutory and regulatory audit papers and previous LFR completed which cover similar processes and controls. Where reliance is placed on statutory or regulatory audits, or previous LFR workings, reference should be
made to the audit reports and/or LFR, and working papers and findings should be included as part of the LFR.
(i) that covers both default risk
and dilution risk, substitute the
risk weight relating to default
risk and dilution risk for the risk
weight of the guarantor;
(ii) that covers only default risk
or dilution risk, but not both
substitute the relevant risk
weight relating to default risk or
dilution risk for the risk weight
of the guarantor, and add the
relevant capital requirement for
the other component;
(iii) that covers only a portion of
the default risk and/or dilution
risk, substitute the risk weight in
respect of the protected
exposure in accordance with the
relevant directives specified
above, and add the relevant risk
weights
relating
to
the
unprotected exposure.
(D) protection against dilution risk
in respect of purchased receivables,
the bank may apply the double
default approach specified in
paragraph (g) below in order to
calculate the required risk-weighted
asset amount for dilution risk,
provided that(i) the bank shall at all times
comply with the relevant
requirements
specified
in
paragraph (g) below;
(ii) PD0 shall be equal to the
estimated EL amount;
(iii) LGIDg shall be equal to 100
percent;
(iv) the bank shall determine the
effective maturity of the
relevant exposure in accordance
with the relevant requirements
specified
in
subregulation
(11)(d)(vi)(A)(ii).
Credit derivative instruments
(14)
(d)
Credit
derivative
instruments
(i) Minimum requirements
As a minimum, a bank that adopted
the advanced IRB approach for the
recognition of risk mitigation
relating to credit protection
obtained in the form of a credit-
The bank's credit policy specifies the
minimum
requirements
for
treatment of credit derivatives for
risk mitigation purposes per
subregulation (9)(d)(xi) as well as
the procedures to be followed in
order to achieve compliance with
these
minimum
requirements.
7.4.1.1. Attestation procedures are individually
listed in below sections.
7.4.1.2. Where the bank uses a standard
agreement and this has been reviewed against
the minimum regulatory requirements in the
last three years and has not changed / updated
during this time period reliance can be placed
for the attest procedures below (7.4.2 until
45
7
7.4.2
Regulation
Criteria
Attest procedures
Bank practice and Findings
Management comments
Criteria for the recognition of credit risk mitigation instruments
Where possible, the attestation should be based on the review of statutory and regulatory audit papers and previous LFR completed which cover similar processes and controls. Where reliance is placed on statutory or regulatory audits, or previous LFR workings, reference should be
made to the audit reports and/or LFR, and working papers and findings should be included as part of the LFR.
derivative instrument7.4.10).
(A) shall comply with the relevant
minimum requirements specified in
subregulation (9)(d)(xi) above;
(9)(d)(xi) Minimum requirements
relating
to
credit-derivative
instruments
(A) General requirement
(i)
Notwithstanding
the
provisions of these Regulations,
a bank that wishes to engage in
credit-derivative transactions(aa) shall obtain the prior
written approval of the
Financial
Surveillance
Department of the Reserve
Bank in respect of any such
transaction involving a nonresident person; Should the
Financial
Surveillance
Department of the Reserve
Bank grant its approval to
the said transaction, the
bank shall adhere to such
rules, conditions or such
regulations as may be
specified by the Financial
Surveillance Department of
the Reserve Bank relating to
such
credit-derivative
instruments;
(bb) shall comply with such
rules, conditions or such
regulations as may be
specified by the Financial
Surveillance Department of
the Reserve Bank relating to
credit-derivative
instruments.
(ii) Protection from a creditderivative contract shall be
recognized in terms of these
Regulations to the extent(aa) that such protection
was not already taken into
consideration
in
the
calculation of the reporting
bank's required amount of
capital and reserve funds;
(bb) that such protection
can be realised by the
reporting
bank
under
7.4.2.1. Through discussion with management
and legal and inspection of bank’s supporting
documentation, document

Whether prior approval has been
obtained in respect of any
transactions involving a non-resident.

Whether the Bank has complied with
such rules, conditions or such
regulations as may be specified by
the
Financial
Surveillance
Department of the Reserve Bank
relating
to
credit-derivative
instruments.

The process of allocation of credit
derivatives protection to the
obligors/exposures.

Whether the protection may be
realised by the reporting bank under
normal market conditions.
46
7
7.4.3
7.4.4
7.4.5
7.4.6
7.4.7
Regulation
Criteria
Attest procedures
Bank practice and Findings
Management comments
Criteria for the recognition of credit risk mitigation instruments
Where possible, the attestation should be based on the review of statutory and regulatory audit papers and previous LFR completed which cover similar processes and controls. Where reliance is placed on statutory or regulatory audits, or previous LFR workings, reference should be
made to the audit reports and/or LFR, and working papers and findings should be included as part of the LFR.
normal market conditions,
that is, the value at which
the protection can be
realised shall not differ
materially from its book
value.
(B) Specific requirements
7.4.3.1. Through discussion with the legal
department,
document
the
Bank’s
A bank that wishes to recognise the
procedures/policy requirements to ensure the
risk-mitigation effect of protection
credit protection constitutes a direct claim on
obtained in the form of a creditthe protection seller.
derivative instrument in the
calculation of the bank's credit
exposure shall comply with the
requirements specified below:
(I) Direct
The
credit
protection
shall
constitute a direct claim on the
protection seller.
(ii) Explicit
The credit protection shall be linked
to specific credit exposures, so that
the extent of the cover is duly
defined and incontrovertible.
(iii) Irrevocable
Other than a protection buyer's
non-payment of money due in
respect of the credit protection
contract, there shall be no clause in
the contract that would allow the
protection seller unilaterally to
cancel the credit protection or
increase the effective cost of the
protection
as
a
result
of
deterioration in the credit quality of
the protected exposure.
(iv) Unconditional
There shall be no clause in the
contract other than clauses relating
to procedural requirements that
could prevent the protection seller
from being obliged to make
payment in a timely manner should
a credit event occur in respect of an
underlying asset, reference entity or
reference asset.
(v) The credit protection shall be
legally enforceable in all relevant
Jurisdictions In cases of uncertainty,
a bank shall obtain legal opinion
confirming the enforceability of the
7.4.4.1. Through discussion with the legal
department,
document
the
Bank’s
procedures/policy requirements to ensure the
credit protection is explicit and the extent of
cover is duly defined and incontrovertible.
7.4.5.1. Through discussion with the legal
department,
document
the
Bank’s
procedures/policy requirements to ensure the
credit protection is irrevocable.
7.4.6.1. Through discussion with the legal
department,
document
the
Bank’s
procedures/policy requirements to ensure the
credit protection is unconditional.
7.4.7.1. Through discussion with the legal
department,
document
the
Bank’s
procedures/policy requirements to ensure the
credit protection is legally enforceable in all
relevant jurisdictions.
47
7
7.4.8
Regulation
Criteria
Attest procedures
Bank practice and Findings
Management comments
Criteria for the recognition of credit risk mitigation instruments
Where possible, the attestation should be based on the review of statutory and regulatory audit papers and previous LFR completed which cover similar processes and controls. Where reliance is placed on statutory or regulatory audits, or previous LFR workings, reference should be
made to the audit reports and/or LFR, and working papers and findings should be included as part of the LFR.
credit protection in all relevant
jurisdictions and that the bank's
rights are legally well founded.
Legal opinions shall be updated at
appropriate intervals in order to
ensure continuing enforceability.
(vi) The protection seller shall not
7.4.8.1. Through discussion with the legal
have any formal recourse to the
department,
document
the
Bank’s
protection buyer in respect of
procedures/policy requirements to ensure the
losses incurred by the protection
protection seller has no recourse to the
seller.
protection buyer in respect of losses incurred
by the protection seller.
7.4.9
(vii) In the case of a funded singlename credit-derivative contract, the
protection buyer shall not be
obliged to repay any funds received
from the protection seller in terms
of the credit derivative contract,
except at the maturity date of the
contract, provided that no credit
event has occurred during the
period of bought protection or as a
result of a defined credit event, and
then in accordance with the terms
of payment defined in the contract.
7.4.9.1. Through discussion with the legal
department,
document
the
Bank’s
procedures/policy requirements to ensure
that, in the case of a funded single-name
credit-derivative contract, the protection buyer
shall not be obliged to repay any funds
received from the protection seller in terms of
the credit derivative contract, except at the
maturity date of the contract, provided that no
credit event has occurred during the period of
bought protection or as a result of a defined
credit event, and then in accordance with the
terms of payment defined in the contract.
7.4.10
(viii) In order to obtain full
recognition of the protection
obtained, the base currency of a
credit-derivative instrument shall be
the same currency as the currency
in which the credit exposure that is
protected is denominated. When a
credit-derivative instrument is
denominated in a currency that
differs from the currency in which
the credit exposure is denominated,
that is, when there is a currency
mismatch, the bought protection
may be less than expected owing to
fluctuations in the exchange rates
When a bank obtains credit
protection that is denominated in a
currency that differs from the
currency in which the exposure is
denominated, the amount of the
exposure deemed to be protected
shall be reduced by the application
of the formula specified below,
which formula is designed to
recognise the effect of the currency
mismatch. The formula is expressed
7.4.10.1. Inspect the Bank’s policy and
document the treatment of currency
mismatches for credit derivatives.
7.4.10.2. Document whether the haircut is
scaled by using a square root of time formula
where daily mark-to-market is not evidenced.
7.4.10.3. On a sample of contracts with
currency mismatch, re-perform the adjustment
to the protection obtained.
48
7
Regulation
Criteria
Attest procedures
Bank practice and Findings
Management comments
Criteria for the recognition of credit risk mitigation instruments
Where possible, the attestation should be based on the review of statutory and regulatory audit papers and previous LFR completed which cover similar processes and controls. Where reliance is placed on statutory or regulatory audits, or previous LFR workings, reference should be
made to the audit reports and/or LFR, and working papers and findings should be included as part of the LFR.
as:
GA = G x (1 -HFx)
where:
GA is the relevant adjusted value of
the protection
G is the relevant nominal amount of
the credit protection obtained
HFx is the haircut relating to the
currency mismatch between the
credit protection and the underlying
obligation.
7.4.11
The haircut shall be based on a ten
business day holding period and
daily mark to market. When a bank
applies the standard haircuts, a
haircut equal to 8 per cent shall
apply. A bank shall use the relevant
square root of time formula
specified in paragraph (b)(xiv)
above to scale up a haircut
percentage when the holding
period or frequency of mark-tomarket adjustment differs from the
specified minimum requirements.
(ix)
Robust
risk-management
process
While credit-derivative instruments
reduce
credit
risk,
they
simultaneously increase other risks
to which a bank is exposed such as
legal and operational risks.
Therefore, a bank shall employ
robust procedures and processes to
control the aforesaid risks. As a
minimum,
a
robust
riskmanagement process relating to
credit-derivative instruments shall
include the fundamental elements
specified below:
(aa) Strategy
A duly articulated strategy for
credit-derivative instruments shall
form an intrinsic part of a bank's
general credit strategy and overall
liquidity strategy.
7.4.11.1. Through discussion with management
and the legal department and inspection of
bank’s supporting documentation confirm
that:

Credit
derivative
strategy
is
documented

Borrower’s
creditworthiness
is
considered

A credit derivative management
system exists and is capable of
tracking the location and status of
instruments.

Treatment of concentration risk is
detailed in policy and the Bank
mitigates its concentration risk
through monitoring general trends
affecting relevant protection sellers.

