Unofficial translation
BOARD OF THE BANK OF LITHUANIA
RESOLUTION No 138
of 9 November 2006
ON THE GENERAL REGULATIONS FOR THE CALCULATION OF CAPITAL
ADEQUACY
Vilnius
(Valstybės žinios (Official Gazette) No 142-5442, 2006)
10 May 2007, No 541 (Valstybės žinios (Official Gazette) No 54-2119, 2007)
7 June 2007, No 74 (Valstybės žinios (Official Gazette) No 65-2549, 2007)
21 October 2010, No 03-127 (Valstybės žinios (Official Gazette) No 130-6689)
15 March 2011, No 03-30 (Valstybės žinios (Official Gazette) No 35-1697, 2011)
In observance of Article 9 of the Law of the Republic of Lithuania on the Bank of
Lithuania (Valstybės žinios (Official Gazette) No 99-1957, 1994; No 28-890, 2001), in
implementing Article 48(2) of the Law of the Republic of Lithuania on Banks (Valstybės žinios
(Official Gazette No 54-1832, 2004), Article 37(3) of the Law of the Republic of Lithuania on
the Central Credit Union (Valstybės žinios (Official Gazette) No 45-1288, 2000; No 61-2181,
2004), Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006
relating to the taking up and pursuit of the business of credit institutions (recast) (OJ 2006 L
177, p. 1), Directive 2006/49/EC of the European Parliament and of the Council of 14 June
2006 on the capital adequacy of investment firms and credit institutions (recast) (OJ 2006 L
177, p. 201), Commission Directive 2007/18/EC of 27 March 2007 amending Directive
2006/48/EC of the European Parliament and of the Council as regards the exclusion or
inclusion of certain institutions from its scope of application and the treatment of exposures to
multilateral development banks (OJ 2007 L 87, p. 9), Commission Directive 2009/27/EC of 7
April 2009 amending certain Annexes to Directive 2006/49/EC of the European Parliament and
of the Council as regards technical provisions concerning risk management (OJ 2009 L 94, p.
97), Commission Directive 2009/83/EC of the European Parliament and of the Council of 27
July 2009 as regards technical provisions concerning risk management (OJ 2009 L 196, p. 14),
and Directive 2009/111/EC of the European Parliament and of the Council of 16 September
2009 amending Directives 2006/48/EC, 2006/49/EC and 2007/64/EC as regards banks affiliated
to central institutions, certain own funds items, large exposures, supervisory arrangements, and
crisis management (OJ 2009 L 302, p. 97) and Directive 2010/76/EU of the European
Parliament and of the Council of 24 November 2010 amending Directives 2006/48/EC and
2006/49/EC as regards capital requirements for the trading book and for re-securitisations, and
the supervisory review of remuneration policies (OJ 2010 L 329, p. 3), the Board of the Bank of
Lithuania has r e s o l v e d:
1. To approve:
1.1. General Regulations for the Calculation of Capital Adequacy (attached);
1.2. Capital Adequacy Report Form 6004 (attached);
1.3. Report on Maximum Exposure Amount to a Single Borrower and Large Exposures,
Form 7001 (attached).
2. The present Resolution, except for the requirements specified in Par. 3, comes into effect
as from 1 January 2007.
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3. The requirements of the General Regulations for the Calculation of Capital Adequacy
approved by this Resolution relating to the internal ratings based approach (IRB method) using
loss given default (LGD) calculated by banks and (or) conversion factors (CF), as well as with the
application of the Advanced Measurement Approach (AMA) for operational risk, shall come into
effect as from 1 January 2008.
4. Having regard to Par. 8, Article 152 of the Directive 2006/48/EC of the European
Parliament and of the Council of 14 June 2006 relating to the taking up and pursuit of the business
of credit institutions (OJ 2006 L 177, p. 1) and Par. 1, Article 50 of Directive 2006/49/EC of the
European Parliament and of the Council of 14 June 2006 on the capital adequacy of investment
firms and credit institutions (OJ 2006 L 177, p. 201), to establish that until 1 January 2008 banks
and the Central Credit Union may apply the approach in force until 1 January 2007 instead of the
standardised method set forth in Section I of Chapter IV of these General Regulations.
5. If banks and the Central Credit Union choose the option referred to in Par. 4 above, by 1
January 2008:
5.1. they shall be exempt from application of the General Regulations for the Calculation
of Capital Adequacy approved by this Resolution;
5.2. credit derivatives should be included in the list of the off-balance sheet items set forth
in subitem 37.1 of the on the Rules for the Calculation of Capital Adequacy approved by the Bank
of Lithuania Board Resolution No 172 of 21 December 2000 (Valstybės žinios (Official Gazette)
No 7-223, 2001);
5.3. requirements set forth in items 38–40 of the Rules for the Calculation of Capital
Adequacy approved by the Bank of Lithuania Board Resolution No 172 of 21 December 2000
(Valstybės žinios (Official Gazette) No 7-223, 2001 ) shall apply both, to the balance sheet and
off-balance sheet items.
6. To repeal with effect from 1 January 2008:
6.1. Bank of Lithuania Board Resolution No 172 of 21 December 2000 on the Rules for the
Calculation of Capital Adequacy (Valstybės žinios (Official Gazette) No 7-223, 2001);
6.2. Bank of Lithuania Board Resolution No 111 of 1 July 2004 on the Amendment to the
Bank of Lithuania Board Resolution No 172 of 21 December 2000 on the Rules for the
Calculation of Capital Adequacy (Valstybės žinios (Official Gazette) No 105-3932, 2004);
6.3. Bank of Lithuania Board Resolution No 159 of 23 September on the Amendment to
the Bank of Lithuania Board Resolution No 172 of 21 December 2000 (Valstybės žinios (Official
Gazette) No 145-5301, 2004);
6.4. Bank of Lithuania Board Resolution No 70 of 25 May 2006 on the Amendment to the
Bank of Lithuania Board Resolution No 172 of 21 December 2000 on the Rules for the
Calculation of Capital Adequacy (Valstybės žinios (Official Gazette) No 61-2246, 2006);
6.5. Bank of Lithuania Board Resolution No 100 of 27 July 2006 on the Implementation of
point 13.2.5 of the Rules for the Calculation of Capital Adequacy approved by Bank of Lithuania
Board Resolution No 172 of 21 December 2000 on the Rules for the Calculation of Capital
Adequacy (Valstybės žinios (Official Gazette) No 86-3393, 2006);
6.6. Bank of Lithuania Board Resolution No 151 of 28 November 2002 on Methodical
Recommendations for Banks Regarding the Application of the Internal Market Exposure
Assessment Models (Valstybės žinios (Official Gazette) No 117-5290, 2002);
6.7. Bank of Lithuania Board Resolution No 28 of 9 March 2000 on the Procedure for
Establishing the Country Risk (Valstybės žinios (Official Gazette) No 24-636, 2000);
6.8. Bank of Lithuania Board Resolution No 94 of 4 July 2002 on the Amendment to the
Bank of Lithuania Board Resolution No 28 of 9 March 2000 on the Procedure for Establishing the
Country Risk (Valstybės žinios (Official Gazette) No 70-2959, 2002);
6.9. Bank of Lithuania Board Resolution No 2 of 29 January 2004 on the Amendment to
the Bank of Lithuania Board Resolution No 28 of 9 March 2000 on the Procedure for Establishing
the Country Risk (Valstybės žinios (Official Gazette) No 22-697, 2004);
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6.10. Item 2 of the Bank of Lithuania Board Resolution No 91 of 4 July 2002 on the
Maximum and Large Exposure Requirements (Valstybės žinios (Official Gazette) No 73-3133,
2002);
6.11. Bank of Lithuania Board Resolution No 84 of 20 May 2004 on the Amendment to the
Bank of Lithuania Board Resolution No 91 of 4 July 2002 on the Maximum and Large Exposure
Requirements (Valstybės žinios (Official Gazette) No 86-3167, 2004);
6.12. Subitems 2.1, 2.3 and 2.4 of the Bank of Lithuania Board Resolution No 131 of 23
August 2001 on Financial Statements and Calculation of Prudential Requirements of the Central
Credit Union (Valstybės žinios (Official Gazette) No 75-2662, 2001);
6.13. Subitems 1.1 and 1.3 of the Bank of Lithuania Board Resolution No 105 of 23
October 2003 on Amending and Supplementing the Bank of Lithuania Board Resolution No 131
of 23 August 2001 on Financial Statements and Calculation of Prudential Requirements of the
Central Credit Union (Valstybės žinios (Official Gazette) No 104-4694, 2003);
6.14. Bank of Lithuania Board Resolution No 146 of 2 September 2004 on the
Amendment to the Bank of Lithuania Board Resolution No 131 of 23 August 2001 on Financial
Statements and Calculation of Prudential Requirements of the Central Credit Union (Valstybės
žinios (Official Gazette) No 139-5091, 2004);
6.15. Item 10 of the Bank of Lithuania Board Resolution No 210 of 30 December on
Reporting Deadlines (Valstybės žinios (Official Gazette) No 2-56, 2000);
6.16. Item 23 of the Bank of Lithuania Board Resolution No 45 of 28 March 2002
(Valstybės žinios (Official Gazette) No 35-1338, 2002);
6.17. Item 2 of the Bank of Lithuania Board Resolution No 37 of 10 March 2005 on
Approving the Requirements for the Information Made Available to the Public, Amending
Resolutions of the Board of the Bank of Lithuania Regulating the Reporting Periodicity and
Repealing Some Resolutions of the Board of the Bank of Lithuania (Valstybės žinios (Official
Gazette) No 37-1219, 2005).
Chairman of the Board
Reinoldijus Šarkinas
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APPROVED by
Resolution No 138 of
the Board of the
Bank of Lithuania of
9 November 2006
GENERAL REGULATIONS
FOR THE CALCULATION OF CAPITAL ADEQUACY
(Valstybės žinios (Official Gazette) No 142-5442, 2006)
10 May 2007, No 541 (Valstybės žinios (Official Gazette) No 54-2119, 2007)
7 June 2007, No 74 (Valstybės žinios (Official Gazette) No 65-2549, 2007)
15 November 2007, No 152 (Valstybės žinios (Official Gazette) No 121-4998, 2007)
21 October 2010, No 03-127 (Valstybės žinios (Official Gazette) No 130-6689)
15 March 2011, No 03-30 (Valstybės žinios (Official Gazette) No 35-1697, 2011)
CHAPTER I
GENERAL REGULATIONS
1. The present General Regulations for the Calculation of Capital Adequacy (hereinafter Regulations) establish the procedure for the calculation of capital adequacy, the requirements of
maximum open position in foreign currency and precious metals, the maximum loan to one obligor
(hereinafter maximum exposure amount to one borrower) and large exposures (loans) limits.
2. The present Regulations shall apply to all commercial banks and the Central Credit
Union licensed by the Bank of Lithuania (hereinafter within the framework of application referred
to as the “bank”).
3. The capital adequacy of the bank shall be calculated in consideration of credit, market
and operating risks.
4. For the purposes of these Regulations the following definitions shall apply:
General terms
4.1.
Credit institution means an undertaking of the Republic of Lithuania or another
Member State of the European Union whose business is to receive deposits or other repayable
funds from the public (unprofessional market participants) and to grant credits for its own account;
or to issue and manage electronic money, or a undertaking of another foreign state, which holds a
license issued by a competent authority of that state to receive and which receives deposits or other
repayable funds from the public (unprofessional market participants) and to grant credits for its
own account; or to issue and manage electronic money.
4.11. EU parent credit institution means an undertaking as defined in the Rules on
Consolidation of Accounts of the Financial Group and on Joint (Consolidated) Supervision
approved by Resolution No 153 of the Board of the Bank of Lithuania of 7 December 2006
(Valstybės žinios (Official Gazette) No 143-5461, 2006).
4.2.
Investment firm means an undertaking of the Republic of Lithuania or another
Member State of the European Union whose regular occupation or business is the provision of one
or more investment services to third parties and/or the performance of one or more investment
activities on a professional basis.
4.3.
Institution means a credit institution or an investment firm.
4.4.
Public sector entities means public legal entities of the Republic of Lithuania, i.e.
legal entities set up by the government or municipality, their institutions or other non-profit
entities for the purpose of satisfying public interests (state and municipal enterprises, public and
municipal bodies, public institutions, etc.), non-profit private legal entities controlled by the
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government or its institutions and granted special status (guarantees)), as well as other entities
of the public sector of the European Union Member States as defined in legal acts thereof.
4.5.
Venture capital company means undertaking, which invests in the private capital
companies with high value generation opportunities.
4.6.
Trading book means balance sheet and off-balance sheet positions of the bank’s
financial instruments used for trading purposes or for hedging other positions of the trading book,
which satisfy the conditions set forth in pars. 541-549 hereof.
4.7.
Banking book means all balance sheet and off-balance sheet positions of the
bank’s claims excluded from the trading book.
4.8.
Lease means lease and operating lease. Operating lease shall be included only in
the calculation of capital adequacy of the financial group.
4.9.
Bank capital means capital calculated in the manner established in Chapter II.
4.10.
Capital requirement of the bank means minimum bank capital necessary for
covering the credit, market and operating risks.
4.11.
Internal capital of the bank means capital requirement calculated for the internal
purposes of the bank.
4.12.
Credit risk means likeliness that the counterparty will fail to settle in the
contractual manner.
4.13.
Market risk means likeliness that as a result of change in market variables –
interest rate, exchange rate, prices of equity securities and commodities – the bank will sustain
losses from the concluded transaction.
4.14.
Operational risk means the risk of loss resulting from inadequate or failed internal
processes, people and systems or from external events, and includes legal risk.
4.15.
Repurchase (reverse repurchase) agreement means any agreement in which the
bank or its counterparty transfers securities or commodities or guaranteed rights relating to title to
securities or commodities (where that guarantee is issued by a recognised exchange which holds
the rights to the securities or commodities) and the agreement does not allow the bank to transfer
or pledge a particular security or commodity to more than one counterparty at one time, subject to
a commitment to repurchase them (or substituted securities or commodities of the same
description) at a specified price on a future date specified, or to be specified, by the transferor,
being a repurchase agreement for the bank selling the securities or commodities and a reverse
repurchase agreement for the bank buying them.
4.16.
Securities or commodities lending and securities or commodities borrowing
means any transaction in which the bank or its counterparty transfers securities or commodities
against appropriate collateral, subject to a commitment that the borrower will return equivalent
securities or commodities at some future date or when requested to do so by the transferor, that
transaction being securities or commodities lending for the bank transferring the securities or
commodities and being securities or commodities borrowing for the bank to which they are
transferred.
4.17.
Real estate means residential or commercial immoveable property.
4.18.
Related person means person who together with the client (borrower) belongs to
the group of interrelated clients (borrowers).
4.19.
Group of connected clients (obligors) means:
4.19.1. two or more natural or legal persons, who, unless it is shown otherwise,
constitute a single risk because one of them, directly or indirectly, has control over the other or
others; or.
4.19.2. two or more natural or legal persons between whom there is no relationship of
control as set out in point (a) but who are to be regarded as constituting a single risk because
they are so interconnected that, if one of them were to experience financial problems, in
particular funding or repayment difficulties, the other or all of the others would be likely to
encounter funding or repayment difficulties.
4.20.
Exposure means item of the bank’s assets or off-balance sheet claims.
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4.21.
Exposure value means amount of the bank’s assets or off-balance sheet claims.
4.22.
Net exposure value means value calculated as difference between overall position
value and value impairment, fixed tangible assets and depreciation, intangible assets and
amortisation.
4.23.
Conversion factor means ratio of an undrawn amount of an obligor’s
commitment in calculating obligor’s exposure value that can be drawn and outstanding at
default to the whole of the currently undrawn amount of the commitment, expressed in
percentage. The extent of the commitment shall be determined by the advised limit (i.e. known to
the borrower) unless the unadvised limit (i.e. established inside the bank and not known to the
borrower) is higher.
4.24.
Credit derivative means financial instrument used for hedging of risk of the
underlying instrument, where such risk is transferred to a third party, while retaining the
ownership rights to the underlying exposure.
4.25.
Revolving exposure means exposure relating to the outstanding balance of the
borrower which can change with respect to the borrower’s decision to borrow and repay without
exceeding the recommended limit established by the bank.
4.26.
Dilution risk of purchased receivables means the likeliness that an amount
receivable will be reduced.
4.27.
Value–at–risk, VaR, means quantification of possible losses of the financial
instruments’ portfolio resulting from market price fluctuations for a given period and under a
certain probability.
4.28.
Recognised exchange means exchange, which:
4.28.1. is a going concern;
4.28.2. observes the rules issued and approved by respective authorities of the home
Member State of the exchange, defining the conditions for its operation, entry as well as conditions
to be satisfied by the contract in order to enter into an effective exchange transaction;
4.28.3. has a clearing system through which contracts listed in Annex 7 are subject to the
daily margin requirement providing the required protection.
Terms related with credit risk
4.29.
Standardised approach means unified approach of the assessment of the credit
risks of banks for the capital adequacy calculation purpose based on the assignment of risk weights
to the exposures held by a bank, in consideration of credit assessments (ratings) established for
borrowers by external credit assessment institutions.
4.30.