The Bank monitors and controls its
roll-off risk.
(bb) Focus on underlying credit
A bank shall continue to assess an
exposure that is hedged by a creditderivative instrument on the basis
of the borrower's creditworthiness.
49
7
Regulation
Criteria
Attest procedures
Bank practice and Findings
Management comments
Criteria for the recognition of credit risk mitigation instruments
Where possible, the attestation should be based on the review of statutory and regulatory audit papers and previous LFR completed which cover similar processes and controls. Where reliance is placed on statutory or regulatory audits, or previous LFR workings, reference should be
made to the audit reports and/or LFR, and working papers and findings should be included as part of the LFR.
A bank shall obtain and analyse
sufficient financial information to
determine the obligor's risk profile
and its risk management and
operational capabilities.
(cc) Systems
A bank's policies and procedures
shall be supported by management
systems capable of tracking the
location and status of its creditderivative instruments.
(dd) Concentration risk
A bank shall have in place a duly
defined policy with respect to the
amount of concentration risk that it
is prepared to accept. A bank shall
take into account purchased credit
protection when assessing the
potential concentrations in its credit
portfolio, including when the bank
determines its concentration risk in
terms of section 73 of the Act. A
bank shall monitor general trends
affecting its credit protection
sellers, in order to mitigate its
concentration risk.
7.4.12
(ee) Roll-off risks
When a bank obtains credit
protection that differs in maturity
from
the
underlying
credit
exposure, the bank shall monitor
and control its roll-off risks, that is,
the fact that the bank will be
exposed to the full amount of the
credit exposure when the credit
protection expires.
(x) As a minimum, the risk
management systems of the
reporting bank shall be adequate-
7.4.12.1. Perform a walkthrough and inspect
the bank’s system and document whether it
covers the nine components of the regulations.
(aa) to capture the credit risk
relating to a reference asset,
reference entity or underlying asset
acquired through a credit-derivative
contract and any counterparty risk
arising from an unfunded over-thecounter credit-derivative contract
within the normal credit approval
and credit
monitoring processes;
(bb) to assess the probability of
50
7
Regulation
Criteria
Attest procedures
Bank practice and Findings
Management comments
Criteria for the recognition of credit risk mitigation instruments
Where possible, the attestation should be based on the review of statutory and regulatory audit papers and previous LFR completed which cover similar processes and controls. Where reliance is placed on statutory or regulatory audits, or previous LFR workings, reference should be
made to the audit reports and/or LFR, and working papers and findings should be included as part of the LFR.
default correlation between the
reference asset, reference entity or
underlying asset and the protection
provider;
(cc)
to
provide
valuation
procedures, including assessment
and monitoring of the liquidity of
the credit-derivative instrument
and the reference asset or
underlying asset. This is particularly
important for credit-derivative
contracts when the reference asset
or underlying asset is illiquid, for
example, a loan, or when the
derivative instrument has multiple
reference assets, reference entities
or underlying assets;
(dd) to assess the impact on
liquidity risk when the reporting
bank has transferred a significant
amount of credit risk through the
use of funded credit-derivative
instruments with a shorter maturity
than the underlying credit
exposure;
(ee) to assess the impact on capital
adequacy when the reporting bank
has transferred a significant amount
of credit risk through the use of
unfunded credit-derivative
instruments
and
when
a
replacement contract may not be
available when the credit protection
expires;
(ff) to assess the change in the risk
profile of the remaining credit
exposures in terms of both the
quality and the spread of the
portfolio, when the reporting bank
makes extensive use of creditderivative instruments to transfer
risk;
(gg) to assess the basis risk between
the reference asset exposure and
the underlying asset exposure when
these exposures are not the same;
(hh) to monitor the legal and
reputational risk associated with
credit-derivative instruments;
51
7
7.4.13
Regulation
Criteria
Attest procedures
Bank practice and Findings
Management comments
Criteria for the recognition of credit risk mitigation instruments
Where possible, the attestation should be based on the review of statutory and regulatory audit papers and previous LFR completed which cover similar processes and controls. Where reliance is placed on statutory or regulatory audits, or previous LFR workings, reference should be
made to the audit reports and/or LFR, and working papers and findings should be included as part of the LFR.
(ii) to monitor the credit risk on an
ongoing basis.
(xi) As a minimum, the credit events
7.4.13.1. Inspect the Bank’s policy and
relating to non-sovereign debt,
document whether it lists the minimum
specified by the contracting parties
regulatory credit events for non-sovereign
shall include:
debt.
(aa) Bankruptcy or insolvency.
(bb) Any application for protection
from creditors.
7.4.13.2. Inspect a sample of derivative
contracts and ensure that the minimum
regulatory credit events for non-sovereign
debt are included.
(cc) Payment default, that is, failure
to pay the principal amount or
related interest amounts due.
7.4.14
(dd) Any restructuring of the
underlying obligation that results in
a credit loss event such as a credit
impairment or other similar debit
being raised, including(i) a reduction in the rate or
amount of interest payable or
the amount of scheduled
interest accruals;
(ii) a reduction in the amount of
principal, fees or premium
payable at maturity or at the
scheduled redemption dates;
(iii) a change in the ranking in
the priority of payment of any
obligation,
causing
the
subordination
of
such
obligation;
(iv) a postponement or other
deferral of a date or dates for
either the payment or accrual of
interest or the payment of the
principal amount or premium.
When the credit-derivative
instrument does not include the
restructuring of the underlying
obligation as a credit event, it
shall be deemed that the bank
obtained protection equal to a
maximum of sixty per cent of
the amount covered in terms of
the
credit-derivative
instrument.
(xii) As a minimum, the credit
events relating to sovereign debt,
specified by the contracting parties
shall include:
(aa)
Any
moratorium
on
the
7.4.14.1. Inspect the Bank’s policy and
document whether it lists the minimum
regulatory credit events for sovereign debt.
7.4.14.2. Inspect a sample of derivative
contracts and ensure that the minimum
52
7
Regulation
Criteria
Attest procedures
Bank practice and Findings
Management comments
Criteria for the recognition of credit risk mitigation instruments
Where possible, the attestation should be based on the review of statutory and regulatory audit papers and previous LFR completed which cover similar processes and controls. Where reliance is placed on statutory or regulatory audits, or previous LFR workings, reference should be
made to the audit reports and/or LFR, and working papers and findings should be included as part of the LFR.
repayment of the principal amount
regulatory credit events for sovereign debt are
or related interest amounts due.
included.
(bb) Repudiation.
(cc) Payment default, that is, failure
to pay the principal or related
interest amounts due.
7.4.15
7.4.16
(dd) Any restructuring of the
underlying obligation that results in
a credit loss event such as a credit
impairment or other similar debit
being raised, including(i) a reduction in the rate or
amount of interest payable or
the amount of scheduled
interest accruals;
(ii) a reduction in the amount of
principal, fees or premium
payable at maturity or at the
scheduled redemption dates;
(iii) a postponement or other
deferral of a date or dates for
either the payment or accrual of
interest or the payment of the
principal amount or premium;
When
the
credit-derivative
instrument does not include the
restructuring of the underlying
obligation as a credit event, it shall
be deemed that the bank obtained
protection equal to a maximum of
sixty per cent of the amount
covered in terms of the creditderivative instrument.
(xiii) Contracts allowing for cash
settlement will be recognised for
risk-mitigation purposes, provided
that a robust valuation process is in
place in order to estimate loss
reliably. There shall be a duly
specified period for obtaining post
credit-event valuations of the
reference asset or underlying
obligation, typically not more than
30 days.
(xiv) The grace period specified in
the credit-derivative contract shall
not be longer than the relevant
grace period provided for failure to
pay in terms of the underlying
obligation.
7.4.15.1. Inspect the Bank’s policy and
document the valuation requirements relevant
to contracts allowing for cash settlement.
7.4.15.2. On a sample of cash settlement
derivative contracts, where a credit event took
place, confirm whether a revaluation took
place within 30 days.
7.4.16.1. Inspect the Bank’s policy and
document the treatment of grace periods.
7.4.16.2. On a sample of derivative contracts,
confirm that the grace period is not longer
than the relevant grace period provided for
failure to pay in terms of the underlying
obligation.
53
7
7.4.17
Regulation
Criteria
Attest procedures
Bank practice and Findings
Management comments
Criteria for the recognition of credit risk mitigation instruments
Where possible, the attestation should be based on the review of statutory and regulatory audit papers and previous LFR completed which cover similar processes and controls. Where reliance is placed on statutory or regulatory audits, or previous LFR workings, reference should be
made to the audit reports and/or LFR, and working papers and findings should be included as part of the LFR.
(xv) The protection buyer shall have
7.4.17.1. Through discussion with the legal
the right and ability to transfer the
department,
document
the
Bank’s
underlying obligation or reference
procedures/policy requirements to ensure the
asset to the protection seller, if
protection buyer shall have the right and
such underlying obligation or
ability to transfer the underlying obligation or
reference asset is required for
reference asset to the protection seller, if such
settlement.
underlying obligation or reference asset is
required for settlement.
7.4.18
(xvi) The delivery of the underlying
obligation or reference asset shall
not contravene any term or
condition relating to the underlying
asset or reference asset, and
consent shall be obtained when
necessary.
7.4.18.1. Through discussion with the legal
department,
document
the
Bank’s
procedures/policy requirements to ensure the
delivery of the underlying obligation or
reference asset shall not contravene any term
or condition relating to the underlying asset or
reference asset, and consent shall be obtained
when necessary.
7.4.19
(xvii) The identity of the person(s)
responsible
for
determining
whether a credit event has
occurred, and the sources to be
used, shall be duly defined. This
determination shall not be the sole
responsibility of the protection
seller. The protection buyer shall
have the right and ability to inform
the protection seller of the
occurrence of a credit event.
(xviii) Asset mismatch
When the reference asset and the
underlying asset being hedged
differ the protection buyer may
suffer a loss on the underlying
credit exposure that will not be fully
compensated by an equivalent
claim against the protection seller.
When there is an asset mismatch
between the underlying exposure
and the reference asset the
protection buyer will be allowed to
reduce
the
credit
exposure
provided that(aa) the reference asset and the
underlying exposure relate to
the same obligor, that is, the
same legal entity;
(bb) the reference asset ranks
pari passu with or more junior
than the underlying asset in the
event of bankruptcy;
(cc) legally effective crossdefault clauses, for example,
7.4.19.1. Through discussion with legal,
document the identity of the person(s)
responsible for determining whether a credit
event has occurred. Document whether the
protection buyer has input the right and ability
to inform the protection seller of the
occurrence of a credit event.
7.4.20
7.4.20.1. Through discussion with legal and
inspection of the Bank’s documentation,
document the treatment of asset mismatches
for regulation (bb) to (dd).
7.4.20.2. Inspect a sample of exposures with
asset mismatches and document whether the
bank complies with regulation (aa)
54
7
7.4.21
7.4.22
Regulation
Criteria
Attest procedures
Bank practice and Findings
Management comments
Criteria for the recognition of credit risk mitigation instruments
Where possible, the attestation should be based on the review of statutory and regulatory audit papers and previous LFR completed which cover similar processes and controls. Where reliance is placed on statutory or regulatory audits, or previous LFR workings, reference should be
made to the audit reports and/or LFR, and working papers and findings should be included as part of the LFR.
crossdefault
or
crossacceleration clauses apply; and
(dd) the terms and conditions of
the credit-derivative contract do
not contravene the terms and
conditions of the underlying
asset or reference asset.
(14)(d)(i)(B) As a minimum, a bank The bank assigns to all obligors and 7.4.21.1. Confirm through inspect the bank's
that adopted the advanced IRB eligible protection providers a credit policy whether the bank specifies the
approach for the recognition of risk borrower rating and own LGD criteria for adjusting the borrower grades and
mitigation relating to credit estimate.
LGD estimates to account for eligible credit
protection obtained in the form of a
derivatives.
credit-derivative instrument shall in The bank’s credit policy specifies the
the case of single-name credit- criteria for adjusting the borrower
derivative instruments assign to all grades and LGD estimates to
relevant obligors and eligible account for eligible credit derivative
protection providers a borrower mitigants.
rating and calculate its own
estimates of LGD in respect of its These criteria shall comprehensively
various exposures, provided that address
the bank shall have in place duly
specified criteria
impact of payments on
level and timing of
(i) to adjust its borrower grades;
recoveries;