External credit assessment institution, ECAI, means institution whose principal
business encompasses the assessment of the borrower’s ability to discharge financial obligations
establishing respective credit assessments (ratings) for the borrower.
4.31.
Eligible ECAI means ECAI, recognised as qualifying in the manner established by
the Bank of Lithuania, i.e. banks may use its credit assessments (ratings) for their capital adequacy
calculation purposes.
4.32.
Solicited credit assessment means credit assessment (rating) performed by ECAI
according to the official order of the rated entity and subject to a certain consideration.
4.33.
Unsolicited credit assessment means credit assessment (rating) performed on
ECAI initiative without participation of the rated entity.
4.34.
Credit quality step, CQS means ECAI credit risk assessment (rating) scale
intervals reflecting different risk level (Annex 1).
4.35.
Internal ratings based approach, IRB method, means credit risk assessment
method used for calculating the capital adequacy of banks and based on the setting of credit risk
components and application of respective functions of risk weights to the bank's exposures having
regard to the internal ratings of the bank and standards established by the supervisory authority.
4.36.
External vendor model means credit risk assessment model developed by third
parties and applied for the assessment and management of the bank’s risk.
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4.37.
Probability of default means probability of default of a borrower over one year
period.
4.38.
Loss means economic loss, including material discount effects, and material direct
and indirect costs associated with collecting on the instrument.
4.39.
Loss given default (LGD) means percentage ratio of the loss on an exposure due to
the default of a counterparty to the exposure at default.
4.40.
Exposure at default, EAD, means amount of the bank’s assets and off-balance
sheet claims booked in the banking book on the day of the default.
4.41.
Risk–weighted exposure amount means product of EAD and respective risk
weight.
4.42.
Rating system shall comprise all of the methods, processes, controls, data
collection and IT systems that support the assessment of credit risk, the assignment of obligors and
exposures to grades or pools, and the quantification of risk parameters .
4.43.
Obligor grade means a risk category within a rating system's obligor rating scale,
to which obligors are assigned on the basis of a specified and distinct set of rating criteria andfrom
which estimates of PD are derived.
4.44.
Facility grade means a risk category within a rating system's facility rating scale,
to which exposures are assigned on the basis of a specified and distinct set of rating criteria and
from which own estimates of LGDs and (or) CFs are derived.
4.45.
Quantification process means process covering collection of data, estimation of
risk parameters, mapping such parameters to respective grades or risk pools and application for
the capital adequacy calculation purposes.
4.46.
Assignment process means associating the obligor (exposure) with the respective
grade of the rating scale of the obligor (exposure), or in case of retail exposures - with respective
risk pools in accordance with the assignment criteria.
4.47.
Expected loss means the percentage ratio of the amount expected to be lost on an
EAD from a potential default of a counterparty or dilution over one year period to the total EAD.
4.48.
Best estimate of expected loss, ELBE, means bank’s loss resulting from defaulted
exposures expressed as percentage and determined on the grounds of bank’s performed assessment
in consideration of the current economic circumstances, exposure status and the possibility of
additional losses during the period of recovery process .
4.49.
Maturity, M means maximum possible period until expected discharge of the
borrower’s obligations.
4.50.
Low-default portfolio means portfolio with few defaults observed, or portfolio
with no defaults observed .
4.51.
Backtesting means validation method based on comparison of quantified risk
parameters with respective realised values.
4.52.
Minimum lease payment means lessee’s contribution which the bank requires or
may require to pay during the term of lease contract in consideration of bargain purchase option,
i.e. the lessee’s right to acquire assets which are the object of lease for price lower than expected
market value. Guaranteed residual value of assets which are the object of lease shall also be
considered as minimum lease payment where the requirements set forth in pars. 325-326 and item
340.9 are observed.
Terms related with credit risk mitigation
4.53.
Capital market driven transaction means secured transaction with regard to
which an exposure occurs and which entitles the bank to receive margin payments.
4.54.
Secured lending transaction means secured transaction with regard to which an
exposure occurs but which does not entitle the bank to receive margin payments.
4.55.
Financial collateral simple method means method based on weight substitution
used to estimate the effects of collateral on credit risk.
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4.56.
Financial collateral comprehensive method means method based on volatility
adjustments of the financial instrument’s value used to estimate the effects of collateral on credit
risk.
4.561. Funded credit protection means a technique of credit risk mitigation where the
reduction of the credit risk on the exposure of a bank derives from the right of the bank — in
the event of the default of the counterparty or on the occurrence of other specified credit events
relating to the counterparty — to liquidate, or to obtain transfer or appropriation of, or to retain
certain assets or amounts, or to reduce the amount of the exposure to, or to replace it with the
amount of the difference between the amount of the exposure and the amount of a claim on the
credit institution (techniques referred to in pars. 314 through 324).
4.562. Unfunded credit protection means a technique of credit risk mitigation where the
reduction of the credit risk on the exposure of a bank derives from the undertaking of a third
party to pay an amount in the event of the default of the borrower or on the occurrence of other
specified credit events.
Terms related with the securitisation
4.57.
Securitised exposure means the underlying exposure, whereby the credit risk
associated with an exposure is tranched on the basis of a securitisation transaction.
4.58.
Securitisation means a transaction or scheme, whereby the credit risk associated
with an exposure or pool of exposures is tranched, having the following characteristics:
4.58.1. payments in the transaction are dependent upon the performance of the exposure or
pool of exposures;
4.58.2. the subordination of tranches determines the distribution of losses during the
ongoing life of the transaction.
4.59.
Originator means either of the following:
4.59.1. an entity which, either itself or through related entities, directly or indirectly, was
involved in the original agreement which created the obligations or potential obligations of the
debtor or potential debtor giving rise to the exposure being securitised; or;
4.59.2. an entity which purchases a third party's exposures onto its balance sheet and then
securitises them.
4.60.
Sponsor means a bank other than an originator bank that establishes and manages
an asset-backed commercial paper programme or other securitisation scheme that purchases
exposures from third party entities.
4.61.
Traditional securitisation means a securitisation involving the economic transfer
of the exposures being securitised to a securitisation special purpose entity which issues securities.
This shall be accomplished by the transfer of ownership of the securitised exposures from the
originator bank or through sub-participation. The securities issued do not represent payment
obligations of the originator bank.
4.62.
Synthetic securitisation means a securitisation where the tranching of the
underlying exposures’ risk is achieved by the use of credit derivatives or guarantees, and the pool
of underlying exposures is not removed from the balance sheet of the originator bank.
4.63.
Tranche – means a contractually established securitisation position (positions),
associated with a risk to incur loss greater than or less than any other securitisation position
(positions) of the same amount, without taking account of credit protection provided by third
parties directly to the holders of securitisation positions.
4.64.
Credit enhancement means a contractual arrangement whereby the credit quality
of a position in a securitisation is improved, including the enhancement provided by more junior
tranches in the securitisation and other types of credit protection.
4.65.
Securitisation special purpose entity, hereinafter – special entity, means a
corporation trust or other entity (other than a bank) organised for carrying on a securitisation or
securitisations, the activities of which are limited to those appropriate to accomplishing that
objective, the structure of which is intended to isolate the obligations of the special entityfrom
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those of the originator bank, and the holders of the beneficial interests in which have the right to
pledge or exchange those interests without restriction.
4.66.
Excess spread means finance charge collections and other fee income received in
respect of the securitised exposures net of costs and expenses.
4.67.
Excess spread trapping point means level of excess spread established according
to the conditions of the securitisation transaction at which excess spread is required to be trapped.
4.68.
Clean–up call option means contractual option for the originator to repurchase or
extinguish the securitisation positions before all of the underlying exposures have been repaid,
when the amount of outstanding exposures falls below a specified level.
4.69.
Liquidity facility means the securitisation position arising from a contractual
agreement to provide funding to ensure timeliness of cash flows to investors.
4.70.
Rated position means securitisation position which has an eligible credit
assessment (rating) by an eligible ECAI.
4.71.
Unrated position means securitisation position which does not have an eligible
credit assessment (rating) by an eligible ECAI.
4.72.
Asset–backed commercial paper programme, ABCP means programme of
securitisations the securities issued by which predominantly take the form of commercial paper
with an original maturity of one year or less.
4.73.
Tranched cover means transaction whereby a bank buys funded credit protection
(e.g., credit-linked notes) or unfunded credit protection (e.g., guarantees, credit default swaps) to
secure only a certain portion of the exposure amount, and where the protected and unprotected
portions of exposure amount are of different seniority, i.e. two different risk tranches are created.
4.74.
Implicit support means support provided by a bank for a securitisation exposure
exceeding contractual obligations established in advance.
Terms related with trading book risk
4.75.
Trading book risk means market risk, counterparty risk, settlement risk and risk of
large exposures of the trading book.
4.76.
Positions held with trading intent means positions held intentionally for shortterm resale and/or with the intention of benefiting from actual or expected short-term price
differences between buying and selling prices or from other price or interest rate variations. The
term ‘positions’ shall include proprietary positions and positions arising from client servicing and
market making.
4.77.
Financial instruments means any contract that gives rise to both a financial asset
of one party and a financial liability or equity instrument of another party. Financial instruments
shall comprise:
4.77.1. equities held for trading;
4.77.2. debt securities held for trading;
4.77.3. money-market instruments: Treasury securities (T- bills) with the maturity of less
than one year);
4.77.4. financial futures;
4.77.5. forward rate agreements (FRA);
4.77.6. equity and currency (excluding foreign currency OTC contracts with the maturity of
less than 14 days) forwards;
4.77.7. interest rate, equity and currency (excluding foreign currency OTC contracts with
the maturity of up to 14 days) swaps;
4.77.8. credit derivatives;
4.77.9. repurchase agreements and reverse repurchase agreements;
4.77.10. other financial instruments covered by the trading business policies of the bank.
4.78.
Matched principal transaction means transaction which may be concluded only
by two qualifying market participants (banks). A transaction shall be concluded on behalf of the
market participant (bank), irrespective of the fact that it is based on the client’s order and therefore
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corresponds to the transaction concluded between the qualifying market participant (bank) and the
client.
Terms related with foreign exchange risk
4.79.
Foreign exchange risk means possibility that a bank, which holds a net open
position in foreign currency (and precious metals) resulting from sale or purchase operations of
foreign currency and (or) from the structure of its assets and liabilities, will incur losses caused by
a certain foreign exchange rate or its fluctuation.
4.80.
Open currency position means difference between the net value of bank assets, its
off-balance sheet claims and bank balance and off-balance sheet liabilities in one currency.
4.81.
Long open currency position means the position when all bank assets and offbalance sheet claims in one currency exceed all bank balance and off-balance sheet liabilities in
the same currency.
4.82.
Short open currency position means position when all bank assets and off-balance
sheet claims in one currency are lower than all bank balance and off-balance sheet liabilities in the
same currency.
4.83.
Overall open currency position (excluding precious metals position) means the
larger sum of the separately summed up long and short positions in currencies held by the bank.
4.84.
Overall net currency position (excluding precious metals position) means
difference between the separately summed up long and short positions of currencies held by the
bank.
Terms related with interest rate risk and equity risk
4.85.
Interest rate risk means the exposure of a bank to loss through interest rate
fluctuations.
4.86.
Equity risk means the exposure of a bank, which holds equity positions, to
movements in the value of thereof.
4.87.
The equity risk shall be split into the specific equity position risk and general
equity position risk:
4.87.1. Specific risk means the risk that the value of a respective financial instrument may
change by reason of factors related with its issuer, or in case of a derivative – the risk related with
the issuer of the underlying financial instrument.
4.87.2. General risk means exposure to loss arising from the general movement in the
value of financial instruments and derivatives market.
4.88.
Long position means position arising from the rights of claim of the bank to
financial instruments or commodities and from the bank’s right to purchase a financial instrument
or commodity.
4.89.
Short position means position arising from the right to sell a financial instrument,
exchange commodity, or from other liabilities pertaining to financial instruments or commodities.
4.90.
Net position means difference between identical (par. 576) financial instruments or
long and short positions of commodities.
4.91.
Convertible security means any security which on discretion of its holder can be
exchanged for another security.
4.911. Warrant means a security which gives the holder the right to purchase an
underlying asset at a stipulated price until or at the expiry date of the warrant and which may be
settled by the delivery of the underlying itself or by cash settlement.
Terms related with commodity risk
4.92.
Commodity means any product, which is or can be trade on a secondary market
(e.g., agricultural products, metals, mining products precious metals).
4.93.
Commodity risk means the risk that a bank trading in the commodities exchange
may be exposed to losses resulting from movements in the value of open positions of these
commodities. .
Terms related with counterparty credit risk
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4.94.
Counterparty credit risk means the risk that the counterparty to a transaction
could default before the final settlement of the transaction's cash flows inflicting losses to the
bank. This risk often occurs when there is a time delay between the transaction date and settlement
date. The counterparty credit risk shall also cover the settlement risk for free deliveries and the risk
of unsettled transactions.
4.95.
Central counterparty means an entity that legally interposes itself between
counterparties to contracts traded within one or more financial markets, becoming the buyer to
every seller and the seller to every buyer.
4.96.
Deferred payment means the settlement for the acquired object of the contract
effected within the agreed period after the acquisition.
4.97.
Margin means the sum which is paid by the customer via the mediator to the bank
as a deposit upon borrowing from the bank in order to acquire securities.
4.98.
Fee means any outstanding amounts (other than margins) which have not yet been
received and which arise from transactions falling in the trading book.
4.99.
Long settlement transaction means mean transactions where a counterparty
undertakes to deliver a security, a commodity, or a foreign exchange amount against cash, other
financial instruments, or commodities, or vice versa, at a settlement or delivery date that is
contractually specified as more than the lower of the market standard for this particular transaction
and five business days after the date on which the bank enters into the transaction.
4.100.
Margin lending agreement means transaction in which a bank extends credit in
connection with the purchase, sale, carrying or trading of securities. Margin lending transactions
do not include other loans that happen to be secured by securities collateral.
4.101.
Stock financing means positions where physical stock has been sold forward and
the cost of funding has been locked in until the date of the forward sale.
4.102.
Rollover risk the amount by which expected positive exposure is understated
when future transactions with a counterpart are expected to be conducted on an ongoing basis. The
additional exposure generated by those future transactions is not included in calculation of EPE.
4.103.
General wrong-way risk arises when the PD of counterparties is positively
correlated with general market risk factors.
4.104.
Specific wrong-way risk arises when the exposure to a particular counterparty is
positively correlated with the PD of the counterparty due to the nature of the transactions with the
counterparty. A bank shall be considered to be exposed to Specific Wrong-Way Risk if the future
exposure to a specific counterparty is expected to be high when the counterparty's PD is also high.
Terms related with netting and hedging
4.105.
Netting set means a group of transactions with a single counterparty that are
subject to a legally enforceable bilateral netting arrangement and for which netting is
recognised. Each transaction that is not subject to a legally enforceable bilateral netting
arrangement, which is recognised under these Regulations, should be interpreted as its own
netting set for the purpose of these Regulations. For the purpose of internal approach method
all netting groups with one counterparty may be treated as one netting group, provided that
during assessment of expected exposure simulated negative market values for separate netting
groups are 0.
4.106.
Risk position means a risk number that is assigned to a transaction under the
Standardised Method set forth in Section VI, Chapter V following a predetermined algorithm.
4.107.
Hedging set means a group of risk positions from the transactions within a single
netting set for which only the difference of that hedging set items (their balance) is relevant for
determining the exposure value under the Standardised Method set out in Section VI, Chapter V.
4.108.
Margin agreement means a contractual agreement (provisions thereof) under
which one counterparty shall supply collateral to a second counterparty when an exposure of that
second counterparty to the first counterparty exceeds a specified level.
4.109.
Margin threshold means the largest amount of an exposure that remains
outstanding until one party has the right to call for collateral.
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4.110.
Margin period of risk means the time period from the last exchange of collateral
covering a netting set of transactions with a defaulting counterpart until that counterpart is closed
out and the resulting market risk is re-hedged.
4.111.
Effective maturity under the internal model method (for a netting set with
maturity greater than one year) means the ratio of the sum of expected exposure over the life of the
transactions in the netting set discounted at the risk-free rate of return divided by the sum of
expected exposure over one year in a netting set discounted at the risk-free rate. This effective
maturity may be adjusted to reflect rollover risk by replacing expected exposure with effective
expected exposure for forecasting horizons under one year.
4.112.
Cross-product netting means the inclusion of transactions of different product
categories within the same netting set pursuant to the Cross Product Netting rules set out in these
Regulations.
4.113.
Current market value, CMV means the net market value of the portfolio of
transactions within the netting set with the counterparty. Both positive and negative market values
are used in computing CMV.
Terms related with distribution
4.114.
Distribution of market value means the forecast of the probability distribution of
net market values of transactions within a netting set for some future date, given the realised
market value of those transactions up to the present time.
4.115.
Distribution of exposures means the forecast of the probability distribution of
market values that is generated by setting forecast instances of negative net market values equal to
zero.
4.116.
Risk-neutral distribution means a distribution of market values or exposures at a
future time period where the distribution is calculated using market implied values (such as
implied volatilities).
4.117.