requirements with regards
(ii) to adjust its LGD estimates;
to
reference
and
underlying assets as per
regulations;

the protection provider’s
ability and willingness to
honour its commitments;

any correlation between
the protection provider’s
ability to honour its
commitment and obligor’s
ability to repay any
amounts due;

the effect of any residual
risks
between
the
protection
and
the
underlying exposure.
(14)(d)(i)(C) As a minimum, a bank The adjusted risk weight relating to 7.4.22.1. For a sample of exposures with a
that adopted the advanced IRB a particular exposure shall not be credit derivative as a mitigant, confirm through
approach for the recognition of risk less than that of a comparable direct comparison that the risk weight relating to a
mitigation relating to credit exposure to the relevant protection particular exposure is not less than that of a
protection obtained in the form of a provider, unless the bank takes into comparable direct exposure to the relevant
credit-derivative instrument shall account the effect of double default protection provider, unless the bank takes into
not in the calculation of the bank's in line with the relevant regulations.
account the effect of double default in line
risk-weighted exposure reflect the
with the relevant regulations.
effect of double default otherwise
than in accordance with the
relevant requirements specified in
paragraph (f) below, that is, the
adjusted risk weight relating to a
particular exposure shall not be less
55
7
7.4.23
7.4.24
Regulation
Criteria
Attest procedures
Bank practice and Findings
Management comments
Criteria for the recognition of credit risk mitigation instruments
Where possible, the attestation should be based on the review of statutory and regulatory audit papers and previous LFR completed which cover similar processes and controls. Where reliance is placed on statutory or regulatory audits, or previous LFR workings, reference should be
made to the audit reports and/or LFR, and working papers and findings should be included as part of the LFR.
than a comparable direct exposure
to the relevant protection provider
unless the bank calculates the said
adjusted risk weight in accordance
with the relevant requirements
specified in paragraph (f) below,
provided that whenever credit
protection obtained in respect of an
exposure results in a higher capital
requirement for the reporting bank
than before the recognition of such
credit protection, the reporting
bank may ignore the effect of the
said credit protection.
(14)(d)(ii)
Eligible
protection The bank shall have in place a 7.4.23.1. Inspect the bank's credit policy and
providers
comprehensive policy and criteria in confirm whether the bank has specifies the
respect of the types of protection criteria for types of protection providers
A bank that adopted the advanced providers acceptable to the bank for acceptable for risk mitigation purposes.
IRB approach for the recognition of
risk mitigation purposes.
risk mitigation relating to credit7.4.23.2. For a sample of exposures with a
derivative
instruments
may
credit derivative as a mitigant, confirm the
recognise the effect of protection
above policy criteria have been met.
obtained from any protection
provider, provided that(A)
the
credit-derivative
instrument shall comply with the
relevant minimum requirements
specified in subregulation (9)(d)(xi)
above;
(B) the bank shall have in place a
comprehensive policy and criteria in
respect of the types of protection
providers acceptable to the bank for
risk mitigation purposes.
(14)(d)(iii) Risk weighting
When a bank that adopted the
advanced IRB approach for the
measurement of the bank's riskweighted credit exposure obtains(A) protection from a protection
provider in respect of the bank's
credit exposure to a corporate
institution, sovereign or bank, the
bank(i) shall reflect the risk
mitigation
effect
of
the
protection by way of an
adjustment either to the PD
ratio or LGD ratio of the
relevant exposure provided that
the bank shall apply the
adjustments to the PD ratio or
The bank's credit policy specifies the
risk weighting treatment for credit
derivatives, as specified in subregulations (14)(d)(iii) and (12)(e).
The
requirements
per
subregulations (14)(d)(iii) and (12)(e)
are listed in the Regulation column
below (see grouped rows).
7.4.24.1. Inspect the bank's credit policy to
determine whether the procedures to ensure
compliance with the requirements specified in
subregulations (14)(d)(iii) and (12)(e) have
been specified.
7.4.24.2. For a sample of exposures with a
credit derivative as a mitigant, inspect relevant
supporting documentation to determine
whether the bank has complied with the
requirements specified in subregulations
(14)(d)(iii) and (12)(e).
56
7
7.4.25
Regulation
Criteria
Attest procedures
Bank practice and Findings
Management comments
Criteria for the recognition of credit risk mitigation instruments
Where possible, the attestation should be based on the review of statutory and regulatory audit papers and previous LFR completed which cover similar processes and controls. Where reliance is placed on statutory or regulatory audits, or previous LFR workings, reference should be
made to the audit reports and/or LFR, and working papers and findings should be included as part of the LFR.
LGD ratio of the exposure in a
consistent manner; or
(ii) may reflect the risk
mitigation
effect
of
the
protection in accordance with
the
relevant
requirements
relating to the recognition of
credit-derivative instruments in
terms of the foundation IRB
approach
prescribed
in
subregulation (12)(e) above.
(C) protection against dilution risk in
respect of purchased receivables,
the bank may apply the double
default approach specified in
paragraph (f) below in order to
calculate the required risk-weighted
asset amount for dilution risk
provided that the bank
shall comply with the relevant
requirements
specified
in
subregulation (12) (e) (iii) (C).
(12)(e)
Credit-derivative
instruments
(i) Minimum requirements
As a minimum, a bank that adopted
the foundation IRB approach for the
recognition of risk mitigation
relating to credit protection
obtained in the form of a creditderivative instrument-
7.4.25.1. Where a foundation IRB approach is
adopted, inspect the bank's credit policy and
document whether procedures to ensure
compliance with the requirements specified in
subregulation (12)(e) have been specified.
7.4.25.2. For a sample of exposures mitigated
through the use of a credit derivative, inspect
relevant supporting documentation to
determine whether the bank has complied
with
the
requirements
specified
in
subregulation (12)(e).
(A) shall comply with the relevant
requirements
specified
in
subregulation (9)(d);
(B) shall, except in the case of retail
exposures and purchased retail
receivables, use the LGD ratios in
respect of its various exposures as
specified in writing by the Registrar;
(C) shall not in the calculation of the
bank's risk-weighted exposure
reflect the effect of double default
otherwise than in accordance with
the relevant requirements specified
in paragraph (g) below, that is, the
adjusted risk weight relating to a
particular exposure shall not be less
than a comparable direct exposure
to the relevant protection provider
unless the bank calculates the said
57
7
Regulation
Criteria
Attest procedures
Bank practice and Findings
Management comments
Criteria for the recognition of credit risk mitigation instruments
Where possible, the attestation should be based on the review of statutory and regulatory audit papers and previous LFR completed which cover similar processes and controls. Where reliance is placed on statutory or regulatory audits, or previous LFR workings, reference should be
made to the audit reports and/or LFR, and working papers and findings should be included as part of the LFR.
adjusted risk weight in accordance
with the relevant requirements
specified in paragraph (g) below,
provided that whenever credit
protection obtained in respect of an
exposure results in a higher capital
requirement for the reporting bank
than before the recognition of such
credit protection, the reporting
bank may ignore the effect of the
said credit protection.
(ii) Eligible protection providers
In addition to the eligible protection
providers
specified
in
the
standardised
approach
in
subregulation (9)(d)(iii), a bank that
adopted the foundation IRB
approach for the recognition of risk
mitigation relating to creditderivative instruments obtained in
respect of corporate institutions,
sovereigns or banks may also
recognise the effect of protection
obtained from a protection provider
that is internally rated, provided
that the said protection shall
comply with the relevant minimum
requirements
specified
in
subregulation (9)(d)(xi) above.
(iii) Risk weighting
When a bank that adopted the
foundation IRB approach for the
measurement of the bank's riskweighted credit exposure obtains(A) protection from an eligible
protection provider in respect of
the bank's credit exposure to a
corporate institution, sovereign or
bank, the bank(I) shall divide the relevant
exposure into a protected
portion and an unprotected
portion;
(ii) shall in respect of the
protected portion, apply(aa) the risk-weight function
relating to the relevant
protection provider; and
(bb) the PD ratio relating to
the relevant protection
provider, or a higher PD
ratio relating to a risk grade
58
7
Regulation
Criteria
Attest procedures
Bank practice and Findings
Management comments
Criteria for the recognition of credit risk mitigation instruments
Where possible, the attestation should be based on the review of statutory and regulatory audit papers and previous LFR completed which cover similar processes and controls. Where reliance is placed on statutory or regulatory audits, or previous LFR workings, reference should be
made to the audit reports and/or LFR, and working papers and findings should be included as part of the LFR.
between the underlying
obligor and the relevant
protection provider when
the bank deems a complete
substitution
approach
inappropriate,
provided
that, based on its seniority
or any collateralization of a
protected exposure, the
bank may replace the LGD
ratio of the underlying
transaction
with
the
relevant LGD ratio relating
to the said protected
position;
(iii) shall in respect of the
unprotected portion, apply the
risk weight relating to the
underlying obligor;
(iv) shall in the case of(aa) proportional protection
comply with the relevant
requirements specified in
subregulation
(9)(d)(x)
above;
(bb) a currency mismatch
between the underlying
obligation
and
the
protection obtained comply
with
the
relevant
requirements specified in
subregulation
(9)(d)(xi)
above;
(C) protection against dilution risk
in respect of purchased receivables,
the bank may apply the double
default approach specified in
paragraph (g) below in order to
calculate the required risk-weighted
asset amount for dilution risk,
provided that(i) the bank shall at all times
comply with the relevant
requirements
specified
in
paragraph (g);
(ii) PD0 shall be equal to the
estimated EL amount;
(iii) LGD9 shall be equal to 100
percent;
(iv) the effective maturity of the
relevant exposure shall be
determined in accordance with
the
relevant
requirements
specified
in
subregulation
(11)(d)(vi)(A)(ii).
59
7
7.2.26
Regulation
Criteria
Attest procedures
Bank practice and Findings
Management comments
Criteria for the recognition of credit risk mitigation instruments
Where possible, the attestation should be based on the review of statutory and regulatory audit papers and previous LFR completed which cover similar processes and controls. Where reliance is placed on statutory or regulatory audits, or previous LFR workings, reference should be
made to the audit reports and/or LFR, and working papers and findings should be included as part of the LFR.
(9) (d) Credit-derivative instruments
7.4.26.1. For a sample of exposures mitigated
(only relevant sections)
through the use of a credit derivative, inspect
relevant supporting documentation to
(iii) Eligible protection providers
determine whether the bank has complied
For risk-mitigation purposes in
with
the
requirements
specified
in
terms of these Regulations, credit
subregulation (9)(d).
protection
obtained
from
protection providers that are
assigned a risk weight lower than
the protected exposure shall be
recognised as eligible protection
providers, including protection
obtained from:
(A) sovereigns;
(B) central banks;
(C) public-sector entities;
(D) banks;
(E) securities firms;
(F) other externally rated
entities that are assigned a risk
weight lower than the protected
exposure,
Provided
that
when
credit
protection is provided in respect of
a securitisation exposure, only
entities that are externally rated
BBB- or better at the end of the
reporting month, and that were
externally rated A or better at the
time the credit protection was
provided, shall constitute eligible
protection for purposes of these
Regulations, including any relevant
credit protection provided by a
parent institution, subsidiary or
affiliate companies.
(iv)
Funded
credit-derivative
instruments
A bank may issue cash instruments,
such as credit-linked notes, in
respect of which instruments the
repayment of the principal amount
is linked to the credit standing of a
reference asset, reference entity or
underlying asset. For risk-mitigation
purposes, a bank shall treat creditlinked notes in a manner similar to
cash-collateralised transactions.
(v) Unfunded credit-derivative
instruments
(A) The capital treatment of the
different credit risk-mitigation
instruments recognized in terms
of these Regulations shall be
60
7
Regulation
Criteria
Attest procedures
Bank practice and Findings
Management comments
Criteria for the recognition of credit risk mitigation instruments
Where possible, the attestation should be based on the review of statutory and regulatory audit papers and previous LFR completed which cover similar processes and controls. Where reliance is placed on statutory or regulatory audits, or previous LFR workings, reference should be
made to the audit reports and/or LFR, and working papers and findings should be included as part of the LFR.
based on the economic effects
of the instruments and not the
legal construction of the said
instruments. Although the legal
construction of guarantees may
differ from credit derivative
instruments, only credit-default
swaps and total-return swaps
that provide credit protection
equivalent to guarantees shall
be recognised as credit riskmitigation
instruments,
in
addition to credit linked notes,
in terms of these Regulations.
(B) When a bank buys credit
protection through a totalreturn swap and records the net
payments received on the swap
as net income, but does not
record
the
offsetting
deterioration in the value of the
asset that is protected, either
through a reduction in fair value
or an adjustment to reserves,
the credit protection shall not
be recognised.
(vi) Materiality thresholds
(A) Normally, a materiality
threshold is specified in a creditderivative contract in order to
ensure that the protection seller
is obliged only to make payment
in terms of the credit-derivative
contract once a material default
has occurred in respect of an
underlying asset, reference
asset or reference entity.
However, the economic effect
of a materiality threshold
specified in a credit-derivative
contract may be that the
protection buyer will suffer a
specified amount of loss before
payment in terms of the credit
derivative contract is triggered
or the amount of payment by
the protection seller to the
protection buyer may even be
reduced. Materiality thresholds
specified in a credit-derivative
contract may therefore result in
a significant loss being incurred
by the protection buyer on an
underlying asset or reference
asset without a credit event
61
7
Regulation
Criteria
Attest procedures
Bank practice and Findings
Management comments
Criteria for the recognition of credit risk mitigation instruments
Where possible, the attestation should be based on the review of statutory and regulatory audit papers and previous LFR completed which cover similar processes and controls. Where reliance is placed on statutory or regulatory audits, or previous LFR workings, reference should be
made to the audit reports and/or LFR, and working papers and findings should be included as part of the LFR.
payment being made.
(B) Materiality thresholds below
which no payment will be made
in the event of a loss to the
protection buyer or that reduce
the amount of payment by the
protection
seller
to
the
protection buyer shall for
purposes of these Regulations
be regarded as equivalent to a
retained first-loss position and
shall be risk weighted in
accordance with the relevant
provisions
specified
in
subregulation (6)(j) above.
(C)
A
credit-derivative
instrument with a materiality
threshold that requires a high
percentage of loss to occur
before the protection seller is
obliged to make payment to the
protection buyer shall not be
recognised
for
credit-risk
mitigation purposes in terms of
these Regulations.
(vii) Multiple-name instruments
(A) Multiple-name instruments
refer
to
credit-derivative
instruments that reference more
than one reference asset, reference
entity or underlying asset, that is, a
basket of instruments. Multiplename structures generally include(i) first-to-default structures,
that is, the first default amongst
the reference names triggers
the credit protection and the
credit event also terminates the
protection;
(ii) second-to-default structures,
that is, the second default
amongst the reference names
triggers the credit protection
and the credit event also
terminates the protection.
(B) When the number of
exposures in a basket is
significant, the transaction will
be regarded as a synthetic
securitisation scheme. Such
transactions shall be subject to
the provisions of the exemption
notice relating to securitisation
schemes.
(C) For the purposes of these
62
7
Regulation
Criteria
Attest procedures
Bank practice and Findings
Management comments
Criteria for the recognition of credit risk mitigation instruments
Where possible, the attestation should be based on the review of statutory and regulatory audit papers and previous LFR completed which cover similar processes and controls. Where reliance is placed on statutory or regulatory audits, or previous LFR workings, reference should be
made to the audit reports and/or LFR, and working papers and findings should be included as part of the LFR.
Regulations, the number of
exposures in a basket shall be
regarded as significant when the
envisaged transaction will cause(I) the capital requirement of
the reporting bank to increase
or decrease by 5 per cent or
more; or
(ii) the amount of the relevant
portfolio of the reporting bank
in respect of which the
transaction will be concluded to
increase or decrease by 5 per
cent or more.
(viii) Settlement
(A) Normally, credit-derivative
instruments provide for either
physical settlement or cash
settlement.
(B)
Some
credit-derivative
instruments provide for preagreed amounts to be paid
when a credit event occurs.
These contracts are generally
referred to as binary or digital
contracts. When the payment in
terms of a credit-derivative
instrument is a fixed amount,
that is, a binary payment, the
amount of protection shall be
the amount of the fixed
payment.
(C) Physical settlement, for
example, involves the delivery
by a protection buyer of an
obligation of the reference
entity specified in the contract
in return for cash settlement by
the protection seller of the
reference
amount.
When
obligations in terms of creditderivative instruments are
physically settled, problems
associated with the valuation of
the reference asset, reference
entity or underlying asset
following a credit event are
avoided.
(D) Cash settlement requires a
cash settlement amount to be
calculated by a calculating agent
specified in the contract.
Following the occurrence of a
credit event in respect of the
reference
asset,
reference
63
7
7.4.27
Regulation
Criteria
Attest procedures
Bank practice and Findings
Management comments
Criteria for the recognition of credit risk mitigation instruments
Where possible, the attestation should be based on the review of statutory and regulatory audit papers and previous LFR completed which cover similar processes and controls. Where reliance is placed on statutory or regulatory audits, or previous LFR workings, reference should be
made to the audit reports and/or LFR, and working papers and findings should be included as part of the LFR.
entity or underlying asset, the
cash settlement amount is
normally calculated as the
nominal amount of protection
purchased; multiplied by the
value of the reference asset,
reference entity or underlying
asset at inception (the value is
normally expressed as a
percentage, for example, 100
per cent); less the "final value",
which value is normally
expressed as a percentage of
the reference asset, reference
entity or underlying asset on the
cash-settlement date.
(11)(d)(vi)(A)(ii) The risk of dilution
7.4.27.1. For a sample of purchased receivables
mitigated through the use of credit derivatives,
In the case of purchased corporate
inspect relevant supporting documentation to
receivables and purchased retail
determine whether the bank has complied
receivables, a bank shall calculate
with the maturity requirements specified in