Actual distribution means a distribution of market values or exposures at a future
time period where the distribution is calculated using historic or realised values (such as
volatilities calculated using past price or rate changes).
Terms related with adjustment of exposures
4.118.
Current exposure means the larger of zero or the market value of a transaction or
portfolio of transactions within a netting set with a counterparty that would be lost upon the default
of the counterparty, assuming no recovery on the value of those transactions in bankruptcy.
4.119.
Peak exposure means a high percentile of the distribution of exposures at any
particular future date before the maturity date of the longest transaction in the netting set.
4.120.
Expected exposure, EE means the average of the distribution of exposures at any
particular future date before the longest maturity transaction in the netting set matures.
4.121.
Effective expected exposure at a specified date, hereinafter - effective EE, means
the maximum expected exposure that occurs at that date or any prior date. Alternatively, it may be
defined for a specific date as the greater of the expected exposure at that date, or the effective
exposure at the previous date.
4.122.
Expected positive exposure, EPE, means the weighted average over time of
expected exposures where the weights are the proportion that an individual expected exposure
represents of the entire time interval. When calculating the minimum capital requirement, the
average is taken over the first year or, if all the contracts within the netting set mature within less
than one year, over the time period of the longest maturity contract in the netting set.
4.123.
Effective expected positive exposure, hereinafter - effective EPE, means the
weighted average over time of effective expected exposure over the first year, or, if all the
contracts within the netting set mature within less than one year, over the time period of the
longest maturity contract in the netting set, where the weights are the proportion that an individual
expected exposure represents of the entire time interval.
4.124.
Credit valuation adjustment means an adjustment to the mid-market valuation of
the portfolio of transactions with a counterparty. This adjustment reflects the market value of the
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credit risk due to any failure to perform on contractual agreements with a counterparty. This
adjustment may reflect the market value of the credit risk of the counterparty or the market value
of the credit risk of both the bank and the counterparty.
4.125.
One-sided credit valuation adjustment means a credit valuation adjustment that
reflects the market value of the credit risk of the counterparty to the bank, but does not reflect the
market value of the credit risk of the bank to the counterparty.
Terms related with options
4.126.
Option means contract conveying the right but not the obligation to buy or sell a
specified financial instrument at a fixed price and at an agreed date or earlier.
4.127.
Put option means contract the right but not the obligation to the buyer to sell a
specified financial instrument.
4.128.
Call option means contract the right but not the obligation to the buyer to buy a
specified financial instrument.
4.129.
Delta means percentage change in an option premium for a given change in the
price of the underlying financial instrument.
Terms related with large exposures
4.130.
Risk of large exposures means risk related with the banking and trading book
positions, which exceed the limits set by the Bank of Lithuania.
4.131.
Large exposure means exposure incurred to a borrower (including borrowerrelated persons), the value of which equals to or exceeds 10% of the bank’s own funds.
CHAPTER II
BANK CAPITAL (OWN FUNDS)
1. Capital structure
5. For the purpose of calculating the capital requirements established in this document, the
unconsolidated bank capital shall be divided into three categories: capitals of Tier I, II and III.
6. Tier I capital shall comprise:
6.1.
authorised (unit) capital excluding preferential shares;
6.2.
capital reserve (share premium) without amount related with the emission of
preferential shares;
6.3.
reserve capital (contingency reserve);
6.4.
share of retained earnings of the previous year (excluding retained earnings of
the previous year with regard to distribution of which the decision of the general meeting of
shareholders has not been adopted yet) which is not to be paid as dividends, or loss of the
previous year;
6.5.
earnings of the current year and (or) retained earnings of the last previous year
with regard to distribution of which the decision of the general meeting of shareholders has not
been adopted yet, after audit of financial statements of the respective period performed by the
audit company and submission of data to the Bank of Lithuania proving that the amount of
earnings is correct and is specified having deducted all expected taxes and dividends;
6.6.
general reserves for covering asset losses;
6.7.
preferential shares without cumulative dividend issued before 31 December 2010
and amount of capital reserve (share premium) related with their emission and non-equity
securities satisfying conditions set forth in paragraph 6 of the General Regulations for
Including Instruments in the Bank Capital approved by Resolution No 131 of the Board of the
Bank of Lithuania of 11 October 2007 (as amended by Resolution No 03-128 of of the Board of
the Bank of Lithuania of 21 October 2010);
6.8.
required reserve or reserve capital.
7. Tier II capital shall comprise:
7.1.
Tier II core capital:
7.1.1.
other general reserves;
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7.1.2.
85% of the fixed assets revaluation reserves, if they are positive;
7.1.3.
85% of the financial assets revaluation reserves, if they are positive;
7.1.4.
restricted (distributable) profit (special undistrubuted reserve);
7.1.5.
subordinated loans of indefinite maturity which conform to other legal acts of the
Bank of Lithuania regulating the requirements established for subordinated loans;
7.1.6.
cumulative preferential shares not specified in subparagraph 6.7 and amount of
capital reserve (share premium) related with their issue;
7.1.7.
non-equity securities as specified in the General Regulations for Including
Instruments in the Bank Capital.
7.2.
Tier II supplementary capital:
7.2.1.
fixed-term subordinated loans which conform to other legal acts of the Bank of
Lithuania regulating the requirements applicable to the subordinated loans;
7.2.2.
fixed-term cumulative preferential shares.
8. Tier III capital shall comprise:
8.1.
short-term subordinated loans which conform to other legal acts of the Bank of
Lithuania regulating the requirements applicable to the subordinated loans;
8.2.
net profit of the trading book, less foreseeable taxes and dividends, or loss, if these
amounts are not included in subitem 6.5.
2. Deductions from capital
9. The following shall be deducted from Tier I capital:
9.1. purchased own shares (par value);
9.2. intangible assets (net value);
9.3. loss of the current year;
9.4. negative fixed assets revaluation reserves;
9.5. negative financial assets revaluation reserves.
10. After deductions from Tier I capital, the sum of capital of Tier I and II shall be
reduced by:
10.1.
investments in other credit and financial institutions (book value) and subordinated
loans granted to such institutions:
10.1.1. when the bank’s investment in other credit and financial institution exceeds 10% of
equity of that institution, the bank capital shall be reduced by the share of investment exceeding
10% of equity of that institution and subordinated loan granted to it. The Bank of Lithuania may
allow not to deduct from the bank’s capital such investments, which are aimed at the
reorganisation of, or financial assistance to, other credit and financial institution;
10.1.2. when the total amount of the bank’s investments in other credit and financial
institutions, which do not exceed 10% of equity of other bank and financial institution, and the
amount of subordinated loans granted to these institutions, not deducted under subitem 10.1.1,
exceeds 10% of the bank capital calculated before deducting the amounts referred to in subitem
10.1.1, bank capital shall be reduced by the portion of the amount of investments and subordinated
loans granted to these institutions, exceeding 10% of bank capital. The Bank of Lithuania may
allow not to deduct from bank capital such investments, which are aimed at the reorganisation of,
or financial assistance to, other credit and financial institution;
10.1.3. holdings of the bank of 20% or more of the authorised capital or voting rights in the
insurance, reinsurance and insurance parent (holding) undertakings; subordinated loans granted to
such undertakings and other holdings of the bank in those undertakings. The Bank of Lithuania
may allow not to deduct from the bank’s capital such investments, which are aimed at the
reorganisation of, or financial assistance to, such undertakings.
10.2.
Difference between expected loss amount, calculated according to paragraph 175
and value adjustments, if the amount of value adjustments is smaller than the expected loss amount
(if the amount of value adjustments is larger than the expected loss amount, the difference between
the value adjustments amount and the expected loss amount, calculated according to paragraph
175, which does not exceed 0,6% of risk-weighted exposure amounts estimated in the manner
14
established in Section II, Chapter IV, shall be added to the financial assets revaluation reserve
referred to in subitem 175).
10.3.
Expected loss amount of equity exposures.
10.4.
Value of securitisation positions which receive a risk weight of 1250%.
10.5.
50% of the amount referred to in items 10.1-10.4 should be deducted from Tier I
capital (less items specified in paragraph 9) and 50% - from Tier II capital. If 50% of the amount
referred to in items 10.1-10.4 exceeds Tier II capital, the excess amount shall be deducted from
Tier I capital.
3. Use of capital
11. Tier I and II capital shall be used to cover the banking and trading book risk effects.
12. Tier III capital shall be used to reduce the effects of foreign exchange, interest rate,
equities, commodity price risks, rather than for mitigating the trading book counterparty risk.
4. Limits on capital
13. Limits applicable to instruments and preferential shares without cumulative dividend
issued before 31 December 2010:
13.1. the total of undated instruments (dated or incentive to redeem) must not exceed 15% of
the bank capital of Tier I minus items referred to in paragraph 9;
13.2. the total of preferential shares without cumulative dividend issued before 31 December
2010, instruments indicated in subparagraph 13.1 and other instruments, except for
instruments to be converted specified in subparagraph 13.3 must not exceed 35% of the
bank capital of Tier I minus items referred to in paragraph 9;
13.3. the total of instruments that must be converted during emergency situations and may
be converted at the initiative of the competent authority, at any time, basedon the
financial and solvency situation of the issuerinto items referred to in subparagraph 13.2
within a pre-determined range must in total not exceed 50% of the bank capital of Tier I
minus items referred to in paragraph 9;
13.4. the total of preferential shares without cumulative dividend issued before 31
December 2010 included in bank capital of Tier I and instruments exceeding the limits
set forth in subparagraphs 13.1, 13.2 and 13.3 shall be included in bank capital of Tier
II in observance of limits applicable to the amount of bank capital of Tier II;
13.5. preferential shares without cumulative dividend issued by the bank before 31
December 2010 purchased for market formation purposes and instruments must not
exdeed 5% of the amount of the respective issue of instruments. Purchased preferential
shares and equities shall not be included in the bank capital.
1
13. The Bank of Lithuania may authorise to exceed the limits laid down in subparagraphs
13.1-13.3 temporarily during emergency situations.
13.2Additional limits imposed on preferential shares without cumulative dividend issued
before 31 December 2010 as regards their inclusionin Tier I capital:
13.21. between 31 December 2020 and 31 December 2030 their amount must not exceed 20%
of the bank capital of Tier I;
13.22. between 31 December 2030 and 31 December 2040 their amount must not exceed 10%
of the bank capital of Tier I;
13.23. from 31 December 2040 preferential shares without cumulative dividend issued before
31 December 2010 may not be included in Tier I capital of the bank;
14. Tier II capital used for the banking book capital adequacy may not exceed 100% of Tier
I capital used for the same purpose (less items referred to in paragraph 9).
15. Tier II supplementary capital may not exceed 50% of Tier I capital (less items referred
to in paragraph 9).
16. Tier II and III capital used for the trading book capital adequacy may not exceed 200%
of Tier I capital used for the same purpose (less items referred to in paragraph 9).
17. The sum of Tier II and III capital may not exceed 200% of Tier I capital (less items
referred to in paragraph 9).
15
18. For the purposes referred to in Chapter VI (applying large exposure (loan) limits ) the
bank capital shall be determined:
18.1.
without deducting the difference between the amount of expected loss calculated
according to par. 175 and value adjustments amount, if the latter is smaller than the expected loss
amount;
18.2.
without deducting the expected loss amount of equities;
18.3.
without deducting the value of securitisation positions which receive a risk weight
of 1250%;
18.4.
without adding the difference between the value adjustments amount and the
expected loss amount, calculated according to paragraph 175, which does not exceed 0,6% of riskweighted exposure amounts, if the amount of value adjustments is larger than the expected loss
amount.
19. When the bank for the purpose of calculating the risk-weighted exposure amounts
according to par. 668 applies IRB approach, value adjustments made in consideration of the
counterparty's credit risk shall be excluded from the bank capital.
CHAPTER III
CAPITAL ADEQUACY (SOLVENCY) RATIO AND LIMITS IMPOSED ON CAPITAL
REQUIREMENTS OF THE BANK
20. Capital adequacy ratio must not be less than 8%. Capital adequacy (solvency) ratio
means the ratio of the bank capital and capital required to cover credit risk, risk identified in the
trading book and operational risk, multiplied by 0,08 and expressed in per cent. This ratio must
not be less than capital adequacy ratio of 8%.
201. When legal acts establish the individual capital adequacy ratio for a bank for the
purpose of calculating the capital adequacy ratio of the bank sum total of capital required for
covering credit risk, risk identified in the banking book and operational risk and the ratio
specified in paragraph 20 shall be increased proportionately to the amount of established ratio
(for example, when the established capital adequacy ratio is 10%, the capital requirement of the
bank shall be increased by 25% applying the factor of 0.1). The ratio calculated according to
requirements of this paragraph must not be less than the established individual amount of
capital adequacy ratio.
21. The bank capital required to cover credit risk, risk identified in the trading book and
operational risk shall always exceed or be equal to the sum of the following capitalrequirements:
21.1.
capital required to cover the credit risk calculated according to Chapter IV;
21.2.
capital required to cover the risk identified in the trading book, calculated according
to Chapters V and VI;
21.3.
capital required to cover the operational risk calculated according to Chapter VII.
22. Minimum general capital requirements of banks, which apply the internal ratings based
approach, but do not use LGD and (or) CF calculated by them (Section II, Chapter IV) shall be:
22.1.
during the first 12 months after 31 December 2006 – 95% of the capital
requirement to be held by the bank in observance of the capital adequacy calculation procedure
applicable before 1 January 2007;
22.2.
during the second 12 months after 31 December 2006 – 90% of the capital
requirement to be held by the bank in observance of the capital adequacy calculation procedure
applicable before 1 January 2007;
22.3.
during the third and fifth 12 months after 31 December 2006 – 80% of the
capital requirement to be held by the bank in observance of the capital adequacy calculation
procedure applicable before 1 January 2007.
16
23.
Minimum general capital requirements of banks, which apply the internal ratings
based approach and use LGD and (or) CF calculated by them (Section II, Chapter IV) and (or)
advanced operational risk measurement method (Section XI, Chapter VII), shall be:
23.1.
during the second 12 months after 31 December 2006 – 90% of the capital
requirement to be held by the bank in observance of the capital adequacy calculation procedure
applicable before 1 January 2007;
23.2.
during the third and fifth 12 months after 31 December 2006 – 80% of the
capital requirement to be held by the bank in observance of the capital adequacy calculation
procedure applicable before 1 January 2007.
24. In observance of the requirements set forth in paragraphs 22 and 23, the capital
requirements shall be adjusted in the manner to reflect the differences between the capital
requirements calculated in observance of the capital adequacy calculation procedure in force
before 1 January 2007 and the capital requirements calculated in observance of the present
Regulations, with expected and unexpected losses distinguished separately in observance of the
provisions set forth in Section II, Chapter IV.
CHAPTER IV
CALCULATION OF CAPITAL REQUIREMENTS FOR CREDIT RISK
25. The capital requirements for credit risk covering purposes (for banking-book
exposures) shall be calculated:
25.1.
using the standardised approach in observance of requirements set forth in Section
I, Chapter IV hereof;
25.2.
using IRB approach having obtained the permission of the Bank of Lithuania in
observance of requirements set forth in Section II, Chapter IV hereof.
PART I
STANDARDIZED APPROACH
1. General provisions
26. The credit risk capital requirements shall be determined multiplying by 8% the riskweighted exposure amount of the bank’s assets and off-balance sheet items. The risk-weighted
exposure amount of items shall be calculated in observance of risk weights determined in
observance of the procedure set forth in Section I, Chapter IV.
27. The risk-weighted exposure amounts of the bank’s assets shall be calculated according
to the procedure specified in Part 2, Section I, Chapter IV.
28. The risk-weighted exposure amountsof the bank’s off-balance sheet items assets shall
be calculated according to the procedure specified in Part 3, Section I, Chapter IV.
29. If an exposure is collateralised by eligible credit risk mitigation collaterals, the value
of such exposure and (or) risk weight applicable to such position may be adjusted in the manner
set forth in Section III, Chapter IV. If the bank applies the Financial Collateral Comprehensive
Method referred to in Section III, Chapter IV and exposures comprise securities or commodities
sold, delivered or lent under a repurchase transaction, the value of such exposure according to
securities or commodities lending or borrowing agreement and margin lending transactions
shall be increased by a respective volatility adjustment applicable to securities or commodities in
the manner established in Section III, Chapter IV.
30. The exposure value of a derivative instrument listed in Annex 7 shall be determined in
accordance with the provisions of Chapter V with the effects of contracts of novation and other
netting agreements. The exposure value of repurchase transactions, securities or commodities
lending or borrowing transactions, long settlement transactions and margin lending transactions
maybe determined either in accordance with the provisions of Section III, Chapter IV, or Chapter
V.
17
31. The exposure value of credit risk exposures outstanding with a central counterparty
shall be determined in accordance with Part 5.2.6, Section VI, Chapter V, provided that the central
counterparty's counterparty credit risk exposures with all participants in its arrangements are fully
collateralised on a daily basis.
32. The values of securitization positions shall be determined in accordance with Section
IV, Chapter IV.
33. To calculate risk-weighted exposure amounts of the bank’s assets and off-balance sheet
claims, risk weights shall be applied to all exposures held by the bank, if their amount is not
deducted from capital.