the risk weights relating to the risk
subregulation (11)(d)(vi)(A)(ii)(dd).
of dilution, that is, the risk that a
receivable amount may be reduced
by way of cash or noncash credit
amounts being made against the
receivable account, for example, as
a result of the return of goods that
were sold or disputes regarding the
quality of a product, in accordance
with the corporate risk-weight
function specified in subparagraph
(ii) above, provided that(aa) the bank shall estimate the
one-year expected loss ratio for
dilution risk, expressed as a
percentage of the receivable
amount, in respect of the pool
as a whole or the individual
receivables included in the pool
on a stand-alone basis, that is,
without
regard
to
any
assumption of recourse, support
or guarantees from the seller or
other parties;
(bb) the bank may use relevant
external or internal data to
estimate the said expected loss
ratio;
(cc) the bank shall set the PD
estimate equal to the estimated
expected loss ratio and the LGD
ratio equal to 100 per cent;
(dd) the bank shall apply such a
64
7
7.5
7.5.1
7.5.2
Regulation
Criteria
Attest procedures
Bank practice and Findings
Management comments
Criteria for the recognition of credit risk mitigation instruments
Where possible, the attestation should be based on the review of statutory and regulatory audit papers and previous LFR completed which cover similar processes and controls. Where reliance is placed on statutory or regulatory audits, or previous LFR workings, reference should be
made to the audit reports and/or LFR, and working papers and findings should be included as part of the LFR.
maturity factor as may be
specified in writing by the
Registrar or, with the prior
written
approval
of
the
Registrar and provided that the
bank manages the risk of
dilution in an appropriate
manner, a one-year maturity
factor;
(ee) when the risk of dilution is
immaterial for the purchasing
bank, the bank may apply for
the approval of the Registrar
not to calculate risk weights in
respect of the risk of dilution.
Maturity Mismatches
(14)(e) Maturity mismatches
The bank's credit policy specifies the 7.5.1.1. Inspect the bank's credit policy and
minimum
requirements
for document whether maturity mismatch
(i) A maturity mismatch occurs treatment of maturity mismatches treatment is addressed.
when the residual maturity of the as well as the procedures to be
credit protection obtained in the followed in order to achieve 7.5.1.2. For a sample of exposures with a
form
of
eligible
collateral, compliance with these minimum maturity
mismatch,
inspect
relevant
guarantees or credit derivative requirements.
supporting documentation to determine
instruments, or in terms of a netting
whether the bank has complied with the
agreement, is less than the
requirements specified in subregulation
residual maturity of the underlying
(14)(e).
credit exposure, that is, when the
residual maturity of the credit
protection is(A) less than the residual
maturity of the underlying
credit exposure a
maturity mismatch exists and
the bank shall treat the relevant
positions in accordance with the
relevant requirements of this
paragraph (e);
(B) longer than the residual
maturity of the underlying
credit exposure, the position
shall be regarded as fully
protected.
(ii) A bank shall conservatively
7.5.2.1. Inspect the bank's credit policy and
define the maturity of the
document whether maturity mismatch
underlying exposure and the
treatment is addressed.
maturity of the credit protection.
The effective maturity of the
7.5.2.2. For a sample of exposures with a
underlying exposure shall be the
maturity
mismatch,
inspect
relevant
longest possible remaining time
supporting documentation to determine
before the obligor is scheduled to
whether the bank has complied with the
fulfil its obligation. Embedded
requirements specified in subregulation
options that may reduce the term
(14)(e).
of the credit protection shall be
taken into account when the
effective maturity of the credit
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7
7.5.3
7.5.4
Regulation
Criteria
Attest procedures
Bank practice and Findings
Management comments
Criteria for the recognition of credit risk mitigation instruments
Where possible, the attestation should be based on the review of statutory and regulatory audit papers and previous LFR completed which cover similar processes and controls. Where reliance is placed on statutory or regulatory audits, or previous LFR workings, reference should be
made to the audit reports and/or LFR, and working papers and findings should be included as part of the LFR.
protection is determined so that the
shortest possible effective maturity
is used. For example, the effective
maturity of credit protection with
step-up and call features will be the
remaining time to the first call.
(iii) In the case of maturity
7.5.3.1. Inspect the bank's credit policy and
mismatched credit protection in
document whether maturity mismatch
respect of which the original
treatment is addressed.
maturity of the relevant credit
protection is less than one year
7.5.3.2. For a sample of exposures with a
such credit protection shall not be
maturity
mismatch,
inspect
relevant
recognised for credit-risk mitigation
supporting documentation to determine
purposes in terms of these
whether the bank has complied with the
Regulations unless the said credit
requirements specified in subregulation
protection has a matching maturity
(14)(e).
with
the
underlying
credit
exposure(s),
that
is,
credit
protection with an original maturity
of less than one year shall be
recognised only when(A) the maturity of the
protection and the maturity of
the exposure is
matched; or
(B) the residual maturity of the
protection is longer than the
residual maturity of the
exposure, provided that in the
calculation of its minimum
required amount of capital and
reserve funds a bank shall in no
case recognise credit protection
obtained when the residual
maturity
of
such
credit
protection is less than or equal
to three months.
(iv) When a bank obtained eligible
7.5.4.1. Inspect the bank's credit policy and
protection, which bank adopteddocument whether there is an adjustment to
(A) the simple approach for
the value of the credit protection to allow for
the recognition of risk
maturity mismatches.
mitigation
relating
to
collateral, a reduction in the
7.5.4.2. Where the bank has used the simple or
risk exposure of the bank shall
comprehensive approach the fixed formula
be allowed only when the
should be used.
maturity of the collateral and
the maturity of the exposure
7.5.4.3. For a sample of exposures with a
is matched, that is, collateral
maturity mismatch, document whether the
obtained by the bank as
adjustment to the value of the protection is
security against an exposure
aligned to policy requirements.
of the bank shall be pledged
as security for the full
duration of the bank's
exposure;
(B)
the
comprehensive
66
7
7.5.5
7.6
7.6.1.
Regulation
Criteria
Attest procedures
Bank practice and Findings
Management comments
Criteria for the recognition of credit risk mitigation instruments
Where possible, the attestation should be based on the review of statutory and regulatory audit papers and previous LFR completed which cover similar processes and controls. Where reliance is placed on statutory or regulatory audits, or previous LFR workings, reference should be
made to the audit reports and/or LFR, and working papers and findings should be included as part of the LFR.
approach for the recognition
of risk mitigation relating to
netting, collateral, guarantees
or
credit-derivative
instruments, shall recognise
the effect of mismatches
between the maturity of the
bank's underlying exposure
and the protection obtained
through the application of the
formula specified below,
which formula is designed to
recognise the effect of the
maturity
mismatch.
The
formula is expressed as:
Pa = P x (t-0.25)/(T-0.25)
where:
Pa is the relevant value of the
credit protection obtained,
adjusted for the maturity
mismatch
P is the relevant amount of
credit protection obtained,
adjusted for any haircuts
t is min (T, residual maturity of
the
credit
protection
arrangement), expressed in
years
T is min (5, residual maturity
of the exposure), expressed in
Years
(v) When a bank obtains protection
7.5.5.1. Inspect the Bank’s monitoring reports
that differs in maturity from the
that deal with roll-off risk and document the
underlying credit exposure the bank
frequency thereof and analysis performed.
shall monitor and control its roll-off
risks, that is, the fact that the bank
will be exposed to the full amount
of the credit exposure when the
protection expires. The bank may
be unable to obtain further
protection or to maintain its capital
adequacy when the protection
expires.
Double Default
(13)(f) Double default
7.6.1.1. Where the SARB has specifically
(i) Minimum requirements
requested, confirm through inspection of the
In respect of each eligible
bank’s documentation that they comply with
exposure as envisaged in
regulations (13)(f) and (12)(g).
subregulation (12)(g)(ii), a bank
that obtained the prior written
approval of the Registrar to
adopt the advanced IRB
approach for the measurement
of the bank’s exposure to credit
risk may apply either the
67
7
Regulation
Criteria
Attest procedures
Bank practice and Findings
Management comments
Criteria for the recognition of credit risk mitigation instruments
Where possible, the attestation should be based on the review of statutory and regulatory audit papers and previous LFR completed which cover similar processes and controls. Where reliance is placed on statutory or regulatory audits, or previous LFR workings, reference should be
made to the audit reports and/or LFR, and working papers and findings should be included as part of the LFR.
substitution
approach
envisaged in paragraphs (c) and
(d) above or the double
default approach specified in
this paragraph (f), provided that
a bank that wishes to apply the
double default approach(A) shall continuously comply
with
the
relevant
requirements specified in
subregulation (12)(g);
(B) in respect of eligible
exposure shall calculate
the relevant risk-weighted
exposure amount and any
related required amount of
capital and reserve funds
in accordance with the
relevant formulae and
requirements specified in
subregulation (12)(g) read
with
the
relevant
provisions
of
this
paragraph (f);
(C) shall calculate the risk
weights and required
amount of capital and
reserve funds relating to all
exposures to a particular
obligor, other than eligible
exposures specified in this
paragraph
(f),
in
accordance
with
the
relevant
requirements
specified in subregulations
(13) and (14), including any
risk weight and required
amount of capital and
reserve funds relating to
any
unhedged
or
unprotected portion of an
exposure in respect of
which the hedged or
protected
portion
is
subject to the provisions of
this paragraph (f);
(D) may apply the said
approach to any eligible
exposure,
irrespective
whether the said exposure
is held in the bank’s
banking book or trading
book.
(ii) Matters specifically related to
risk-weighted exposure and the
68
7
Regulation
Criteria
Attest procedures
Bank practice and Findings
Management comments
Criteria for the recognition of credit risk mitigation instruments
Where possible, the attestation should be based on the review of statutory and regulatory audit papers and previous LFR completed which cover similar processes and controls. Where reliance is placed on statutory or regulatory audits, or previous LFR workings, reference should be
made to the audit reports and/or LFR, and working papers and findings should be included as part of the LFR.
required amount of capital and
reserve funds
In respect of any hedged or
protected exposure subject to
the double default approach,
the reporting bank shall
calculate
its
risk-weighted
exposure and related required
amount of capital and reserve
funds through the application of
the relevant formulae specified
in
subregulation
(12)(g),
provided that(A) when estimating any of
the required LGD ratios
the bank may recognise
collateral
posted
exclusively against the
relevant exposure or
credit
protection,
provided that the bank
shall in all cases comply
with
the
relevant
minimum requirements
relating to LGD, specified
in
subregulation
(13)(b)(v);
(B) the bank shall in no case
apply a principle of
double recovery when the
bank
estimates
any
required LGD ratio.
69
Regulation
Process and control environment
Independent validation
Criteria
Attest procedures
8.1.1.
(11)(b)(ii)(E) For a minimum period
of three years or such lesser
minimum
period
as
may be specified in writing by the
Registrar, prior to a bank’s
implementation of the foundation
IRB approach for the measurement
of the bank’s exposure to credit
risk, the rating and risk estimation
systems and processes of the bank
should have been subjected to
appropriate internal controls and
independent review.
Has initial independent validation
been done? Was it done according
to the model development policy?
Was it approved by the relevant
committees as stipulated in the
policy?
8.1.1.1. If the bank is on the foundation IRB,
perform all the procedures in the “Process and
Control” section, except where it has
specifically been indicated as not applicable for
the foundation IRB approach.
8.1.2.
23(11)(b)(x): As a minimum, a bank
that adopted the IRB approach for
the measurement of the bank's
exposure to credit risk -
See below
8.1.1.2. See below
8.1.3.
23(11)(b)(x)(A): shall have in place a
robust system to validate the
accuracy and consistency of the
bank’s
rating
systems
and
processes, including all estimates of
relevant risk components, which
internal assessments shall be based
on long data histories, covering a
range of economic conditions and
ideally one or more complete
business cycles;
Does the bank have a robust
ongoing
validation
system
(frequency of reviews and content
of validation)? Is it in line with the
Regulations?
8.1.3.1. Document the frequency of the
validation during development and ongoing
reviews after the implementation of the
model.
8
8.1
Bank practice and Findings
8.1.3.2. Obtain the validation report for the
latest validation.
8.1.3.3. Document the scope of the work
performed by internal audit and the
independent validation function.
8.1.3.4. Confirm that the validation is in line
with the scope of the validation guideline and
that the tests include the power and stability
of the ratings system and the accuracy of
estimates, where applicable.
8.1.3.5. Inspect the evidence that significant
validation findings were reported to the
designated committee in terms of internal
policy.
8.1.4.
23(13)(b)(vi)(B): shall for each
relevant risk grade regularly
compare realised PD ratios, LGD
ratios and EAD amounts with
estimated PD ratios, LGD ratios and
EAD amounts, and demonstrate to
the satisfaction of the Registrar that
the realised risk components are
within the expected range of risk
components for a particular grade;
The bank regularly tests expected
PDs, EADs and LGDs against actual.
8.1.4.1. Inspect the monitoring / validation
documentation to confirm that the bank is
comparing the realised risk ratios to the risk
estimates at the frequency as required by the
bank's policy.
8.1.5.
23(13)(b)(vi)(C):
The bank documents the data and
8.1.5.1. Inspect the independent validation’s
shall
duly
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Process and control environment
Criteria
Attest procedures
document the data and methods
used to compare realised default
rates, LGD ratios and EAD amounts
with estimated PD ratios, LGD ratios
and EAD amounts in respect of each
relevant risk grade, including the
periods that were covered and any
changes in the data and methods
that were used, which analysis and
documentation shall be updated at
appropriate intervals but not less
frequently than once every year;
the methods used to compare
realised default rates with estimated
PD ratios in respect of each grade,
including the periods that were
covered and any changes in the data
and methods that were used; the
analysis and documentation are
updated at appropriate intervals,
but not less frequently than once
every year.
documentation outputs and confirm that the
bank documents the data and the methods
used to compare realised default rates with
estimated PD ratios in respect of each grade
(where sufficient data is available), including
the periods that were covered and any
changes in the data and methods that were
used.
8.1.6.
23(11)(b)(x)(D): shall make use of
quantitative validation tools and
comparisons with relevant external
data sources in order to validate the
bank’s internal estimates of risk
components;
The bank shall make use of
quantitative validation tools and
comparisons with relevant external
data sources in order to validate the
bank’s internal estimates of risk
components.
8.1.6.1. List the quantitative validation tools
and the external data sources used by the bank
to validate the internal estimates of risk
components.
8.1.7.
23(11)(b)(x)(E): shall demonstrate
to the satisfaction of the Registrar
that the bank’s quantitative testing
methods and validation methods do
not vary systematically with the
economic cycle;
The bank applies validation methods
and quantitative tests consistently.
8.1.7.1. Confirm through inspection of the
bank’s documentation to ensure that the
bank’s tests do not vary with the economic
cycle.
8.1.8.
23(11)(b)(x)(F): shall have in place
sufficiently
robust
internal
standards to deal with situations
where realised PD ratios deviate
substantially from expected PD
ratios provided that when the
realised values continue to be
higher than expected values the
bank shall adjust its estimates of
risk components upward in order to
reflect the appropriate default and
loss experiences.
8
Bank practice and Findings
8.1.5.2. Confirm through inspection that the
analysis and documentation are updated at
appropriate intervals, but not less frequently
than once every year.
8.1.8.1. Obtain the bank's policy which details
the processes and procedures for situations
where the realised PD ratios deviate
substantially from expected PD ratios over a 5
year period or the bank’s defined economic
cycle.
8.1.8.2. Document the bank’s justification for
adjusting or not adjusting the estimates
upward.
8.2
Controls over use of models
8.2.1.
23(11)(b)(v)(H): Statistical models
and mechanical methods to assign
borrower and facility ratings or
estimate PD ratios, LGD ratios and
EAD amounts, which models and
methods -
See below
8.2.1.1. See below
8.2.2.
23(11)(b)(v)(H)(iv): shall incorporate
a reasonable set of risk predictors
and the bank shall have in place
clear guidelines and processes to
monitor situations in which
The bank shall have clear guidelines
and processes in place to monitor
situations in which variables or risk
inputs to models were altered.
8.2.2.1. Inspect the bank's guidelines for the
process to change variables or risk inputs into
models.
8.2.2.2. Inspect evidence to confirm that the
process is followed in line with the bank's
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Management comments
8
Regulation
Process and control environment
variables
altered.
8.2.3.
or
risk
inputs
Criteria
were
Attest procedures
Bank practice and Findings
guidelines.
23(11)(b)(v)(H)(vii): shall be subject
to a regular validation process of
data
inputs,
including
an
assessment
of
accuracy,
completeness and appropriateness;
8.2.3.1. Document the bank's data validation
process with regard to the following:
8.2.4.
23(11)(b)(v)(H)(viii): shall be subject
to written policies and procedures
for human review and judgement
provided that when human
judgement is used to override the
model's output, the bank shall
separately keep track of the
performance of the relevant
exposure;
8.2.4.1. Refer to Regulation 23(11)(b)(iii)(G)
below.
8.2.5.
23(11)(b)(v)(H)(ix): shall be subject
to regular backtesting.
8.2.5.1. Document the frequency
backtesting performed by the bank.
8.3
Data maintenance
8.3.1.
23(11)(b)(viii): As a minimum, a
bank that adopted the IRB approach
for the measurement of the bank’s
exposure to credit risk shall collect
and store data in respect of all key
borrower
and
facility
characteristics, which data -
See below
8.3.2.
23(11)(b)(viii)(A): shall provide
effective support to the bank's
internal credit risk measurement
and management process;
The bank collects and stores data in
respect of all key borrower and
facility characteristics.
8.3.2.1. Obtain the bank’s latest credit risk
management pack and document the
underlying data sources.
8.3.3.
23(11)(b)(viii)(B):
shall
be
sufficiently detailed to allow
retrospective
re-allocation
of
obligors and facilities to the bank’s
various risk grades;
The bank keeps sufficient data on
borrower and facility characteristics
to enable the retrospective reallocation of obligors and facilities to
risk grades.
8.3.3.1. Confirm through inspection that the
fields which are required to apply the model
retrospectively are stored.
8.3.4.
23(11)(b)(vi)(C): Based on the
definition of default specified in
regulation 67, a bank shall record all
actual defaults in respect of all
exposures subject to the IRB
approach.
The bank records all actual defaults
that meet the definition of default.
8.3.4.1. Confirm through inspection that the
bank has stored historical defaults.
8.3.5.
23(11)(b)(viii)(C): shall in the case of
corporate, sovereign or bank
See below
8.3.5.1. See below