34. The application of risk weights shall be based on the exposure class to which the
exposure is assigned (par. 51) and to the credit risk assessment (rating) determined by ECAI
assigned to the borrower’s transaction with regard to which such exposure arises, and (or) to the
credit risk assessment (rating) of the exposure itself. For the purposes of calculating risk-weighted
exposure amounts for exposures to the central government and central banks (item 51.1), a risk
weight may be determined in observance of the minimum export insurance premiums of export
credit agencies (pars. 56 and 57).
35. To determine risk weights only solicited credit assessments (ratings) and only those
which cover all exposure-related amounts: the principal and interest may be used.
36. Risk weights may be determined on the basis of credit assessments (ratings) of one or
more eligible ECAI.
37. Credit assessments (ratings) may not be applied selectively. The bank which has
decided to apply to a certain exposure class credit assessments (ratings) of an eligible ECAI, shall
consistently apply them to all exposures belonging to that class. The bank which has decided to
apply to the class of exposures to the central governments and central banks (item 51.1) credit
assessments (ratings) of the export credit agency, shall apply them consistently to all exposures
attributed to that class of the central governments and central banks.
38. If only one credit assessment (rating) is available from an eligible ECAI for an
exposure that credit assessment (rating) shall be used to determine the risk weight for that
exposure.
39. If two credit assessments (ratings) are available from eligible ECAI and the two
correspond to different risk weights for an exposure, the higher risk weight shall be assigned to
this exposure.
40. If more than two credit assessments (ratings) are available from nominated ECAIs
for a rated item, the two assessments (ratings) generating the two lowest risk weights shall be
referred to. If the two lowest risk weights are different, the higher risk weight shall be assigned.
If the Bank of Lithuania, in observance of the principle of conservatism, has established a
higher CQS for a credit assessment (rating) available from the ECAI and the ECAI proves that
indicators of default related with the credit assessment (rating) assigned by it are no longer
materially and systematically higher than the benchmark, the Bank of Lithuania may assign
the previous CQS to credit assessment (rating) obtained from the ECAI.
41. Where the exposure of a particular issuer belongs to issue of bonds by such issuer for
which a certain credit assessment (rating) exists, this exposure shall be assigned a risk weight
which corresponds to such credit assessment (rating). This provision does not apply for calculating
risk-weighted exposure values of covered bonds (item 51.12 and par. 88).
42. Where the exposure of a particular issuer does not belong to the issue of bonds by such
issuer, for which a certain credit assessment (rating) exists, however, a general credit assessment
exists for the issuer, then that credit assessment shall be used if it produces a higher risk weight
than would other wise be the case or if it produces a lower risk weight and the exposure in
question ranks pari passu or senior in all respects to the specific exposure or to senior unsecured
exposures of that issuer, as relevant. This provision does not apply for calculating risk-weighted
exposure values of covered bonds (item 51.12 and par. 88).
18
43. Credit assessment (rating) for issuers within a corporate group cannot be used as
credit assessment of another issuer within the same corporate group.
44. Short-term credit assessments (ratings) may only be used for short-term asset and offbalance sheet items constituting exposures to institutions and undertakings.
45. Any short-term credit assessment (rating) shall only apply to the exposure the shortterm credit assessment (rating) refers to, and it shall not be used to derive risk weights for any
other exposure, except in cases referred to in pars 46-47.
46. If a short-term rated exposure is assigned a 150% risk weight, then all unrated
unsecured exposures on that obligor whether short-term or long-term shall also be assigned a
150% risk weight.
47. If a short-term rated exposure is assigned a 50% risk weight, no unrated short-term
exposure shall be assigned a risk weight lower than 100%.
48. Credit assessment (rating) that refers to an exposure denominated in the obligor's
domestic currency cannot be used to derive a risk weight for another exposure on that same
obligor that is denominated in a foreign currency, excluding the case, when an exposure arises
through a bank's participation in a loan that has been extended by a Multilateral Development
Bank whose preferred creditor status is recognised in the market, competent authorities may allow
the credit assessment (rating) on the obligors' domestic currency exposure to be used for risk
weighting purposes.
49. Exposures excluded from the calculation of risk-weighted amounts provided for in this
Chapter shall be assigned a risk weight of 100% .
2. Determining risk-weighted exposure amounts
50. For the purpose of determining risk-weighted exposure amounts of the bank’s assets, all
exposures of the bank shall be classified into classes referred to in paragraph 51 and their net value
shall be multiplied by the risk weight assigned to that class, expressed as percentage, having regard
to the credit assessments (ratings) established for such exposures by eligible ECAIs or to credit
assessments (ratings) of export credit agencies.
51. Using the Standardized Approach, each exposure of the bank shall be assigned to one
of the following exposure classes:
51.1.
Exposures to central governments and central banks – exposures of the
Republic of Lithuania Government and the Bank of Lithuania, as well as of other entities
attributed to the central government and of the central banks of other Member States of the
European Union, including exposures of the European Central Bank.
51.2.
Exposures to regional governments and local authorities – exposures of the
Republic of Lithuania counties and municipalities as well as of other entities attributable to the
regional governments and local authorities of other European Union Member States, as specified
in the respective legal acts thereof.
51.2.1. Exposures to churches and religious communities constituted in the form of a legal
person under public law of the Republic of Lithuania and other Member States of the European
Union shall, insofar as they raise taxes in accordance with legislation conferring on them the right
to do so, be treated as exposures to regional governments and local authorities.
51.3.
Exposures to administrative bodies and non–commercial undertakings –
exposures to public sector entities and other entities attributable to the administrative bodies and
non–commercial undertakings of other European Union Member States, as specified in the
respective legal acts thereof.
51.4.
Exposures to multilateral development banks – exposures to the multilateral
development banks listed in par. 62 below.
51.4.1. Included in the Exposures to the multilateral development banks shall also be the
exposures to American Investment Corporation, the Black Sea Trade and Development Bank and
Central American Bank for Economic Integration.
51.5.
Exposures to international organisations – exposures to the international
organisations listed in par. 64 below.
19
51.6.
Exposures to institutions – exposures to the credit institutions and investment
firms of the Republic of Lithuania as well as to the credit institutions and investment firms of other
European Union Member States, as specified in the respective legal acts thereof.
51.6.1. exposures to financial institutions authorised and supervised by the competent
authorities responsible for the authorisation and supervision of credit institutions and subject to
prudential requirements equivalent to those applied to credit institutions shall be risk-weighted as
exposures to institutions.
51.7.
Exposures to corporates – exposures to undertakings, other than those listed in
item 51.8 below.
51.8.
Retail exposures – exposures that meet the following conditions:
51.8.1. the exposure shall be either to an individual person or persons, or to a small or
medium sized entity;
51.8.2. the exposure shall be one of a significant number of exposures with similar
characteristics;
51.8.3. the total amount owed to the bank, bank’s parent bank and bank’s controlled
financial undertakings, including any past due exposure, by the obligor t or group of connected
clients, but excluding claims or contingent claims secured on residential real estate collateral, shall
not, to the knowledge of the bank, exceed LTL 1 million. The bank shall take reasonable steps to
acquire this knowledge.
51.8.4. Securities shall not be eligible for the retail exposure class.
51.8.5. The present value of retail minimum lease payments shall be eligible for the retail
exposure class.
51.9.
Exposures secured by real estate property – exposures or any part thereof fully
secured by residential or commercial real estate property.
51.10.
Past due items – the unsecured by eligible collateral parts of any exposure of the
bank that is past due for more than 90 days.
51.11.
Exposures to items belonging to regulatory high–risk categories – exposures
associated with particularly high risks such as investments in venture capital firms and private
equity investments.
51.11.1. The following exposures shall also be attributed to items belonging to regulatory
high–risk categories:
51.11.1.1.
exposures of collective investment undertakings associated with particularly
high risks (item 51.15);
51.11.1.2.
other exposures which, in the bank’s opinion, are associated with
particularly high risks.
51.12.
Exposures in the form of covered bonds – exposures arising from transactions
with bonds as defined in Par. 4, Article 22 of the Council Directive 85/611/EEC coordinating laws,
regulations and administrative provisions relating to undertakings for collective investments in
transferable securities (UCITS) (OJ 2004, SE, Chapter 6, Vol. 1, p. 139), including all subsequent
amendments thereto (hereinafter – Directive 85/611/EEC ), which are collateralised by any of the
following eligible assets (for the purpose of this item the term “collateralised” shall include the
cases where assets defined in subitems 51.12.1-51.12.6 is exclusively intended for the protection
of the holder of debt securities from losses, and, moreover the real estate property used to secure
covered bonds should conform to the requirements of paragraphs:
51.12.1. Exposures to or guaranteed by central governments, central banks, public sector
entities, regional governments and local authorities in the European Union.
51.12.2. exposures to or guaranteed by non-EU central governments, non-EU central banks,
multilateral development banks, international organisations that qualify for the CQS 1 as set out in
Section I, Chapter IV, and exposures to or guaranteed by non-EU public sector entities, non-EU
regional governments and non-EU local authorities that are risk weighted as exposures to
institutions or central governments and central banks and that qualify for the CQS 1 as set out in
Section I, Chapter IV, and exposures in the sense of this point that qualify as a minimum for the
20
CQS 2 as set out in Section I, Chapter IV, provided that they do not exceed 20% of the nominal
amount of outstanding covered bonds of issuing institutions.
51.12.3. exposures to institutions that qualify for the CQS 1 as set out in Section I, Chapter
IV. The total exposure of this kind shall not exceed 15% of the nominal amount of outstanding
covered bonds of the issuing institution. Exposures caused by transmission and management of
payments of the obligors of, or liquidation proceeds in respect of, loans secured by real estate to
the holders of covered bonds shall not be comprised by the 15% limit. Exposures to institutions in
the EU with a maturity not exceeding 100 days shall not be comprised by the step1 requirement
but those institutions must as a minimum qualify for CQS 2 as set out in Section I, Chapter IV.
51.12.4. Loans secured by:
51.12.4.1.
residential real estate or shares in Finnish residential housing companies
operating in accordance with the Finnish Housing Company Act of 1991 or subsequent equivalent
legislation, up to the lesser of the principal amount of the liens that are combined with any prior
liens and 80% of the value of the pledged properties;
51.12.4.2.
senior units issued by French Fonds Communsde Créances or by
equivalent securitisation entities governed by the laws of a Member State securitising residential
real estate exposures (provided that at least 90% of the assets of such Fonds Communs de
Créancesor of equivalent securitisation entities governed by the laws of a Member State are
composed of senior mortgages) up to: 1) the lesser of the principal amounts due under the units;
2) the principal amounts of the liens of the senior mortgage; and 3) 60% of the value of the
pledged properties. The units qualify for the CQS 1 as set out in Section I, Chapter IV, where
such units do not exceed 10% of the nominal amount of the outstanding issue (until 31
December 2010, the senior units issued by French Fonds Communsde Créances or by
equivalent securitisation entities of the European Union Member States defined in the
respective legal acts thereof, the maximum limit of 10% shall be disregarded, provided the credit
assessment (rating) assigned to these senior units by ECAI is the most favourable among all
credit assessments (ratings) assigned by such ECAI to covered bonds). Exposures caused by
transmission and management of payments of the obligors of, or liquidation proceeds in respect
of, loans secured by pledged properties of the senior units or debt securities shall not be
comprised in calculating the 90% limit.
51.12.5. Loans secured by:
51.12.5.1.
commercial real estate or shares in Finnish residential housing companies
operating in accordance with the Finnish Housing Company Act of 1991 or subsequent equivalent
legislation, up to the lesser of the principal amount of the liens that are combined with any prior
liens and 60% of the value of the pledged properties;
51.12.5.2.
senior units issued by French Fonds Communsde Créances or by
equivalent securitisation entities governed by the laws of a Member State securitising residential
real estate exposures (provided that at least 90% of the assets of such Fonds Communs de
Créancesor of equivalent securitisation entities governed by the laws of a Member State are
composed of mortgages) up to: 1) the lesser of the principal amounts due under the units; 2) the
principal amounts of the liens of the senior mortgage; and 3) 60% of the value of the pledged
properties. The units qualify for the CQS 1 as set out in Section I, Chapter IV, where such units
do not exceed 10% of the nominal amount of the outstanding issue (until 31 December 2010,
the senior units issued by French Fonds Communsde Créances or by equivalent securitisation
entities of the European Union Member States defined in the respective legal acts thereof, the
maximum limit of 10% shall be disregarded, provided the credit assessment (rating) assigned to
these senior units by ECAI is the most favourable among all credit assessments (ratings)
assigned by such ECAI to covered bonds). Exposures caused by transmission and management
of payments of the obligors of, or liquidation proceeds in respect of, loans secured by pledged
properties of the senior units or debt securities shall not be comprised in calculating the 90%
limit.
21
51.12.6. Loans secured by ships where only liens that are combined with any prior liens
within 60% of the value of the pledged ship (until 31 December 2010, the limit of 70% may be
applied).
51.13. Items representing securitisation positions – exposures resulting from
securitization (item 4.58).
51.14. Short–term exposures to institutions and corporates with a short-term credit
rating – exposures to an institution or corporate for which a short-term credit assessment
(rating) by a nominated ECAI is available.
51.15. Exposures in the form of collective investment undertakings, (hereinafter –
CIUs) – exposures caused by transactions with the investment company of variable capital or with
the investment fund defined by laws of the Republic of Lithuania and respective legal acts of other
Member States of the European Union:
51.15.1. concluded for the sole purpose – to accumulate funds through public distribution of
investment units or shares and to invest such funds in securities and (or) other liquid assets
referred to in laws of the Republic of Lithuania and respective legal acts of other Member States of
the European Union and to distribute risks in such manner;
51.15.2. securities which (investment units or shares) evidence the holder’s right to demand
their redemption at any time.
51.16. Other items – exposures of the bank excluded from items 51.1-51.15.
2.1. Exposures to central governments and central banks
52. Exposures to central governments and central banks shall be assigned a 100% risk
weight, except in cases provided for under pars. 53-56.
53. Exposures to central governments and central banks for which a credit assessment by a
nominated ECAI is available shall be assigned a risk weight according to Table 1:
Table 1
CQS
1
2
3
4
5
6
(Annex 1)
Risk
0
20
50
100
100
150
weight, %
54. Exposures to the European Central Bank shall be assigned a 0% risk weight.
55. Exposures to Member States' central governments and central banks denominated in the
domestic currency of that central government and central bank shall be assigned a risk weight of
0%. Until 31 December 2015, Exposures to Member States' central governments and central banks
denominated in the domestic currency of any Member State of the European Union shall be
assigned the same risk weight, which would apply to their domestic currency-denominated
exposures.
56. Exposures to Member States' central governments and central banks may be assigned a
risk weight in observance of the credit assessment (rating) established by the export credit
agencies for the respective central government and central bank, if either of the following
conditions is met:
56.1.
Such credit assessment (rating) is a consensus risk score from Export Credit
Agencies participating in the OECD “Arrangement on Guidelines for Officially Supported Export
Credits”.
56.2.
The Export Credit Agency publishes its credit assessments, and the Export Credit
Agency subscribes to the OECD agreed methodology, and the credit assessment is associated with
one of the eight minimum export insurance premiums (Table 2) that the OECD agreed
methodology establishes.
57. The bank, having selected an export credit agency the credit assessments (ratings) of
which will be applied for the purpose of calculating exposures to the central governments and
central banks, must notify the Bank of Lithuania to the effect and apply such ratings on continuous
basis.
22
Table 2
MEIP of export credit agencies and corresponding risk weights
MEIP
0
1
2
3
4
5
6
7
Risk
0
0
20
50
100
100
100
150
weight, %
2.2. Exposures to regional governments and local authorities
58. Exposures to the regional governments and local authorities, which have the credit
assessment (rating) established by the nominated ECAI, shall be risk weighted as exposures to
institutions in observance of pars. 65, 68, 69 and 71-75, except for the fact that the preferential
treatment for short-term exposures shall not be applied to exposures to the regional governments
and local authorities (pars. 66 and 69).
59. Exposures of the following entities of the regional government and local authorities of
the Republic of Lithuania shall be risk weighted as exposures to the Government of the Republic
of Lithuania and the Bank of Lithuania (Part 2.1, Section I, Chapter IV):
59.1.
municipalities.
2.3. Exposures to administrative bodies and non–commercial undertakings
60. Exposures to administrative bodies and non-commercial undertakings shall be assigned
a 100% risk weight.
61. Exposures of the following administrative bodies shall be risk weighted as exposures to
the Government of the Republic of Lithuania and the Bank of Lithuania (Part 2.1, Section I,
Chapter IV):
61.1.
ministries and departments,
61.2.
State Tax Inspectorate under the Ministry of Finance,
61.3.
State Social Insurance Fund Board under the Ministry of Social Security and
Labour and its regional branches.