Frequency
Accuracy
Completeness
Appropriateness
of
8.3.1.1. Inspect the bank documentation and
through discussions with management, and
document the key borrower and facility
characteristics.
8.3.1.2. Inspect the bank's data store and
confirm that the bank stores key borrower and
facility characteristics.
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Regulation
Process and control environment
Criteria
Attest procedures
Bank practice and Findings
exposures include 8.3.6.
23(11)(b)(viii)(C)(i):
the
rating
histories in respect of obligors and
eligible guarantors;
(i) the rating histories in respect of
obligors and eligible guarantors
8.3.6.1. Inspect the data store to confirm that
the bank has stored the rating histories in
respect of each obligator and guarantors.
8.3.7.
23(11)(b)(viii)(C)(ii): the date on
which a rating was assigned;
(ii) the date on which a rating was
assigned;
8.3.7.1. Inspect the data store to confirm that
the bank has stored the date of rating
assignment.
8.3.8.
23(11)(b)(viii)(C)(iii):
the
methodology, key data and the
model/person used to derive the
rating;
(iii) data related to the estimated PD
ratios, LGD ratios and EAD amounts
associated with each relevant pool
of exposures;
8.3.8.1. Inspect the data store and confirm that
the following fields are captured:
8.3.9.
8.3.10.




the rating,
the model used ,
the override if applicable, and
the person/committee responsible for the
override if applicable.
23(11)(b)(viii)(C)(iv): the identity of
borrowers and facilities that
defaulted, and the timing and
circumstances of such defaults;
(iv) the identity of borrowers and
facilities that defaulted, and the
timing and circumstances of such
defaults;
8.3.9.1. Select a sample of defaulted accounts
and inspect the data stores to confirm that the
data contains the following information:
23(11)(b)(viii)(C)(v): the PD ratios
and
realised
default
rates
associated with the bank’s rating
grades;
(v) PD ratios and realised default
rates associated with the bank’s
rating grades
8.3.10.1. Inspect the data store and confirm
that the fields needed for the calculation of the
following quantities are stored:






(vi) rating migrations are stored.
the customer identity
date of first default
circumstances of the default
PD ratios
realised default rates
bank specific rating grades
8.3.11.
23(11)(b)(viii)(C)(vi):
rating
migration in order to keep track of
the predictive power of the rating
system;
8.3.11.1. Inspect the data store to confirm that
the ratings have been stored over time.
8.3.12.
23(13)(b)(iv): A bank that adopts
the advanced IRB approach for the
measurement of the bank's
exposure to credit risk shall in the
case of exposures to corporate
institutions, sovereigns and banks
collect and store data in respect of -
8.3.12.1. See below
8.3.13.
23(13)(b)(iv)(A): the LGD ratios and
EAD estimates associated with each
relevant facility;
8.3.13.1. Inspect the data store to confirm that
the LGD and EAD estimates are stored over
time for each relevant facility.
8.3.14.
23(13)(b)(iv)(B): the key data that
was used to derive a particular risk
8.3.14.1. Inspect the model document and
ascertain which key data inputs are used to
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Management comments
8
Regulation
Process and control environment
Criteria
Attest procedures
estimate;
derive a particular risk estimate. Inspect the
data store and confirm that these key data
inputs are stored.
8.3.15.
23(13)(b)(iv)(C): the person or
model responsible for a particular
risk estimate;
8.3.15.1. Inspect the data store and confirm
that the fields with regard to the responsible
person / committee are stored.
8.3.16.
23(13)(b)(iv)(D): the estimated and
realised LGD ratios and EAD
amounts associated with each
relevant defaulted facility;
the estimated and realised LGD
ratios and EAD amounts associated
with each relevant defaulted facility;
8.3.16.1. Select a sample of defaulted accounts
and inspect the data store and confirm that the
estimated and realised LGD ratios and EAD
amounts associated with each relevant
defaulted facility are stored.
8.3.17.
23(13)(b)(iv)(E):
the credit risk
mitigating effects of guarantees or
credit-derivative instruments on
LGD ratios, that is, the bank shall
retain data in respect of the LGD
ratio of the facility before and after
the effect of a guarantee or creditderivative instrument was taken
into consideration;
CRM effect of guarantees or creditderivative instruments on LGD
ratios, i.e. LGD ratio before and after
CRM
8.3.17.1. Inspect the data store and confirm
that the bank stores data in respect of the LGD
ratio of the facility before and after the effect
of a guarantee or credit-derivative instrument
was taken into consideration.
8.3.18.
23(13)(b)(iv)(F): the components of
loss or recovery for each defaulted
exposure such as the amounts
recovered, the source of recovery,
for example, collateral, liquidation
proceeds and guarantees, the time
period required for recovery and
administrative costs.
the components of loss or recovery
for each defaulted exposure such as
the amounts recovered, the source
of recovery, for example, collateral,
liquidation
proceeds
and
guarantees, the time period
required
for
recovery
and
administrative costs.
8.3.18.1. Inspect the data store and confirm
that the following information is stored:


the amounts recovered,
the source of recovery, for example,
collateral, liquidation proceeds and
guarantees,