2.4. Exposures to multilateral development banks
62. exposures to multilateral development banks shall be treated in the same manner as
exposures to institutions in accordance with pars. 65, 68, 69 and 71-75, except for the fact that the
preferential treatment for short-term exposures shall not be applied to exposures to multilateral
development banks (pars. 66 and 69). Exposures to the following multilateral development banks
shall be assigned a 0% risk weight:
62.1.
the International Bank for Reconstruction and Development,
62.2.
the International Finance Corporation,
62.3.
the Inter-American Development Bank,
62.4.
the Asian Development Bank,
62.5.
the African Development Bank,
62.6.
the Council of Europe Development Bank,
62.7.
the Nordic Investment Bank,
62.8.
the Caribbean Development Bank,
62.9.
the European Bank for Reconstruction and Development,
62.10. the European Investment Bank,
62.11. the European Investment Fund,
62.12. the Multilateral Investment Guarantee Agency;
62.13. the International Finance Facility for Immunisation;
62.14. the Islamic Development Bank.
63. A risk weight of 20% shall be assigned to the portion of unpaid capital subscribed to
the European Investment Fund.
2.5. Exposures to international organisations
64. Exposures to the European Community, the International Monetary Fund and the Bank
for International Settlements shall be assigned a 0% risk weight.
2.6. Exposures to institutions
23
65. Exposures to institutions with an original effective maturity of more than three months
for which a credit assessment by a nominated ECAI is not available shall be assigned a risk weight
of 50%.
66. For exposures to institutions with an original effective maturity of three months or less
for which a credit assessment by a nominated ECAI is not available the risk weight shall be 20 %.
67. Exposures to institutions mentioned in pars. 65 and 66, shall not be assigned a risk
weight lower than that applied to exposures to the central government of the jurisdiction in which
the institutions are incorporated.
68. Exposures to institutions with residual maturity of more than three months for which a
credit assessment (rating) by a nominated ECAI is available shall be assigned a risk weight
according to Table 3:
Table 3
CQS
1
2
3
4
5
6
(Annex 1)
Risk
20
50
50
100
100
150
weight, %
69. Exposures to an institution with residual maturity of three months or less for which a
credit assessment (rating) by a nominated ECAI is available shall be assigned a risk weight
according to Table 4:
Table 4
CQS
1
2
3
4
5
6
(Annex 1)
Risk
20
20
20
50
50
150
weight, %
70. For the purpose of applying pars. 65-69 above, the banks shall take into account the fact
whether a short-term credit assessment (rating) by a nominated ECAI is available for at least one
exposure of the institution.
71. If there is no short-term exposure assessment (rating) assigned by a nominated ECAI to
either of the exposures referred to in par. 70, the risk weights set forth in par. 69 shall apply to all
exposures to institutions of up to three months residual maturity.
72. If there is a short-term assessment (rating) assigned by a nominated ECAI to at least
one exposure referred to in par. 70 above and such an assessment (rating) determines the
application of a more favourable or identical risk weight to the institution’s exposure being
assessed (par. 90), than provided for in par. 69, then such short-term assessment (rating) (par. 90)
shall be used for that specific exposure only. For the purpose of assigning risk weights to other
short-term exposures of the given institution par. 69 shall apply.
73. If there is a short-term assessment (rating) assigned by a nominated ECAI to at least
one exposure referred to in par. 70 above and such an assessment (rating) determines the
application of a less favourable risk weight to the institution’s exposure being assessed (par. 90),
than provided for in par. 69, then risk weights established in par. 69 shall not be assigned, and all
unrated short-term exposures of that institution shall be assigned the same risk weight as that
applied by the specific short-term assessment (rating) as specified in par. 90.
74. Exposures relating to the investments in equity or regulatory capital instruments issued
by institutions shall be risk weighted at 100%, unless deducted from the own funds.
75. Where an exposure to an institution is in the form of minimum reserves required by the
ECB or by the central bank of a Member State to be held by the bank, Member States may permit
the assignment of the risk weight that would be assigned to exposures to the central bank of the
Member State in question provided:
75.1.
the reserves are held in accordance with Regulation (EC) No1745/2003 of the
European Central Bank of 12 September 2003 on the application of minimum reserves or a
subsequent replacement regulation or in accordance with national requirements in all material
respects equivalent to that Regulation;
24
75.2.
in the event of the bankruptcy or insolvency of the institution where the reserves are
held, the reserves are fully repaid to the bank in a timely manner and are not made available to
meet other liabilities of the institution.
2.7. Exposures to corporates
76. Exposures for which a credit assessment by a nominated ECAI is available shall be
assigned a risk weight according to Table 6:
Table 5
CQS
1
2
3
4
5
6
(Annex 1)
Risk
20
50
100
100
150
150
weight, %
77. Exposures to corporates for which a credit assessment by a nominated ECAI is not
available shall be assigned a 100% risk weight or the risk weight of its central government,
whichever is the higher.
2.8. Retail exposures
78. Retail exposures shall be assigned a risk weight of 75%.
2.9. Exposures secured by real estate property
79. Exposures or any part of an exposure fully and completely secured by mortgages on
residential property shall be assigned a risk weight of 100%, excluding exposures secured by
mortgages on residential property, as specified in pars. 80, 81 and 82 , having regard to the
requirements set forth under par. 83.
80. Exposures or any part of an exposure fully and completely secured by mortgages on
residential property having regard to the requirements of pars. 337, 384 and 385, which is or shall
be occupied or let by the owner (i.e. property not intended for resale), excluding exposures
referred to in par. 86, shall be assigned a risk weight of 35%.
81. Exposures fully and completely secured, to the satisfaction of the competent authorities,
by shares in Finnish residential housing companies, operating in accordance with the Finnish
Housing Company Act of 1991 or subsequent equivalent legislation, in respect of residential
property which is or shall be occupied or let by the owner i.e. property not intended for resale),
excluding exposures referred to in par. 86, shall be assigned a risk weight of 35%.
82. Exposures to a tenant under a property leasing transaction concerning residential
property under which the bank is the lessor and the tenant has an option to purchase that
property, excluding exposures referred to in par. 86, shall be assigned a risk weight of 35%,
provided that the bank has ownership of the property and requirements of paragraphs 83, 337,
384 and 385 are met.
83. Exposures or any part of an exposure fully and completely secured by mortgages on
residential property shall be assigned a risk weight of 35%, only if the following conditions are
met:
83.1.
The value of the property does not materially depend upon the credit quality of the
obligor. This requirement does not preclude situations where purely macroeconomic factors affect
both the value of the property and the performance of the borrower.
83.2.
Repayment of the facility (closure of the exposure) does not materially depend on
any cash flow generated by the underlying property serving as collateral.
83.3.
Requirements set out in par. 337 are met.
83.4.
The ratio between the collateral and exposure (facility) or part thereof may not be
less than 140%.
2.10. Past due items
84. The unsecured part of any exposure that is past due for more than 90 days (in
observance of the requirements of Section III, Chapter IV), which exceeds 5% of the net value of
the exposure balance and the level of risk of which is acceptable to the bank, shall be assigned the
following risk weights:
25
84.1.
150%, if value adjustments are less than 20% of the unsecured part of the exposure
gross of value adjustments;
84.2.
100%, if value adjustments are no less than 20% of the unsecured part of the
exposure gross of value adjustments.
85. For the purpose of defining the secured part of the past due exposure, eligible collateral
and guarantees shall be those eligible in observance of the provisions of Section III, Chapter IV.
86. Exposures or parts thereof fully and completely secured by mortgages on residential
property which are past due for more than 90 days, shall be assigned a risk weight of 100%.
2.11. Items belonging to high-risk categories
87. Items belonging to high-risk categories shall be assigned a risk weight of 150%.
2.12. Exposures in the form of covered bonds
88. Exposures in the form of covered bonds shall be assigned a risk weight on the basis of
the risk weight assigned to unsecured exposures (when the bank has the priority right of creditor’s
claim) applicable to the institutions which issue them. The following correspondence between risk
weights shall apply:
88.1.
if the exposures to the institution are assigned a risk weight of 20 %, the covered
bond shall be assigned a risk weight of 10%;
88.2.
if the exposures to the institution are assigned a risk weight of 50 %, the covered
bond shall be assigned a risk weight of 20%;
88.3.
if the exposures to the institution are assigned a risk weight of 100%, the covered
bond shall be assigned a risk weight of 50%;
88.4.
if the exposures to the institution are assigned a risk weight of 150%, the covered
bond shall be assigned a risk weight of 100%.
2.13. Items representing securitisation positions
89. Risk weighted exposure amounts for securitisation positions shall be determined in
accordance with the provisions of Section IV, Chapter IV.
2.14. Institutions and corporates with a short-term credit raring
90. Risk weight to exposures of institutions to which paragraphs 65, 66, 68 and 69 apply
and corporates with short-term credit rating from an eligible ECAI shall be assigned a
according to Table 6:
Table 6
CQS
1
2
3
4
5
6
(Annex 1)
Risk
20
50
100
150
150
150
weight, %
2.15. Exposures in the form of CIUs
91. Exposures in the form of CIUs shall be assigned a risk weight of 100%, excluding the
cases referred to in pars. 92-96.
92. Exposures in the form of CIUs for which a credit assessment by a nominated ECAI is
available shall be assigned a risk weight according to Table 7:
Table 7
CQS
1
2
3
4
5
6
(Annex 1)
Risk
20
50
100
100
150
150
weight, %
93. Banks may determine a risk weight for CIUs, as specified in pars. 93-96, if the CIUs’
governance principles and activities are organised in observance of the Republic of Lithuania Law
on Collective Investment Undertakings and other related legal acts and equivalent legislation of
other Member States of the European Union implementing the Directive 85/611/EEC, including all
subsequent amendments thereto.
94. Where the bank has all necessary information about the underlying exposures of a CIU,
it may take such information into account when calculating an average risk weight for the CIU.
26
95. Where the bank does not have all necessary information about the underlying exposures
of a CIU, it may calculate an average risk weight for the CIU relying on the assumption that the
CIU first invests, to the maximum extent allowed under its mandate, in the exposure classes
attracting the highest capital requirement, and then continues making investments in descending
order until the maximum total investment limit is reached.
96. Banks may rely on a third party to calculate a risk weight for the CIU, in accordance
with the methods set out in pars. 93 and 95, provided that the correctness of the calculation and
reports shall be adequately ensured.
2.16. Other items
97. Tangible assets’ items shall be assigned a risk weight of 100%.
98. Prepayments and accrued income for which an institution is unable to determine the
counterparty in accordance with Directive 86/635/EEC on the annual accounts and consolidated
accounts of banks and other financial institutions (OJ, 2004, SE, Chapter 6, Vol.1, p. 157),
hereinafter – Directive 86/635/EEC, shall be assigned a risk weight of 100%.
99. Cash items in the process of collection shall be assigned a 20% risk weight. Cash in
hand and equivalent cash items shall be assigned a 0% risk weight.
100. Holdings of equity and other participations, except where deducted from own funds,
shall be assigned a risk weight of at least 100%.
101. Gold bullion held in own vaults or on an allocated basis to the extent backed by bullion
liabilities shall be assigned a 0% risk weight.
102. In the case of asset sale and repurchase agreements and outright forward purchases, the
risk weight shall be that assigned to the assets in question and not to the counterparties to the
transactions.
103. Where a bank provides credit protection for a number of exposures under terms that the
nth default among the exposures shall trigger payment and that this credit event shall terminate the
contract, and where the product has an external credit assessment (rating) from an eligible ECAI,
the risk weights prescribed in Section IV, Chapter IV shall be assigned. If the product is not rated
by an eligible ECAI, the risk weights of the exposures included in the basket will be aggregated,
excluding n-1 exposures, up to a maximum of 1250% and multiplied by the nominal amount of the
protection provided by the credit derivative to obtain the risk weighted asset amount.
1031. Lease exposure value shall be equal to discounted minimum lease payments. These
exposures shall be attributed to the respective exposure class in observance of requirements of
paragraph 51. When the exposure is a residual value of leased assets, risk weighted exposure
amount shall be calculated as follows:
Risk-weighted exposure value = 1/t * 100 per cent * exposure value,
Where t is the greater of 1 and the nearest number of whole years of the lease remaining.
3. Determining the values of risk-weighted off-balance sheet items of the bank
104. The amounts of risk-weighted off-balance sheet items of the bank shall be determined
in two stages.
105. Firstly, items of the bank’s off-balance sheet claims shall be attributed to the groups
referred to in pars. 106-109 and their value shall be multiplied by conversion factors (CF) assigned
to those groups and expressed as percentage. Secondly, the resulting amounts shall be again
multiplied by percentage risk weights applicable to the other counterparty upon classification of
assets according to par. 51.
106. Items of the bank’s off-balance sheet claims assigned a conversion factor of 100%:
106.1. guarantees having the character of credit substitutes,
106.2. credit derivatives;
106.3. acceptances;
106.4. endorsements on bills not bearing the name of another bank;
106.5. transactions with recourse;
106.6. irrevocable standby letters of credit having the character of credit substitutes;
106.7. assets purchased under outright forward purchase agreements;
27
106.8. forward forward deposits;
106.9. asset sale and repurchase agreements as defined in Article 12(3) and (5) of
Directive 86/635/EEC);
106.10. other items of the bank’s off-balance sheet claims, which, on discretion of the bank,
are assigned a conversion factor of 100%.
107. Items of the bank’s off-balance sheet claims assigned a conversion factor of 50%:
107.1. documentary credits issued and confirmed, excluding those specified in item 108.1;
107.2. warranties and indemnities (including tender, performance, customs and tax bonds)
and guarantees not having the character of credit substitutes);
107.3. irrevocable standby letters of credit not having the character of credit substitutes;
107.4. undrawn credit facilities (agreements to lend, purchase securities, provide
guarantees or acceptance facilities) with an original maturity of more than one year);
107.5.
note issuance facilities (NIFs) and revolving underwriting facilities (RUFs);
107.6. other items of the bank’s off-balance sheet claims, which, on discretion of the bank,
are assigned a conversion factor of 50%.
108. Items of the bank’s off-balance sheet claims assigned a conversion factor of 20%:
108.1. documentary credits in which underlying shipment acts as collateral and other self–
liquidating transactions;
108.2. undrawn credit facilities (agreements to lend, purchase securities, provide
guarantees or acceptance facilities) with an original maturity of up to and including one year which
may not be cancelled unconditionally at any time without notice or that do not effectively provide
for automatic cancellation due to deterioration in a borrower’s creditworthiness;
108.3. other items of the bank’s off-balance sheet claims, which, on discretion of the bank,
are assigned a conversion factor of 20%.
109. Items of the bank’s off-balance sheet claims assigned a conversion factor of 0%:
109.1. undrawn credit facilities (agreements to lend, purchase securities, provide
guarantees or acceptance facilities) which may be cancelled unconditionally at any time without
notice, or that do effectively provide for automatic cancellation due to deterioration in a
borrower’s creditworthiness. Retail credit lines may be considered as unconditionally
cancellable if the terms permit the bank to cancel them to the full extent allowable under
consumer protection and related legislation;
109.2. other items of the bank’s off-balance sheet claims, which, on discretion of the bank,
are assigned a conversion factor of 0%.
28
PART II
INTERNAL RATINGS BASED APPROACH
1. Implementation of the internal ratings-based approach
110. A bank shall be allowed to apply the Internal Ratings Based Approach (“IRB
Approach”) for calculating capital requirements for covering the credit risk and the dilution risk of
receivables only upon having obtained the permission of the Bank of Lithuania. The permission to
apply the IRB Approach shall be issued in the manner established by the Bank of Lithuania.
111. The permission to apply the Foundation IRB Approach or the Advanced IRB
Approach is granted only when the bank’s systems for the management and rating of credit risk
exposures conform to the requirements of Part 9, Section II, Chapter IV.
112. The bank which has obtained the required permission, but ceases to apply the IRB
Approach in consistent manner with the requirements of this Chapter, shall furnish the Bank of
Lithuania with a plan for a timely return to compliance or demonstrate that the effect of noncompliance is immaterial.
113. As from 1 January 2008, a bank will be allowed to apply its own estimates of LGD
and (or) CF to the classes of exposures to the central government and central banks, institutions
and corporates (to apply the Advanced IRB Approach). A bank may apply its own estimates of
LGD and CF only with the permission of the Bank of Lithuania.
114. The permission to use own estimates of LGD and (or) CF shall be granted only when
the bank satisfies the quantification requirements of LGD and (or) CF.
115. When the bank’s parent bank and its controlled financial undertakings use the
IRB Approach on a unified basis (develop rating systems, estimate credit risk parameters
and risk-weighted exposure amounts, etc. on a centralised basis), the parent bank and its
controlled financial undertakings shall be allowed to apply the IRB Approach at the group
level in conformity with the requirements of Part 9, Section II, Chapter IV.
116. A bank applying for the use of the IRB Approach shall demonstrate to the satisfaction
of the Bank of Lithuania that it has been using for the IRB exposure classes in question rating
systems that were broadly in line with the minimum the requirements of Part 9, Section II,
Chapter IV for internal risk measurement and management purposes for at least three years prior to
its qualification to use the IRB Approach. In case of a bank applying for the use of the IRB
Approach until 2010, the minimum use period until 31 December 2009 shall be one year. The
bank shall prove that the internal rating systems, credit risk parameters and related systems and
processes are used not only for the calculation of the capital requirement and play an essential role
in the following processes of the bank:
116.1. distribution of capital;
116.2. assessment of the risk level the bank is willing to assume;
116.3. evaluating the strategy of the bank;
116.4. determining the bank’s profitability and performance efficiency;
116.5. providing exposures;
116.6. taking pricing decisions;
116.7. in the management information system;
116.8. adopting other relevant decisions relating to credit risk and assessment thereof.