the time period required for recovery, and
administrative costs.
8.4
Credit policy
8.4.1.
23(11)(b)(iii): As a minimum, a bank
that adopted the IRB approach for
the measurement of the bank’s
exposure to credit risk in respect of
positions held in the bank’s banking
book shall have in place a duly
documented credit policy, which
credit policy -
The bank has a board approved
credit risk policy.
8.4.1.1. Obtain the minutes of the Board
meeting where the credit policy was approved.
Document the date of approval.
8.4.2.
23(11)(b)(iii)(A): shall be applied
consistently over time for internal
risk management purposes and in
terms of the IRB approach;
The policy has been consistently
applied.
8.4.2.1. Obtain reports / minutes where the
bank has compared the credit policy to its
implemented
processes
and
controls.
Document the gaps identified by the bank.
8.4.3.
23(11)(b)(iii)(B): shall in the case of
exposures relating to a corporate
institutions, sovereigns or banks
duly specify the relationship
between borrower grades in terms
The relationship between borrower
grades and PD estimates is
monotonic.
8.4.3.1. Inspect the credit policy and confirm
that the bank has risk ratings that are mapped
to a PD and that as the risk increases so does
the PD rating.
Bank practice and Findings
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Management comments
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Regulation
Process and control environment
Criteria
Attest procedures
Policy relating to each model
includes description of PD range
associated with each grade, and the
factors taken into account in the
rating system.
8.4.4.1. Inspect the credit policy and confirm
that the bank’s model documentation includes
a description of the PD range associated with
each grade.
Bank practice and Findings
of the level of risk that each grade
implies, that is, the perceived and
measured risk shall increase as the
credit quality of an exposure
declines from one grade to the next;
8.4.4.
23(11)(b)(iii)(C): shall in the case of
exposures relating to a corporate
institutions, sovereigns or banks
duly specify the risk represented in
each risk grade in terms of both a
description of the probability of
default risk typical for obligors
assigned to the specific grade and
the criteria used to distinguish that
level of credit risk;
8.4.5.
23(11)(b)(iii)(D): shall be sufficiently
robust to ensure that -
8.4.5.1. See below
8.4.6.
23(11)(b)(iii)(D)(i): each relevant
individual legal entity or person to
which the bank is exposed is
separately rated;
8.4.6.1. Inspect the credit policy and confirm
that the bank has documented that the PD
ratings are assigned per borrower and not per
facility. Document reasons for the instances
where PD ratings are assigned per facility.
8.4.7.
23(11)(b)(iii)(D)(ii): shall duly specify
the treatment of individual entities
in a connected group, including the
circumstances under which the
same rating may or may not be
assigned to all or some related
entities;
The policy covers the treatment of
connected groups, including the
circumstances under which the
same rating may or may not be
assigned to all or some entities.
The policy with respect to
connected groups is consistently
applied.
8.4.7.1. Inspect the credit policy and confirm
that the bank has documented the treatment
of individual entities in a connected group,
including the circumstances under which the
same rating may or may not be assigned to all
or some related entities.
8.4.8.
23(11)(b)(iii)(D)(iii):
the
bank
develops and maintains a robust
process for the identification of
specific wrong way risk for each
relevant person or legal entity to
which the bank is exposed;
Wrong way risk: It is possible for the
counterparty's credit quality to be
co-dependent with the level of
exposure. This effect is called
wrong-way risk if the exposure
tends to increase when the
counterparty credit quality gets
worse. ISDA (the International
Swaps and Derivatives Association)
defines wrong-way risk as the risk
that occurs when "exposure to a
counterparty is adversely correlated
with the credit quality of that
counterparty". The terms 'wrongway risk' and 'wrong-way exposure'
are often used interchangeably.
8.4.8.1. Inspect the credit policy and confirm
that the bank has a process for the
identification
of
transactions
with
counterparties where specific wrong way risk
exists.
An example of this would be a
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Management comments
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Regulation
Process and control environment
Criteria
Attest procedures
Bank practice and Findings
forward contract with a gold
producer in which the bank pays the
spot price of gold and receives a
fixed price. Suppose the price of
gold were to decrease. That would
worsen the credit quality of the gold
producer, since their revenues
would decrease, making their
business less profitable and viable. It
would also increase the value of the
forward contract to the bank, since
the bank is paying the spot price;
therefore, the bank's exposure
would increase. If these two effects
tend to happen together, then that
co-dependence will increase the
CVA on the forward contract and it
will make the CVA larger than if the
effects were independent. The data
to quantify these co-dependencies
are difficult to obtain, and are
ephemeral. But it is important that
the CVA framework be able to
handle this effect.
8.4.9.
23(11)(b)(iii)(D)(iv):
transactions
with counterparties where specific
wrong way risk has been identified
are appropriately treated in
accordance with the relevant
requirements specified in these
Regulations;
8.4.9.1. Obtain and document the bank’s
process for the identification and treatment of
wrong way risk transactions.
8.4.10.
23(11)(b)(iii)(E): shall reinforce and
foster the independence of the
rating process;
The policy addresses the adequate
segregation of duties.
Rating
assignments and reviews are
performed by an independent party
who does not directly stand to
benefit from the extension of credit.
8.4.10.1. Inspect the credit policy and confirm
that the roles and responsibilities have been
defined and that reporting lines are
independent.
8.4.11.
23(11)(b)(iii)(F): shall duly specify
the bank’s process with regards to
the assignment of ratings to credit
exposures;
The operational processes for
ratings assignment must be
documented
in
the
bank’s
procedures.
8.4.11.1. Inspect the credit policy and confirm
that the bank has documented procedures for
the assignment of ratings. Walk through the
assignment process to determine whether the
documented process has been implemented.
8.4.12.
23(11)(b)(iii)(G): shall duly specify
the situations in which the senior
management of the bank may
override the output of the rating
process, including how and to what
extent such overrides may be used,
A bank has guidelines and processes
for monitoring cases where human
judgement has overridden the
model’s rating, variables were
excluded or inputs were altered.
Guidelines include identification of
8.4.12.1. Inspect the credit policy and perform
the following:
1)
Document the bank’s guidelines and
processes for monitoring cases where
human judgement has overridden the
model’s rating.
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Management comments
8
Regulation
Process and control environment
Criteria
Attest procedures
and the names of senior
management who may approve
overrides of the model’s output;
individuals
responsible
for
approving overrides and the extent
to which overrides can be made.
The bank has a policy stating the
tolerance for overrides. Where the
override tolerance is exceeded, the
issue is appropriately escalated to
senior management who takes
appropriate remedial action. The
bank monitors the occurrence of
overrides, including capturing the
reason for override. Banks identify
overrides and separately track their
performance.
2)
See below
8.4.13.1. See below
8.4.14.1. Inspect the credit policy and confirm
that the policy includes guidance and
definitions on the manner in which days past
due is calculated.
4)
Confirm
that
mandates
include
identification of individuals responsible
for approving overrides and the extent to
which overrides can be made.
Confirm through inspection of evidence
that the bank monitors the occurrence of
overrides, including capturing the reason
for override.
Inspect the record of overrides for the
period and the monitoring and
management review thereof.
8.4.13.
23(11)(b)(iii)(I):
shall
comprehensively with -
8.4.14.
23(11)(b)(iii)(I)(i): overdue amounts,
including the manner in which the
bank determines the number of
past due days in respect of credit
exposures;
The policy includes guidance on the
manner in which days past due is
calculated.
8.4.15.
23(11)(b)(iii)(I)(ii): exposures that
are in default;
The policy includes guidance on the
definition of default across all
portfolios; the policy definition of
default is compliant with the
requirements of the Regulations;
the policy with respect to definition
of default has been consistently
applied.
8.4.15.1. Inspect the credit policy and confirm
that the bank has documented its definition,
treatment, monitoring and curing of defaulted
exposures a watchlist.
8.4.16.
23(11)(b)(iii)(I)(iii):
re-aging
of
facilities or exposures, which reaging, amongst other things, shall
comprehensively deal with -
The policy contains guidance on the
treatment of re-aged facilities
including:
8.4.16.1. In the majority of instances this is not
applicable to a wholesale portfolio.
23(11)(b)(iii)(I)(iii)(aa):
responsible for approval;
(aa) persons
approval;
8.4.17.1.
8.4.17.
8.4.18.
8.4.19
23(11)(b)(iii)(I)(iii)(bb):
requirements;
deal
3)
persons
reporting
23(11)(b)(iii)(I)(iii)(cc): the minimum
age of a facility or exposure before
it is eligible for re-aging;
The policy with respect to
calculation of days past due has
been consistently applied.
responsible
for
(bb) reporting requirements;
Bank practice and Findings
8.4.16.2. If applicable, inspect the credit policy
and confirm that the bank has documented the
following in terms of re-aging of facilities:
(aa) persons responsible for approval;
8.4.18.1.
(bb) reporting requirements;
(cc) the minimum age of a facility or
exposure before it is eligible for reageing;
8.4.19.1.
(cc) the minimum age of a facility or exposure
before it is eligible for re-ageing;
77
Management comments
Regulation
Process and control environment
Criteria
Attest procedures
23(11)(b)(iii)(I)(iii)(dd):
the
delinquency levels of facilities or
exposures that are eligible for reageing;
(dd) the delinquency levels of
facilities or exposures that are
eligible for re-ageing;
8.4.20.1.
23(11)(b)(iii)(I)(iii)(ee):
the
maximum number of exposures per
facility, eligible for re-ageing;
(ee) the maximum number of
exposures per facility, eligible for reageing;
8.4.21.1.
23(11)(b)(iii)(I)(iii)(ff):
a
reassessment of the borrower’s
capacity to repay amounts due;
(ff) a reassessment of the
borrower’s capacity to repay
amounts due;
8.4.22.1.
8.4.23.
23(11)(b)(iii)(I)(iv): the granting of
extensions, deferrals, renewals or
rewrites in respect of existing
accounts;
See above.
8.4.23.1. Inspect the credit policy and confirm
that the bank has documented guidelines in
terms of the granting and monitoring of
extensions, deferrals, renewals or rewrites in
respect of existing accounts.
8.5
8.5.1
Documentation
23(11)(b)(v)(I):The rating and risk
estimation systems and processes
of a bank that adopted the IRB
approach for the measurement of
the bank’s exposure to credit risk in
respect of positions held in the
bank’s banking book shall be duly
documented, which documentation,
as a minimum -
Rating
system
documentation
includes required item.
8.5.1.1. Confirm that the bank has documented
the following:
23(11)(b)(v)(I)(i):
matters such as -
See below
8.5.1.2. See below
23(11)(b)(v)(I)(i)(aa):
specific
definitions of default and loss,
which definitions shall materially be
consistent with the definitions
contained in this subregulation (11)
and regulation 67;
Rating
system
documentation
includes required item. Definitions
of default which are consistent with
the requirements of subregulation
(11) and regulation 65.
8.5.1.3.
23(11)(b)(v)(I)(i)(bb):
differentiation;
Rating
system
documentation
includes required item. What is
documented has actually been
implemented.
8.5.1.4.
Rating
system
documentation
includes required item.; evidence to
support rating system discrimination
falls within policy tolerances (see
above)
8.5.5.1.
8
8.4.20.
8.4.21.
8.4.22.
8.5.2
8.5.3
8.5.4
8.5.5
shall
address
portfolio
23(11)(b)(v)(I)(i)(cc): rating criteria
and the rationale for the bank’s
choice of particular internal rating
criteria provided that the bank shall
be able to demonstrate to the
satisfaction of the Registrar that the
selected
rating
criteria
and
Bank practice and Findings
(dd) the delinquency levels of facilities or
exposures that are eligible for re-ageing;
(ee) the maximum number of exposures per
facility, eligible for re-ageing;
(ff) a reassessment of the borrower’s capacity
to repay amounts due;



specific definitions of default and loss,
which definitions shall materially be
consistent with the definitions contained
in this subregulation (11) and regulation
67;
which portfolios are rated through which
models.
rating criteria; rationale for rating criteria;
and analysis where the bank proves that
the
rating
criteria
meaningfully
differentiate risk.
78
Management comments
8
Regulation
Process and control environment
Criteria
Attest procedures
23(11)(b)(v)(I)(i)(dd):
the
responsibilities
of
persons
responsible for the rating of
borrowers and facilities;
Rating
system
documentation
includes required item. What is
documented has actually been
implemented.
8.5.6.1.
23(11)(b)(v)(I)(i)(ee):
definitions
relating to rating exceptions and the
persons authorised to approve any
rating exceptions;
Rating
system
documentation
includes required item. What is
documented has actually been
implemented.
8.5.7.1.
23(11)(b)(v)(I)(i)(ff): the frequency
of rating reviews;
Rating
system
documentation
includes required item. What is
documented has actually been
implemented.
8.5.8.1.
23(11)(b)(v)(I)(i)(gg): management
oversight and the bank’s internal
control structure;
Rating
system
documentation
includes required item. What is
documented has actually been
implemented.
8.5.9.1.
23(11)(b)(v)(I)(i)(hh): the history of
major changes in the bank’s risk
rating process;
Rating
system
documentation
includes required item. What is
documented has actually been
implemented.
8.5.10.1.
23(11)(b)(v)(I)(ii): shall provide
adequate evidence of the bank’s
compliance with all relevant
minimum requirements;
There is adequate documentation of
all policies, procedures and tests
performed
(including
results)
pursuant to these requirements.
8.5.11.1.
23(11)(b)(v)(I)(iii): shall duly indicate
any differences between the bank’s
risk estimates for purposes of
complying with the IRB approach
and for internal risk management
purposes, such as pricing;
Rating
system
documentation
includes required item. What is
documented has actually been
implemented.
8.5.12.1.
23(11)(b)(v)(I)(iv): shall in the case
of statistical models used in the
bank’s
rating
process,
comprehensively deal with -
See below
8.5.13.1. Confirm through inspection of the
model documentation that the bank has
documented the following:
23(11)(b)(v)(I)(iv)(aa): the relevant
methodologies, including a detailed
outline of the theory, assumptions
and/ or mathematical and empirical
Rating
system
documentation
includes required item. What is
documented has actually been
implemented.
8.5.14.1.
Bank practice and Findings
procedures are likely to result in
ratings
that
meaningfully
differentiate risk;
8.5.6
8.5.7
8.5.8
8.5.9
8.5.10
8.5.11
8.5.12
8.5.13
8.5.14








the responsibilities of persons responsible
for the rating of borrowers and facilities.
definitions relating to rating exceptions
(such as overrides and model used out of
scope); and persons authorised to
approve any rating exceptions (such as
overrides and model used out of scope).
the frequency of rating reviews.
the management oversight and the bank's
internal control structure (such as model
governance).
the history of major changes in the bank's
risk rating.
Confirm that the bank has documented a
process to identify and address any self
assessment gaps.
the differences between the bank's IRB
risk estimates and that used for internal
risk management purposes.
the relevant methodologies, including a
detailed
outline
of
the
theory,
assumptions and / or mathematical and
79
Management comments
8
Regulation
Process and control environment
Criteria
Attest procedures
empirical basis to assign risk estimate to
risk grades, individual obligors, exposures
or pools.
basis to assign risk estimate to risk
grades,
individual
obligors,
exposures or pools;
8.5.15
8.5.16
8.5.17
23(11)(b)(v)(I)(iv)(bb):
sources used;
the
data
Bank practice and Findings
Rating
system
documentation
includes required item. What is
documented has actually been
implemented.
8.5.15.1.
23(11)(b)(v)(I)(iv)(cc): the process to
validate the model;
Rating
system
documentation
includes required item. What is
documented has actually been
implemented.
8.5.16.1.
23(11)(b)(v)(I)(iv)(dd):
any
circumstances under which the
model does not work effectively.
Rating
system
documentation
includes required item. What is
documented has actually been
implemented.
8.5.17.1.