117. A bank applying for the use of its own estimates of LGDs and (or) CFs to the classes
of exposures to the central government and central banks, institutions and corporates (the
Advanced IRB Approach), shall demonstrate that it has been estimating and employing own
estimates of LGDs and (or) CFs in a manner that was broadly consistent with the minimum
requirements for use of own estimates of those parameters for at least three years prior to
qualification to use own estimates of LGDs and (or) CFs. Until 31 December 2008, this use period
may not be shorter than two years.
29
118. A bank and its controlled financial undertakings shall apply the IRB Approach to all
classes of exposures specified in par. 122, except for permanent exemptions, set forth in par. 121.
A bank, its parent bank and bank’s controlled financial undertakings, having obtained the
permission to use their own estimates of LGDs and (or) CFs, shall apply them consistently to all
classes of exposures to the central government and central banks, except for permanent
exemptions. The IRB Approach may be rolled out:
118.1. across the different exposure classes or subclasses within the same business unit;
118.2. to the same class of exposures or retail exposure subclasses across different
business units;
118.3. for the use of own estimates of the credit risk parameters (LGD, CF) for the
calculation of risk weights for exposures to central governments and central banks, institutions and
coprporates or to the same class of these exposures across different business units.
119. Roll-out of the IRB Approach shall be carried out within maximum three-year period.
In the first year of this period the IRB Approach shall be used for the equity exposure class, except
for permanent exemptions. For the purpose of drawing up the IRB Approach roll-out plan, the
minimum capital requirement specified in it may not be smaller for those exposure classes or
business units, to which the application of the IRB Approach and the use of own estimates of LGD
and (or) CF are only pending.
120. A bank which has obtained permission to use the IRB Approach shall not revert to
the use of the Standardized Approach, except for demonstrated good cause and subject to the
approval of the Bank of Lithuania. A bank which has obtained permission to use own estimates of
LGDs and CFs, shall not revert to the use of LGDs and CFs specified by the Bank of Lithuania,
except for demonstrated good cause and subject to the approval of the Bank of Lithuania.
121. Subject to the approval of the Bank of Lithuania, the bank permitted to use the IRB
Approach, may apply the Standardized Approach for the following:
121.1. the exposure class referred to in item 122.1 where the number of material
counterparties is limited and it would be unduly burdensome for the bank to implement a rating
system for these counterparties;
121.2. the exposure class referred to in item 122.2 where the number of material
counterparties is limited and it would be unduly burdensome for the bank to implement a rating
system for these counterparties;
121.3. exposures in non-significant business units as well as exposure classes that are
immaterial in terms of size and perceived risk profile. For the purpose of this derogation, the
equity exposure class of a bank shall be considered material if its aggregate value exceeds, on
average over the preceding year, 10% of the bank capital. If the number of those equity exposures
is less than 10, that threshold shall be 5% of the bank capital. For the purpose of this derogation,
the perceived risk of other exposure classes of a bank shall be considered immaterial, if riskweighed exposure amount of the respective exposure class accounts for less than 15% of the riskweighted amount of all exposures of the bank calculated applying the Standardized Approach at
the level of the bank group;
121.4. exposures to central governments of the EU MS and to their regional
governments, local authorities and administrative bodies, provided that there is no difference in
risk between the exposures to that central government and those other exposures because of
specific public arrangements and exposures to the central government of the EU MS are
assigned a 0% risk weight;
121.5. exposures of a bank to a counterparty which is its parent bank, bank’s controlled
undertaking or a controlled undertaking of its parent bank provided that the counterparty is an
institution or a financial holding company, financial institution, asset management company or
ancillary services undertaking subject to appropriate prudential requirements or an undertaking
linked by a relationship within the meaning of Article 12(1) of Directive 83/349/EEC on
consolidated accounts (OJ, SE, Chapter 17, Vol.1, p. 58);
30
121.6. equity exposures to entities whose credit obligations qualify for a 0% risk weight
under the Standardised Approach;
121.7. until 31 December 2017, equity exposures of a bank, parent bank and controlled
undertakings in observance of the following requirements:
121.7.1.
a component part of the equity portfolio to which this derogation applies
shall be determined according to the number of equities held on 31 December 2007 having regard
to all additional acquisitions related with the ownership right to these equities, if the percentage
share of the authorised capital held by a respective company does not increase due to such
acquisitions;
121.7.2.
if the acquisition increases percentage share of the authorised capital held by
a respective company, the excess amount shall not qualify for this derogation;
121.7.3.
this derogation shall not apply to sold and repurchased portions of the
authorised capital which qualified for it previously;
121.8. exposures of institutions defined under par. 75.
2. Assignment to exposure classes
122. Each exposure of the banking book shall be assigned to one of the following exposure
classes:
122.1. exposures to central governments and central banks, defined in item 51.1;
122.2. exposures to institutions, defined in item 51.6;
122.3. exposures to corporates;
122.4. retail exposures;
122.5. equity exposures;
122.6. other non credit-obligation exposures;
122.7. securitisation positions. Risk-weighted amounts of securitisation positions shall be
calculated in observance of the provisions of Section IV, Chapter IV.
123. The following exposures shall be treated as exposures to central governments and
central banks:
123.1. exposures to Multilateral Development Banks and International Organisations
which attract a risk weight of 0 % under items 51.4-51.5;
123.2. exposures to regional governments, local authorities or public sector entities as
specified in item 51.2 which are treated as exposures to central governments and central banks
under the Standardized Approach (par. 59);
123.3. exposures to administrative bodies and non–commercial undertakings defined in
item 51.3 which are treated as exposures to central governments and central banks under the
Standardized Approach (par. 61).
124. The following exposures shall be treated as exposures to institutions:
124.1. exposures to regional governments and local authorities defined under item 51.2,
which are not treated as exposures to central governments central banks under the Standardized
Approach;
124.2. exposures to Multilateral Development Banks defined in item 51.4, which do not
attract a 0% risk weight under the Standardized Approach.
125. Attributed to the corporate exposure class shall be exposures to corporates, excluding
those referred to in par. 127, but including all the remaining exposures not attributed to items
122.1-122.2 and 122.5-122.6.
126. Within the corporate exposure class, banks shall separately identify as specialised
lending exposures, exposures which possess the following characteristics:
126.1. The exposure is to an entity which was created specifically to finance and/or
operate physical assets.
126.2. The contractual arrangements give the lender a substantial degree of control over
the assets and the income that they generate.
126.3. the primary source of repayment of the exposure is the income generated by the
assets being financed, rather than other operations of the company.
31
127. To be eligible for the retail exposure class exposures shall meet the following criteria:
127.1. They shall be either to an individual person or persons, or to a small or medium
sized entity, provided in the latter case that the total amount owed to the bank, its parent bank and
bank’s controlled financial undertakings, including any past due exposure, by the obligor or group
of connected clients, but excluding claims or contingent claims secured on residential real estate
collateral, shall not, to the knowledge of the bank, which shall have taken reasonable steps to
confirm the situation, exceed LTL 1 million.
127.2. They are treated by the bank in its risk management consistently over time and in a
similar manner.
127.3. They are not managed just as individually as exposures in the corporate exposure
class.
127.4. They each represent one of a significant number of similarly managed exposures.
128. The present value of retail minimum lease payments is eligible for the retail exposure
class.
129. The following subclasses shall be distinguished in the class of retail exposures:
129.1.
qualifying revolving retail exposures;
129.2.
retail exposures secured by real estate;
129.3.
other retail exposures.
130. Retail exposures shall be recognised as qualifying revolving retail exposures, when
the following conditions are met:
130.1. They are exposures to individual persons.
130.2. Exposures are revolving.
130.3. A bank can unconditionally cancel the unused part of the obligation, if contractual
conditions allow the bank to fully cancel it in observance of the consumer protection and related
legal acts.
130.4. The exposures are unsecured. This condition may be disregarded in case of the
credit limit on a wage account. In this case the amount recovered when the bank is assigned the
right to manage the borrower’s account shall be excluded from the estimation of LGD.
130.5. Maximum exposure amount per individual person within the sub-portfolio does not
exceed EUR 100000 (LTL 345 280).
130.6. The bank can demonstrate that portfolios in which these retail exposures are
included were characterised by low volatility of loss rates compared with their average loss rate, in
particular within the low PD bands.
131. Classed as equity exposures shall be non-debt exposures conveying a subordinated,
residual claim on the assets or income of the issuer, and debt exposures similar in terms of their
economic substance.
132. Attributed to other non credit-obligation exposures shall be the residual value of
leased properties if not included in the lease exposure.
133. The methodology used by the bank for assigning exposures to different exposure
classes shall be appropriate and consistent over time.
3. Determining risk-weighted exposure amounts
134. For the purpose of determining the capital requirements for credit risk, the riskweighted exposure amount of bank assets and off-balance sheet claims shall be multiplied by 8%.
The risk-weighted exposure amounts for credit risk for bank exposures shall, unless deducted from
own funds, be calculated in accordance with the provisions of this Chapter. The credit risk
parameters (PD, LGD, EAD, M) shall be determined in observance of Parts 5–8, Section II,
Chapter IV, and the expected loss amounts – according to Part 4, Section II, Chapter IV.
135. For the purpose of applying the IRB Approach, the effects of collaterals shall be
taken into account in observance of requirements set forth in Section III, Chapter IV.
136. The risk-weighted exposure amounts for dilution risk for purchased corporate and
retail receivables shall be calculated in the same manner as for exposures to corporates. Where
the dilution risk for purchased receivables is immaterial, it may not be recognized for the
32
calculation of risk-weighted exposure values. If due to the default risk and dilution risk of
purchased receivables the bank has the right of regress to the seller of purchased receivables,
provisions of Parts 3 and 4, Section II, Chapter IV related with purchased receivables shall not
apply. In such case this exposure shall be treated as a collateralised exposure of the seller.
137. The risk-weighted exposure amounts for securitised exposures shall be calculated
according to Section IV, Chapter IV.
138. Risk-weighted amounts of exposures in the form of a collective investment
undertaking (CIU) shall be calculated in the manner set forth in Annex 2. If, for those
purposes, the bank is unable to differentiate between private equity, exchange-traded and other
equity exposures, it shall treat the exposures concerned as other equity exposures. Without
prejudice to the requiremenrs of subparagraph 121.7, where those exposures taken together
with the bank’s direct exposures in that exposure class are not material within the meaning of
subparagraph 131.3, the bank may applied to those exposures the standardised approach.
139. When the bank applies the standardised approach according to Annex 2:
139.1.
for exposures subject to a specific risk weight for unrated exposures or subject to
the credit quality step (CQS) yielding the highest risk weight for a given exposure class,
the risk weight must be multiplied by a factor of 2, but must not be higher than 1 250%.
139.2. for all other exposures the risk weight must be multiplied by a factor of 1,1 and
must be subject to a minimum of 5%.
140. Where exposures in the form of a CIU do not meet the criteria of par. 93 or the bank
is not aware of all of the underlying exposures of the CIU, the bank, using the simple risk weight
approach, shall treat the unknown underlying exposures concerned as other equity exposures. A
bank may calculate itself or may rely on a third party to calculate and report the average risk
weighted exposure amounts based on the CIU's underlying exposures according to the alternative
approach defined in Annex 2, provided that the correctness of the calculation and the report is
adequately ensured.
3.1. Risk weighted exposure amounts for exposures to central governments and central
banks, institutions and corporates
141. Risk weighted exposure amounts for exposures to central governments, central banks,
institutions and corporates shall be calculated according to the following formulae:
Risk-weighted exposure amount =Risk weight (RW) * EAD
Risk weight (RW) = (LGD * N [(1 - R)-0.5 * G(PD) + (R /(1 - R))0.5 * G(0.999)]- PD * LGD)* (1 1.5 *b)-1 *(1 +(M - 2.5)* b)*12.5* 1.06
N(x) – denotes the cumulative distribution function for a standard normal random variable
which can be derived from statistical tables or using MS Excel function NORMSDIST( ) (i.e. the
probability that a normal random variable with mean zero and variance of one is less than or equal
to x).
G(z) – denotes the inverse cumulative distribution function for a standard normal random
variable which can be derived from statistical tables or using MS Excel function NORMSINV ( )
(i.e. such value that N(x)= z).
Correlation (R) =
0 .12  1  EXP  50 * PD  / 1  EXP  50   0 .24 *
1  1  EXP  50 * PD  / 1  EXP  50 
Maturity factor (b) = 0.11852  0.05478 * ln PD 
2
33
142. In case of unfunded credit protection, when the protection provider satisfies the
requirements of par. 327, and the collateral – the requirements of par. 351, the exposure risk
weight may be calculated as follows:
Risk weight (RW) = RWi * (0,15 + 160*PDpp)
PDpp – protection provider’s PD
RWi – risk-weight calculated using the relevant risk weight formula set out in par.
141, the PD of the obligor and the LGD of a comparable direct exposure to the protection
provider, depending upon whether in case of default of the borrower and protection
provider during the life of the hedged transaction the amount recovered by the bank would
depend upon the financial condition of the obligor or of the protection provider, having
regard to the available evidence and in consideration of the transaction characteristics. The
maturity factor (b) shall be calculated using the lower of the PD of the protection provider
and the PD of the obligor.
143. When in case of exposures to the central government and central banks PD = 0, risk
weight (RW) should also be equal to 0. When PD = 1:
143.1. for defaulted exposures where a bank does not use its own estimates of LGD, RW
shall be 0;
143.2. for defaulted exposures where a bank uses its own estimates of LGD, RW shall be
calculated as follows:
Max{0, 12.5 *(LGD–ELBE)}
ELBE – bank’s best estimate of expected loss for the defaulted exposures.
144. For exposures to companies where the total annual sales for the consolidated group of
which the firm is a part is less than EUR 50 million (LTL 172 640 thousand), a bank may use the
following correlation formula for the calculation of risk weights for corporate exposures:
0.12  1  EXP 50 * PD / 1  EXP 50  0.24 *
Correlation (R) = 1  1  EXP 50 * PD / 1  EXP 50
 0.04 * 1  S  5 / 45
S – total annual sales in millions of Euros with EUR 5million<=S<=EUR50 million.
Reported total annual sales less than EUR 5 million (LTL 17 264 thousand) shall be
treated as if they were equivalent to EUR 5 million. For purchased receivables the total annual
sales shall be the weighted average by individual exposures of the pool. A bank shall substitute
total assets of the consolidated group for total annual sales when total annual sales are not a
meaningful indicator of firm size and total assets are a more meaningful indicator than total annual
sales.
145. For specialised lending exposures in respect of which a bank cannot demonstrate that
its PD estimates meet the quantification requirements, the slotting criteria approach shall be
applied according to Part 9.5, Section II, Chapter IV.
146. The purchased corporate receivables shall comply with requirements set out in Part
9.3, Section II, Chapter IV. Where purchased corporate receivables comply with requirements set
out in par. 153 and where it would be unduly burdensome for a bank to use the risk quantification
standards for corporate exposures, the risk quantification standards for retail exposures may be
used.
147. For purchased corporate receivables, refundable purchase discounts, collateral or
partial guarantees that provide first-loss protection for default losses, dilution losses, or both, may
be treated as first-loss positions under the IRB securitisation framework.
34
148. Where a bank provides credit protection for a number of exposures under terms that
the nth default among the exposures shall trigger payment and that this credit event shall terminate
the contract, if the product has an external credit assessment (rating) from an eligible ECAI, the
risk-weighted exposure values shall be calculated in observance of the provisions of Section IV,
Chapter IV. If the product is not rated by an eligible ECAI, the risk weights of the exposures
included in the basket will be aggregated, excluding n-1 exposures where the sum of the expected
loss amount multiplied by 12,5 and the risk weighted exposure amount shall not exceed the
nominal amount of the protection provided by the credit derivative multiplied by 12,5. The n-1
exposures to be excluded from the aggregation shall be determined on the basis that they shall
include those exposures each of which produces a lower risk-weighted exposure amount than the
risk-weighted exposure amount of any of the exposures included in the aggregation.
3.2. Determining risk weighted exposure amounts for retail exposures
149. The risk weighted exposure amounts for retail exposures shall be calculated
according to the following formulae:
Risk-weighted exposure amount = Risk weight (RW) * EAD
Risk weight (RW) = (LGD * N[(1 - R)-0.5 * G(PD) + (R /(1 - R))0.5 * G(0.999)]- PD *
LGD)*12.5*1.06
NN(x) – denotes the cumulative distribution function for a standard normal random
variable which can be derived from statistical tables or using MS Excel function NORMSDIST( )
(i.e. the probability that a normal random variable with mean zero and variance of one is less than
or equal to x).
G(z) – denotes the inverse cumulative distribution function for a standard normal random
variable which can be derived from statistical tables or using MS Excel function NORMSINV ( )
(t. y. such value that N(x)= z).
150. In case of unfunded credit protection, when the protection provider satisfies the
requirements of par. 327, and the collaterall – the requirements of par. 351, the exposure risk
weight may be calculated in the manner set forth in par. 142.