the data sources used.
the process to validate the model.
the circumstances under which the model
does not work effectively.
8.6
Controls relating to overdraft facilities
8.6.1
23(11)(b)(iii)(H): The bank’s credit
policy shall contain comprehensive
requirements
to
assess
the
creditworthiness of persons with
overdraft facilities.
The rating system for overdrafts is
used in the sanctioning process.
8.6.1.1. Inspect the credit policy and document
the bank's requirements to assess the credit
worthiness of persons with overdraft facilities.
8.6.2
23(b)(vi)(E)(i):
A
bank
shall
determine and specify a credit limit
in respect of all authorised
overdraft facilities, which credit
limit -
The bank has a credit limit in respect
of all overdraft facilities.
8.6.2.1. Select a sample of accounts and
inspect the account details to confirm that the
account has a credit limit.
8.6.3
23(b)(vi)(E)(i)(aa): shall in writing be
brought to the attention of the
relevant client of the bank;
The bank notifies the borrower of
the credit limit in writing.
8.6.3.1. Select a sample of accounts and
inspect the letters where the bank has notified
the client of the credit limit in writing.
8.6.4
23(b)(vi)(E)(i)(bb): shall on a
continuous basis be monitored by
the relevant bank for compliance
with the limit by the relevant client;
The bank monitors the client’s
compliance with the credit limit on a
continuous basis; reporting of
breaches; relationship between
breaches and definition of default:
If an authorised overdraft is not
brought under the limit within 90180 days (subject to applicable
trigger), it should be considered
defaulted; days past due for
unauthorised overdrafts commence
once any credit is granted to a
customer. If not repaid within 90 to
180 days, the exposure should be
considered in default.
8.6.4.1. Document the bank's process and
controls it has in place to monitor the client's
compliance with the credit limit.
80
Management comments
Regulation
Process and control environment
Criteria
Attest procedures
8.6.5
23(b)(vi)(E)(ii): shall assign a limit of
zero to any unauthorised overdraft
facility.
The credit limit on unauthorised
overdraft facilities is zero.
8.6.5.1. Document the bank’s treatment of
unauthorised overdrafts.
8.7
8.7.1
Controls relating to unutilized facilities
8
8.7.2
8.7.3
8.7.4
23(13)(b)(v)(D)(xv): Shall be based
on comprehensive policies, systems
and procedures, which policies,
systems and procedures shall be
adequate -
See below
8.7.1.1. See below
23(13)(b)(v)(D)(xv)(aa): to prevent
further drawings in circumstances
short of payment default, such as
covenant violations or other
technical default events;
The bank has policies, systems and
procedures in place which are
adequate to prevent further
drawings in circumstances short of
payment default, such as covenant
violations or other technical default
events.
8.7.2.1. Document the process and controls
that the bank has in place to prevent further
drawings in circumstances short of payment
default, such as covenant violations or other
technical default events.
23(13)(b)(v)(D)(xv)(bb): to monitor,
on a daily basis, facilities amounts
and current outstanding amounts
against committed lines;
On a daily basis, the bank monitors
facility amounts and current
outstanding
amounts
against
committed lines.
8.7.3.1. Confirm via inspection of the
monitoring reports that daily reports are used
and reviewed to monitor facility amounts and
current
outstanding
amounts
against
committed lines.
23(13)(b)(v)(D)(xv)(cc): to monitor
any changes in outstanding
amounts per borrower, and per risk
grade
The bank monitors any changes in
outstanding amounts per borrower
and per risk grade.
8.7.4.1. Confirm via inspection of the
monitoring reports that the bank monitors any
changes in outstanding amounts (e.g. loan
facilities that are overdue and / or changes in
account behaviour) per borrower and per risk
grade.
Bank practice and Findings
81
Management comments
9
9.1.1
Regulation
Use Test
The rating and risk estimation
systems and processes of the Bank
should have produced internal
ratings and default and loss
estimates that formed an integral
part of the Bank’s(i) credit approval process
(ii) risk management process
(iii) internal capital allocation
process
(iv) corporate governance process
Criteria
Attest procedures
9.1 The Bank has documented how
it has complied with the use test for
the rating, PD, LGD and EAD models
9.1.1.1 Inspect the bank’s documentation and
hold discussions with management to confirm
how it has used the output of the risk
estimation systems and processes (ratings, PD,
LGD and EAD) in each criteria indicated (e.g.
Policy documentation indicating requirements
for compliance with the use test /
management reports indicating actual
compliance).
Bank practice and Findings
Where the bank uses the output of a separate
(not used for regulatory reporting) risk
estimation system for any one of the criteria,
document management’s reasoning for this.
9.1.1.2 Confirm the bank’s documented
compliance with the use test through
inspection and documentation of reports &
minutes of meetings of relevant committees
responsible for the decision making related to
each of the criteria stated, ensuring that the
output of the risk estimation systems is
considered at these committees.
82
Management comments
10
Regulation
Experience Test
Criteria
Attest procedures
Bank practice and Findings
83
Management comments
11
11.1
11.1.1
11.2
11.2.1
11.3
11.3.1
11.3.2
Regulation
Stress Testing
Policy
23(11)(b)(ix) As a minimum, a bank
that adopted the IRB approach for
the measurement of the Bank’s
exposure to credit risk shall have in
place a stress-testing process in
respect of the Bank’s exposure to
credit risk, which stress testing
processScenarios and Events
[23(11)(b)(ix) As a minimum, a bank
that adopted the IRB approach for
the measurement of the Bank’s
exposure to credit risk shall have in
place a stress-testing process in
respect of the Bank’s exposure to
credit risk, which stress testing
process- ]
(D) shall assess the effect of a
recession on the bank’s PD ratios,
LGD ratios and EAD amounts;
Stress Testing Application
39(8)(f)(i)The results of Stress
Testing:
A. Shall periodically be reviewed
by the senior management of
the bank;
Criteria
Attest procedures
The Bank has policy with respect to
the stress testing of the pillar 1
credit risk requirement.
11.1.1.1. Confirm through inspection of the
bank’s stress testing process or policy exists.
A. Stress testing results are reviewed
periodically by senior management
of the Bank.
11.3.1.1. Inspect supporting documentation to
confirm whether the results of stress testing
are reviewed by senior management as per
Bank policy or process on a periodic basis.
[23(11)(b)(ix) As a minimum, a bank
that adopted the IRB approach for
the measurement of the Bank’s
exposure to credit risk shall have in
place a stress-testing process in
respect of the Bank’s exposure to
credit risk, which stress testing
process-]
For protected exposure subject to
the double default approach, ensure
that an assessment if the impact of
the below are considered:
11.3.2.1. Inspect supporting documentation to
confirm that for protected exposures subject
to the double default approach, an assessment
of the impact of potential stress of both the
obligors and protection providers is performed
in line with the bank’s policy or process.
(B) shall in the case of protected
exposure subject to the double
default approach envisaged in subregulation (12)(g) include an
assessment of the impact of(i) a deterioration in the credit
quality of protection providers, in
particular the impact of protection
providers falling outside the
eligibility criteria specified in sub
regulation (12)(g) due to rating
changes;
Bank practice and Findings
11.1.1.2. Confirm through inspection of the
bank’s stress testing process that the stress
testing policy has been implemented for this
model in question.
The Bank has established a
methodology for estimating the
impact of a recession on PDs, LGDs
and EADs.
11.2.1.1. Inspect that of the events and/or
scenarios considered; at least one is defined by
the Bank as a recession.
11.2.1.2. Inspect supporting documentation to
confirm that the Bank’s methodology assesses
the impact of such a recession on PDs, LGDs
and EADs.
(i) a deterioration in the credit
quality of protection providers, in
particular the impact of protection
providers falling outside the
eligibility criteria specified in subregulation (12)(g) due to rating
changes;
(ii) the default of one but not both
the obligor and the protection
provider, and the consequent
increase in risk exposure and
required capital and reserve funds at
the time of the said default;
84
Management comments
11
Regulation
Stress Testing
Criteria
Attest procedures
Bank practice and Findings
The process considers internal
and/or external (as appropriate,
where external refers to vendor
models, externally produced ratings
for internal credit risk exposures)
ratings migration in respect of at
least some of the Bank’s credit risk
exposures.
11.3.3.1. Inspect supporting documentation to
confirm that the Bank’s process includes an
assessment of internal and/or external (as
appropriate) ratings migration in line with the
Bank’s stress testing policy or process.
.
The bank’s stress testing should
consider events or changes in the
economy which will unfavourably
affect the bank’s risk exposures.
These may include:
11.3.4.1. Confirm through discussions with
management that the events or future
economic changes are tailored to the portfolio
in question.
.
(ii) the default of one but not both
the obligor and the protection
provider, and the consequent
increase in risk exposure and
required capital and reserve funds
at the time of the said default;
11.3.3
[23(11)(b)(ix) As a minimum, a bank
that adopted the IRB approach for
the measurement of the Bank’s
exposure to credit risk shall have in
place a stress-testing process in
respect of the Bank’s exposure to
credit risk, which stress testing
process- ]
(E) shall make provision for an
internal ratings migration in respect
of at least some of the Bank’s
exposure to credit risk;
(F) Shall appropriately evaluate
evidence of rating migration in
respect of external ratings.
11.3.4
[23(11)(b)(ix) As a minimum, a bank
that adopted the IRB approach for
the measurement of the Bank’s
exposure to credit risk shall have in
place a stress-testing process in
respect of the Bank’s exposure to
credit risk, which stress testing
process- ]
(A) shall include an identification of
possible events or future changes in
economic conditions that may have
an unfavourable effect on the
bank’s risk exposures and an
assessment of the bank’s ability to
withstand such events or changes,
which events or changes may
include(i) economic or industry downturns;
(ii) market-risk events;
(iii) liquidity constraints;
(iv) mild recession scenarios;
(i) economic or industry downturns;
(ii) market-risk events;
(iii) liquidity constraints;
(iv) mild recession scenarios;
11.3.4.2. Confirm through inspection of the
bank’s stress testing results that these
unfavourably affect one or more of the bank’s
rating system parameters (PD, LGD or EAD).
The events and future economic
changes considered must be
relevant to the portfolio in question.
(C) shall be meaningful based on
the environment in which the bank
conducts business
85
Management comments