151. Correlation (R) shall be determined as follows:
151.1. for retail exposures secured by real estate a correlation (R) shall be 0,15;
151.2. for qualifying revolving retail exposures a correlation (R) shall be 0,04;
151.3. for other retail exposures a correlation (R) shall be calculated as follows:
Correlation (R) =
0.03  1  EXP 35 * PD  / 1  EXP 35  0.16 *
1  1  EXP 35 * PD / 1  EXP 35
152. Where PD is 1, a bank shall calculate a risk weight for defaulted exposures as
follows:
Max{0, 12.5 *(LGD-ELBE)}
ELBE – bank’s best estimate of expected loss for the defaulted exposures.
153. To be eligible for the retail treatment, purchased receivables shall comply with the
minimum requirements set out in Part 9.3, Section II, Chapter IV and the following conditions:
153.1. The bank has purchased the receivables from unrelated, third party sellers, and its
exposure to the obligor of the receivable does not include any exposures that are directly or
indirectly originated by the bank itself.
35
153.2. The purchased receivables shall be generated on an arm's-length basis between the
seller and the obligor. As such, inter-company accounts receivables and receivables subject to
contra-accounts between firms that buy and sell to each other are ineligible.
153.3. The purchasing bank has a claim on all proceeds from the purchased receivables or
a pro-rata interest in the proceeds.
153.4. The portfolio of purchased receivables is sufficiently diversified.
154. For purchased retail receivables, refundable purchase discounts, collateral or partial
guarantees that provide first-loss protection for default losses, dilution losses, or both, may be
treated as first-loss positions under the IRB securitisation framework.
155. For purchased retail receivables where a purchasing bank cannot separate exposures
secured by real estate and qualifying revolving retail exposures from other retail exposures, the
retail risk weight function producing the highest capital requirements for those exposures shall
apply.
3.3. Determining risk weighted exposure amounts for equity exposures
156. Risk weighted exposure amounts for equity exposures shall be determined employing
one of the following approaches:
156.1.
simple risk weight approach,
156.2.
PD/LGD approach,
156.3.
internal models approach.
157. Different approaches may apply to different portfolios where a bank itself uses
different approaches internally; however, the choice should be made consistently and not
determined by regulatory arbitrage considerations.
158. EAD of equity exposures shall be equal to theirbook value.
159. For the purpose of applying the simple risk weight approach:
159.1. The risk weighted exposure amount shall be calculated according to the following
formula, assigning respective risk weights:
Risk-weighted exposure amount =Risk weight (RW) * EAD
Risk weight (RW) =190% for private equity exposures in sufficiently diversified
portfolios.
Risk weight (RW) = 290% for exchange traded equity exposures.
Risk weight(RW) =370% for all other equity exposures.
159.2. Short cash positions and derivative instruments held in the non-trading book are
permitted to offset long positions in the same individual stocks provided that these instruments
have been explicitly designated as hedges of specific equity exposures and that they provide a
hedge for at least another year. Other short positions are to be treated as if they are long positions
with the relevant risk weight assigned to the absolute value of each position. In the context of
maturity mismatched positions, the method is that for corporate exposures.
159.3. The bank may recognise unfunded credit protection obtained on an equity
exposure in accordance with requirements of Section III, Chapter IV. In such case the bank
may use protection provider’s PD and such LGD and M values which would be determined
under PD/LGD approach.
160. For the purpose of applying the PD/LGD approach:
160.1. The risk weighted exposure amounts shall be calculated in the same manner as for
corporate exposures. When a bank does not have sufficient information to use the definition of
default, a scaling factor of 1,5 shall be assigned to the risk weights.
160.2. PD shall be calculated in the same manner as for corporate exposures, however, it
may not be less than minimum amounts specified in Table 8:
Table 8
36
For exchange traded
equity
exposures
where the investment
is part of a long-term
customer relationship
For non-exchange traded
equity exposures where
the returns on the
investment are based on
regular and periodic cash
flows not derived from
capital gains
For exchange traded
exposures, including
other short positions,
as
specified
in
subitem 159.2
For all other equity
exposures,
including
other short positions, as
specified in subitem
159.2
0.09%
0.09%
0.4%
1.25%
160.3. At the individual exposure level the sum of the expected loss amount multiplied
by12,5 and the risk weighted exposure amount shall not exceed EAD multiplied by 12,5.
160.4. A bank may recognise unfunded credit protection obtained on an equity exposure in
accordance with the requirements of Section III, Chapter IV. This shall be subject to an LGD of
90% on the exposure to the provider of the hedge. For private equity exposures in sufficiently
diversified portfolios an LGD of 65% may be used. For these purposes M shall be 5 years.
161. The risk-weighted exposure amounts applying the internal models approach may be
calculated having obtained the permission of the Bank of Lithuania, provided the bank is eligible
for the application of the internal models approach. For the purpose of applying the internal
models approach:
161.1. The risk weighted exposure amount shall be the potential loss on the bank's equity
exposures as derived using internal value-at-risk models subject to the 99th percentile, one-tailed
confidence interval of the difference between quarterly returns and an appropriate risk-free rate
computed over a long-term sample period, multiplied by 12,5.
161.2. The risk weighted exposure amounts at the equity portfolio level shall not be less
than the sum of minimum risk weighted exposure amounts required under the PD/LGD
Approach and the corresponding expected loss amounts multiplied by 12,5. This corresponding
expected loss amount shall be calculated on the basis of Table 8 and 65% LGD for private
equity exposures in sufficiently diversified portfolios or 90% LGD – for all other exposures.
161.3. A bank may recognise unfunded credit protection obtained on equity in observance
of the requirements set forth in Section III, Chapter IV.
3.4. Determining risk weighted exposure amounts for other non credit-obligation assets
162. The risk weighted exposure amounts for other non credit-obligation assets shall be
calculated according to the formula:
Risk-weighted exposure amount =100% * EAD
163. EAD shall be equal to net value of other non credit-obligation assets.
164. When the exposure is a residual value of leased assets, risk weighted exposure
amount shall be calculated as follows:
Risk-weighted exposure amount = 1/t * 100 proc. * EAD
Where t is the greater of 1 and the nearest number of whole years of the lease remaining.
4. Calculation of expected loss amounts
165. The expected loss amount of exposures shall be calculated applying the same PD,
LGD and EAD likewise those used for the purpose of determining the risk-weighted exposure
amounts.
166.
The expected loss amount shall be calculated as follows:
Expected loss amount = Expected loss (EL) * EAD
37
167. The expected loss amounts for exposures to central government, central banks,
institutions, corporates and retail exposures shall be calculated as follows:
Expected loss (EL) = PD * LGD
For defaulted exposures, where banks use use own estimates of LGDs, the expected loss
(EL) shall be equal to the bank’s best estimate of expected loss (ELBE).
168. Where a bank determines a risk weight (RW) according to par. 142, the expected loss
(EL) shall be 0.
169. The EL values for specialised lending exposures, where a bank uses the slotting
criteria approach in observance of requirements set forth in Part 9.5, Section II, Chapter IV, shall
be determined according to Table 9:
Table 9
Remaining
Category 1
Category 2
Category 3
Category 4
Category 5
Maturity
(very good)
(good)
(satisfactory)
(poor)
(default)
Less than 2,5
years
Equal to or
more than 2,5
years
0%
0.4%
2.8%
8%
50%
0.4%
0.8%
2.8%
8%
50%
Where the slotting criteria approach is not used, the EL for specialised lending exposures
shall be calculated as follows:
Expected loss (EL) = PD * LGD
170. In case of corporate and retail receivables dilution risk, the expected loss (EL) may
be determined according to Table 10 as follows:
Table 10
Expected loss (EL)
PD
LGD
PD* LGD
PD directly calculated by the
LGD directly calculated by the
bank itself
bank itself
PD* LGD
PD directly calculated by the
75%
bank itself
Expected loss (EL) directly
calculated by the bank itself
Expected loss (EL)
100%
Expected loss (EL) directly PD directly calculated by the
Expected loss (EL)
calculated by the bank itself
bank itself
PD
Expected loss (EL) directly
Expected loss (EL)
LGD directly calculated by the
calculated by the bank itself
LGD
bank itself
171. The expected loss amounts for equity exposures shall be determined in observance of
the applicable methods for determining the risk-weighted exposure amounts:
171.1. Where the risk weighted exposure amount is calculated using the simple risk weight
approach, the expected loss (EL) shall be determined according to Table 11:
Table 11
Exposure
For private equity For exchange traded For
other
equity
exposures
in equity exposures
exposures
sufficiently
diversified portfolios
Expected loss
0.8%
0.8%
2.4%
38
(EL)
171.2. Where the risk weighted exposure amount is calculated using the PD/LGD
approach, the expected loss (EL) shall be determined as follows:
Expected loss (EL) = PD * LGD
171.3. Where the risk weighted exposure amount is calculated using the internal models
approach, the expected loss (EL) shall be 0%.
172. For exposures attributed to the class of other non-credit obligation assets the expected
loss (EL) shall be 0%.
173. The expected loss (EL) for securitised exposures shall be calculated according to
Section IV, Chapter IV.
174. The expected loss (EL) for CIUs exposures shall be calculated having regard to the
applicable methods for the calculation of risk-weighted exposure amounts.
175. For exposures specified in paragraphs 166–170 the expected loss amount shall be
compared with the value adjustment amount of these exposures. With respect to defaulted
exposures purchased at a price different than the amount owed, , the difference between the
amount owed and net value (discount) shall be added to the value adjustment amount of these
exposures. Expected loss amounts for securitised exposures and value adjustments and provisions
related to these exposures shall not be included in this calculation:
175.1. When the value adjustment amount is smaller than the total amount of expected
loss, the capital of Tier I and II shall be respectively reduced by 50% of the difference between the
expected loss amount and value adjustment amount.
175.2. When the value adjustment amount is larger than the total amount of expected loss,
the capital of Tier II shall be increased by the difference between the expected loss amount and
value adjustment amount; however, this difference may not exceed 0.6% of the risk-weighted
amount of all exposures of the bank.
5. Determining PD
176. A bank shall apply PD calculated by itself for exposures to the central government
and central banks, institutions, corporates and retail exposures.
177. The PD of an exposure to a corporate or an institution and of a retail exposure shall
be at least 0,03%.
178. The PD in the case of default shall be 100%.
179. For purchased corporate receivables in respect of which a bank cannot demonstrate
that its PD estimates meet the quantification requirements, the PDs for these exposures shall be
determined according to the following methods:
179.1. For senior claims on purchased corporate receivables PD shall be the calculated as
the ratio of the bank’s directly estimated expected loss (EL) and 45% of LGD for these
receivables.
179.2. For subordinated claims on purchased corporate receivables PD shall be equal to
directly estimated expected loss (EL) .
179.3. If a bank is permitted to use own LGD estimates for corporate exposures and it can
decompose its directly estimated expected loss (EL) for purchased corporate receivables into PDs
and LGDs in a reliable manner, the PD may equal to the ratio of expected loss (EL) to LGD.
180. For dilution risk of corporate and retail purchased receivables PD shall be set as
follows:
180.1. PD shall be set equal to directly estimated expected loss (EL) for dilution risk.
180.2. Where with regard to purchased receivables a bank satisfies the quantification
requirements applicable to PD, it may use its own PD estimate.
180.3. Where with regard to purchased receivables a bank does not satisfy the
quantification requirements applicable to PD:
39
180.3.1.
If a bank is permitted to use own LGD estimates for and it can decompose
its directly estimated expected loss (EL) for dilution risk into PDs and LGDs in a reliable manner,
the PD may equal to the ratio of expected loss (EL) to LGD;
180.3.2.
in other cases PD shall equal to the directly estimated expected loss (EL).
181. Banks may recognise unfunded credit protection, determining the PD according to the
requirements set forth in Section III, Chapter IV. If a bank is permitted to use own LGD estimates,
it may recognise unfunded credit protection by adjusting PDs subject to the requirements of Part
9.2.3, Section II, Chapter IV. The risk weight per collateralised exposure may not be less than the
risk weight of the protection provider’s exposure.
5.1. Requirements for PD quantification
182. PD estimates shall be quantified in observance of requirements set forth in Part 9,
Section II, Chapter IV.
183. PDs by obligor grade or pool shall be estimated from long run averages of one-year
default rates.
184. For exposures to central government and central banks as well as institutions and
corporates a bank may apply the following PD quantification approaches or combinations thereof:
184.1. Historical approach:
184.1.1.
A bank shall use uses data on internal historical default experience.
184.1.2.
Internal historical data shall be reflective of underwriting standards and of
any differences in the rating system that generated the data and the current rating system. Where
underwriting standards or rating systems have changed, the bank shall add a greater margin of
conservatism in its estimate of PD.
184.2. Credit risk assessments (ratings) mapping approach:
184.2.1.
A bank shall associate its internal rating scale’s obligor grades to the scale
used by an ECAI or similar organisations.
184.2.2.
The default rates observed for the external organisation's grades shall be
attributed to the bank‘s obligor grades.
184.2.3.
The internal rating criteria shall be compared to the criteria used by the
external organisation and on a comparison of the internal and external ratings of any common
obligors. Biases or inconsistencies in the mapping approach or underlying data shall be avoided.
184.2.4.
The external organisation's criteria underlying the data used for
quantification shall be oriented to default risk only and not reflect transaction characteristics.
184.2.5.
Analysis by a bank shall include a comparison of the default definitions
used.
184.2.6.
The basis for the mapping shall be documented in detail.
184.3. Statistical default prediction models:
184.3.1.
When the bank uses direct estimates of risk parameters, intervals of these
estimates may be determined per each grade of the rating scale. PD may be determined as the
simple average of PDs of individual obligors in a given grade.
184.3.2.
Bank shall meet the requirements for the use of models specified in Part
9.1.3.
184.4. A bank may apply PD quantification methods only after careful analysis justifying
the application of such methods is completed. A bank shall rely on expert assessments when
coordinating the outcomes of such methods and when applying respective adjustments for their
weaknesses.
185. Where an exposure is attributed to the categories of exposures to central governments
and central banks as well as institutions and corporates, for banks, which use IRB method and do
not use own estimates of LGD and (or) CF (Foundation IRB Approach), the length of the
underlying historical observation period used shall be at least two years for at least one source. The
period to be covered shall increase by one year each year until relevant data cover a period of five
years. For banks which use own estimates of LGDs or CF (Advanced IRB Approach), underlying
40
historical observation period used shall be at least five years for at least one source. If the available
observation period spans a longer period for any source, and this data is relevant, this longer
period shall be used.
186. For the class of retail exposures:
186.1. A bank may estimate the expected loss (EL) directly by obligor grade or pool from
long run averages of one-yearlosses, and PD may be determined as the ratio of the bank’s expected
loss (EL) to the appropriate estimate of LGD. Loss estimation shall be carried out in observance of
the general requirements for PD and LGD quantifications.
186.2. A bank shall regard internal data for assigning exposures to grades or pools as the
primary source of information. A bank shall be permitted to use external data (including pooled
data) or statistical models for quantification provided a strong link can be demonstrated between:
186.2.1.
the bank’s process of assigning exposures to grades or pools and the process
used by the external data source;
186.2.2.
the bank’s internal risk profile and the composition of the external data.
186.3. For banks implementing the IRB Approach, the length of the underlying historical
observation period used shall be at least five years for at least one internal or external data source.
The period to be covered shall increase by one year each year until relevant data cover a period of
five years. If the available observation period spans a longer period for any source, and this data is
relevant, this longer period shall be used. If the data of later periods is more appropriate for
quantification of PD, bank can provide higher comparative weight for this data..
186.4. A bank shall identify and analyse expected changes of risk parameters over the life
of credit exposures (seasoning effects).
187. For purchased corporate retail receivables a bank may calculate the expected loss
(EL) by obligor grade from long run averages of one-year default rates.
188. For purchased retail receivables, a bank may use external and internal reference data.
189. For the purpose of determining the PD for low-default portfolios, a bank shall be
allowed to:
189.1. use pooled data of several banks, external data sources or respective market
indicators, in which case, however, the bank shall demonstrate that such data is representative;
189.2. use a combination of sub-portfolios with similar risk profiles; for example, a bank
may split the portfolio into separate component parts used for the internal credit risk management
(e.g., pricing) purposes arriving thereby at several low-default portfolios;
189.3. use a combination of different risk categories of the rating scale;
189.4. apply higher interval limit of the risk parameter, when respective intervals of risk
parameters are established for the risk categories of the rating scale;
189.5. divide the data observation period into spans of several years, rather than into oneyear spans; for example, a bank may establish the risk parameter observation period of several
years and only after that calculate the one-year value of this parameter.
6. Determining LGD
190. For exposures to the central governments and central banks, institutions, corporates
and retail exposure categories, LGD shall be determined having regard to the provisions of this
Chapter.
191. For retail exposures a bank shall apply its own estimates of LGD.
192. For exposures to the central governments and central banks, institutions, corporates
and retail exposure categories, LGD shall be determined in the following manner:
192.1. 45% LGD: for exposures without eligible collateral, where a bank has the right of a
senior claim, and for purchased corporate receivables, where a bank has the right of a senior claim
and does not satisfy the PD quantification requirements.
192.2. 75% LGD: for exposures without eligible collateral, where a bank does not have the
right of a senior claim.
41
192.3. 100% LGD: for subordinated claims on purchased corporate receivables, where the
bank cannot demonstrate that its PD estimates satisfy the quantification requirements.
192.4. LGD for covered bonds may be 11,25%.
192.5. LGD for purchased corporate receivables may be equal to the ratio of the directly
estimated expected loss (EL) and directly estimated PD, if with regard to purchased corporate
receivables the bank can demonstrate that its PD estimates satisfy the quantification requirements.
192.6. A bank may recognise the effects of collaterals in observance of requirements set
forth in Section III, Chapter IV.
192.7. A bank may use its own estimates of LGD upon permission of the Bank of
Lithuania.
193. For dilution risk of purchased corporate and retail receivables LGD shall be
determined as follows:
193.1. Where PD is equal to the expected loss (EL), LGD shall be 100%.
193.2. Where a bank, which satisfies the PD quantification requirements, uses its directly
estimated PD, but does not apply own estimates of LGD, LGD shall be 75%. When bank can
decompose its directly estimated expected loss (EL) for purchased corporate receivables into PDs
and LGDs in a reliable manner, the LGD may be equal to the ratio of expected loss (EL) to PD.
193.3. A bank may use its own estimates of LGD, if the following conditions are met:
193.3.1.
To be eligible for the application of own estimates of LGD for purchased
corporate receivables, a bank shall obtain a permission to apply its own estimates of LGD to the
class of corporate exposures.
193.3.2.
A bank, which does not use direct estimates of PD, shall be able to
decompose in reliable a manner the directly estimated expected loss (EL) into PD and LGD.
194. Where a bank uses its own estimates of LGD, unfunded credit protection may be
recognised by adjusting those amounts in accordance with the requirements set forth in Part 9.2.3,
Section II, Chapter IV. The risk weight of collateralised exposure may not be lower that the risk
weight of the guarantor’s exposure.
6.1. Requirements for LGD quantification
195. Banks may use their own estimates of LGD in observance of requirements set forth
in Part 9, Section II, Chapter IV.
196. LGDs shall be estimated by facility grade or pool on the basis of all observed
defaults of that facility grade or pool.
197. For the actual LGD calculation purposes the current value of these amounts shall be
determined on the day of the default:
197.1. value of outstanding exposure on the day of establishment of the default, including
the principal, accrued interest and fees;
197.2. recovered amounts, including cash flows from realisation of collateral and actual
receips from sales of defaulted exposures.
198. A bank shall use LGD estimates that are appropriate for an economic downturn if
those are more conservative than the long-run average.
199. A bank shall make adjustments to arrive at LGD for an economic downturn. Where
upon change of the economic cycle LGD amount does not change or changes insignificantly, LGD
adjustment to take into account the economic downturn conditions shall not be required.
200. For the purpose of quantification of LGD, a mismatch between currencies of the
underlying exposure and its collateral shall be addressed in a conservative manner. A bank
shall consider the extent of any dependence between the risk of the obligor with that of the
collateral or collateral provider. In cases where there is a significant degree of dependence,
calculation of LGD shall be more conservative.
201. To the extent that LGD estimates take into account the existence of collateral:
201.1. a bank must establish internal requirements for collateral management;
201.2. a bank may not rely exclusively only on the current market value of the collateral;
42
201.3. a bank, for the purpose of determining cash flows from collateral, shall take into
account potential difficulties pertaining to realisation of collateral.
202. To the extent that a bank recognises collateral for determining the exposure value
for counterparty credit risk according to the standardised method, or internal model method
according to the provisions of Chapter V, the collateral shall not be taken into account in the LGD
estimates.
203. For defaulted exposures LGD shall be equal to the sum of the bank‘s best estimate
of expected loss (ELBE).
204. Value adjustments related with unpaid late fees capitalised in the bank‘s income
statement, shall be included in the bank‘s estimates of LGD and EAD.
205. For classes of exposures to central governments and central banks, institutions and
corporates, the data observation period for any one internal or external source shall be at least 5
years, increasing this period by one year until the period of seven years is reached. If the available
observation period spans a longer period for any source, and the data is relevant, this longer period
shall be used.
206. For the class of retail exposures, the data observation period of any of the internal
or external data source for banks implementing the IRB Approach shall be at least two years. The
period to be covered shall increase by one year each year until relevant data cover a period of five
years. If the available observation period spans a longer period for any source, and this data is
relevant, this longer period shall be used. If the data of later periods is more appropriate for
quantification of LGD, bank can provide higher comparative weight for this data.
207. For the class of retail exposures:
207.1. LGD may be equal to the ratio of directly estimated expected loss (EL) to PD;
207.2. the future drawings may be taken into account, provided they are excluded from
CF calculations;
207.3. until 31 December 2012, the exposure weighted average LGD for all retail
exposures secured by real estate without the central government guarantees may not be less
than 10%. The exposure weighted average LGD shall be calculated as follows:
Exposure weighted average LGD = ( (LGDi * EADi)) /  EADi
LGDi – ith exposure’s LGD (with i varying between 1 and n, where n – number of
exposures)
EADi – ith exposure’s EAD (with i varying between 1 and n, where n – number of
exposures);
207.4. For the purpose of calculating the purchased receivables’ LGD, a bank may take
into account external as well as internal data.
7. Determining EAD
208. In case of exposures to central governments and central banks, institutions,
corporates and retail exposures, EAD shall be determined in observance of provisions of this
Chapter.
209. EAD for exposures held by a bank shall be determined gross of value adjustments.
Where assets are acquired for the price, other than amount owed, EAD shall be:
209.1. increased by difference between amount owed and net value (discount), when
amount owed exceeds net value;
209.2. reduced by difference between amount owed and net value (premium), when
amount owed is lower than net value.
210. For the purpose of calculating the risk-weighted amount of purchased receivables’
exposures, EAD shall be equal to the difference between the outstanding amount and capital
required for covering the dilution risks of amounts receivable, irrespective of the effects of
collateral.
43
211. EAD for exposures referred to in this paragraph shall be calculated by summing up
the drawn amount and the amount committed but not drawn times respective CF. A bank shall
apply its own estimates of CF for retail exposures. In other cases CF shall be determined as
follows:
211.1. 0%: uncommitted credit lines, the undrawn portions of which may be
unconditionally cancelled by a bank at any time without notice, or credit lines the agreements
whereof include the possibility of automatic cancelling of undrawn portions due to deterioration of
the borrower's credit quality. Undrawn portions of retail credit lines may be unconditionally
cancelled, if so provided under agreement conditions in observance of consumer protection and
related legal acts.
211.2. 0%: undrawn purchase commitments for revolving purchased receivables which
may be unconditionally cancelled by a bank at any time without notice.
211.3. To qualify for the application of 0% CF, a bank shall actively monitor the
borrower's financial condition, and internal control systems should enable the bank to immediately
notice any deterioration of the credit quality of the borrower.
211.4. 20%: short-term letters of credit arising from movement of goods. Such CF shall be
applied by banks issuing and endorsing such letters of credits.
211.5. 75%: other credit lines, note issuance facilities (NIFs) and revolving underwriting
facilities (RUFs).
211.6. Where a commitment is based on the extension of another commitment, applied
shall be the lower of the two CF, relating to the individual commitment.
211.7. A bank, having obtained the permission of the Bank of Lithuania, may use its own
estimates of CF for the above-listed exposures.
212. Where a bank applies master netting agreements in relation to repurchase
transaction or securities or commodities lending or borrowing transactions, exposure value
shall be calculated in observance of the principles set forth in Section III, Chapter IV. EAD for
financial instruments specified in Annex 7 shall be determined according to Chapter V. For the
purpose of balance sheet netting of loans and deposits a bank shall apply exposure value
calculation methods specified in Section III, Chapter IV.
213. Where an exposure takes the form of securities or commodities sold, posted or lent
under repurchase transactions, securities or commodities lending or borrowing transactions, long
settlement transactions and margin lending agreements, EAD shall be equal to the book value of
securities or commodities. In case of application of the Financial Collateral Comprehensive
Method, EAD shall be adjusted by relevant volatility adjustment according to Section III, Chapter
IV. EAD for repurchase transactions, securities or commodities lending or borrowing transactions,
long settlement transactions and margin lending agreements may be determined in observance of
Chapter V. In case of outstanding credit exposures to the central counterparty, exposure amount
may be estimated in the manner set forth in par. 684, if the central counterparty’s credit exposures
to all counterparties are fully collateralised on a daily basis.
214. EAD for lease exposures shall be equal to the sum of discounted minimum lease
payments.
215. EAD for all of the remaining off-balance sheet claims, excluded from this
paragraph shall be estimated multiplying the amount of the off-balance sheet claims by CF of
100%, 50%, 20% or 0% assigned to them respectively according to Section I, Chapter IV.
7.1. Requirements for CF quantification
216. Quantification of CF shall be performed in observance of requirements set forth in
Part 9, Section II, Chapter IV.
217. Bank shall estimate CF by facility grade or pool on the basis of the average
realised conversion factors by facility grade or pool using all observed defaults.
218. A bank shall estimate economic downturn CFs if those are more conservative than
the long-run average. Where upon change of the economic cycle CF estimate does not change or
44
changes insignificantly, CF adjustment to take into account the economic downturn conditions
shall not be required.
219. The CF estimate shall incorporate a larger margin of conservatism where a stronger
positive correlation can reasonably be expected between the default frequency and the magnitude
of CF.
220. A bank shall consider its policies and strategies adopted in respect of account
monitoring and payment processing, as well as to its ability and willingness to prevent further
drawings on the credit in circumstances short of payment default.
221. A bank shall have adequate systems and procedures in place to monitor facility
amounts, current outstandings against committed lines and changes in outstandings per obligor and
per grade.
222. For exposures to the central governments and central banks, institutions and
corporates data observation period of any of the internal or external data source shall be at least
five years, increasing it by one year each year until relevant data cover a period of seven years. If
the available observation period spans a longer period for any source, and this data is relevant, this
longer period shall be used.
223. For retail exposures the data observation period of any of the internal or external
data source for banks implementing the IRB Approach shall be at least two years. The period to be
covered shall increase by one year each year until relevant data cover a period of five years. If the
available observation period spans a longer period for any source, and this data is relevant, this
longer period shall be used. If the data of later periods is more appropriate for quantification of CF,
bank can provide higher comparative weight for this data.
224. For the purpose of calculating CF for retail exposures, the future drawings may be
taken into account, where it has been excluded from LGD estimates.
8. Determining Maturity (M)
225. For exposures to central governments and central banks, institutions and corporates
M shall be calculated in observance of provisions of this Chapter.
226. For exposures arising from repurchase transactions or securities or commodities
lending or borrowing transactions M shall be 0,5 years and for all other exposures M shall be 2,5
years.
227. For dilution risk of corporate and retail purchased receivables M shall be 1 year.
228. Banks permitted to use own LGDs and (or) CF for exposures to central
governments and central banks, institutions and corporates, shall calculate M for these exposures
as set out in pars. 229-236. In all cases, M shall be no greater than 5 years.
229. For an instrument subject to a cash flow schedule, M shall be calculated according
to the following formula, but it may not be shorter than 1 year:
 t * CF /  CF
t
M=
t
t
t
CFt – denotes the cash flows (principal, interest payments and fees) contractually payable
by the obligor in period t.
230. For derivatives subject to a master netting agreement, M shall be the weighted
average remaining maturity of the exposure, where M shall be at least 1 year. The notional amount
of each exposure shall be used for weighting the maturity.
231. For exposures arising from fully or nearly-fully collateralised derivative
instruments (listed in Annex 7) transactions and fully or nearly-fully collateralised margin
lending transactions which are subject to a master netting agreement, M shall be the weighted
average remaining maturity of the transactions where M shall be at least 10 days. For
repurchase transactions or securities or commodities lending or borrowing transactions which
are subject to a master netting agreement, M shall be the weighted average remaining maturity
of the transactions where M shall be at least 5 days. The notional amount of each transaction
shall be used for weighting the maturity.
45
232. If a bank bank is permitted to use own PD estimates for purchased corporate
receivables, for drawn amounts M shall equal the purchased receivables exposure weighted
average maturity, where M shall be at least 90 days. This same value of M shall also be used for
undrawn amounts under a committed purchase facility provided the facility contains effective
covenants, early amortisation triggers, or other features that protect the purchasing bank against a
significant deterioration in the quality of the future receivables it is required to purchase over the
facility's term. Absent such effective protections, M for undrawn amounts shall be calculated as
the sum of the longest-dated potential receivable under the purchase agreement and the remaining
maturity of the purchase facility, where M shall be at least 90 days.
233. M for exposures the amount of which is calculated by a bank using the internal
model approach according to Chapter V, and for which the maturity of the longest-dated contract
contained in the netting set is greater than one year shall be calculated according to the following
formula:
maturity
 tk 1 year

  EffectiveEEk * tk * dfk   EEk * tk * dfk 
 k 1

tk 1 year
M  MIN 
;5 
tk 1 year


EffectiveEEk * tk * dfk

k 1


dfk – the risk-free discount factor for future time period tk.
234. For fully or nearly-fully collateralised derivative instruments listed in Annex 7,
fully or nearly-fully collateralised margin lending transactions, repurchase transactions, securities
or commodities lending or borrowing transactions:
234.1. M shall be at least one-day;
234.2. the documentation shall contain provisions that require daily re-margining and daily
revaluation and allow for the prompt liquidation or setoff of collateral in the event of default or
failure to re-margin;
234.3. for netting sets in which all contracts have an original maturity of less than one
year, M shall be calculated in observance of par. 229.
235. For the remaining exposures, excluding those mentioned in pars. 223-234, or when
a bank is not in a position to calculate M according to par. 229, M shall be the maximum
remaining time (in years) that the obligor is permitted to take to fully discharge its contractual
obligations, where M shall be at least 1 year.
236. Maturity mismatches shall be treated as specified in Section III, Chapter IV.
9. Minimum requirements for IRB approach
9.1. Requirements for internal rating systems
237. Validation of the rating systems’ structure, the assignment process, the quantification
of risk parameters and other processes shall be carried out in the manner established by the Bank
of Lithuania.
9.1.1. Structure of rating systems
238. When exposure is assigned to classes of exposures to central government and central
banks, institutions and corporates:
238.1. The bank’s internal rating system shall take into account obligor and transaction
risk characteristics.
238.2. A rating system shall have an obligor rating scale which reflects exclusively
quantification of the risk of obligor default.
238.3. The obligor rating scale shall have a minimum of 7 grades for non-defaulted
obligors and one for defaulted obligors.
238.4. A bank shall document the relationship between obligor grades in terms of the level
of default risk each grade implies and the criteria used to distinguish that level of default risk.
238.5. A bank with portfolios concentrated in a particular market segment and range of
default risk shall have enough obligor grades within that range to avoid undue concentrations of
46
obligors in a particular grade. Significant concentrations within a single grade shall be supported
by convincing empirical evidence that the obligor grade covers a reasonably narrow PD band and
that the default risk posed by all obligors in the grade falls within that band.
238.6. In order to get the permission by the Bank of Lithuania to estimate own LGDs and
(or) CFs, a rating system of a bank shall incorporate a distinct facility rating scale which
exclusively reflects LGDs and (or) CFs related transaction characteristics.
238.7. The facility grade definition shall include both a description of how exposures are
assigned to the grade and of the criteria used to distinguish the level of risk across grades.
238.8. Significant concentrations within a single facility grade shall be supported by
convincing empirical evidence that the facility grade covers a reasonably narrow LGD and (or) CF
band, respectively, and that the risk posed by all exposures in the grade falls within that band.
239. Retail exposures:
239.1. The bank’s internal rating system shall capture all relevant obligor and transaction
characteristics.
239.2. Exposures’ assignment to grades or pools shall ensure meaningful risk
differentiation, accurate and consistent quantification and validation of the loss characteristics at
the grade or pool level.
239.3. The distribution of exposures and obligors across grades or pools shall be such as to
avoid excessive concentrations.
239.4. Exposures within the same grade or pool shall be sufficiently homogeneous.
9.1.2. Requirements for assignment process
240. A bank using more than one rating system, shall have clear criteria for assigning the
obligor or exposure to the particular system of ratings, which precisely reflect the risk level of the
obligor or exposure. The assignment criteria and the process of assignment shall be subject to
regular revisions to determine their adequacy with regard to the existing portfolio and external
conditions.
241. When exposures are assigned to classes of exposures to central governments and
central banks, institutions and corporates:
241.1. Each obligor shall be assigned to an obligor grade.
241.2. For a bank permitted to use own estimates of LGDs and (or) CFs, each exposure
shall also be assigned to a facility grade.
241.3. Each separate legal entity to which the bank is exposed shall be separately rated. A
bank shall have acceptable policies regarding the treatment of individual obligor clients and groups
of connected clients.
241.4. Separate exposures to the same obligor shall be assigned to the same obligor grade.
Exceptions, where separate exposures are allowed to result in multiple grades for the same obligor
are:
241.4.1.
country transfer risk;
241.4.2.
where the treatment of associated guarantees to an exposure may be
reflected in an adjusted assignment to an obligor grade;
241.4.3.
where consumer protection, bank secrecy or other legislation prohibit the
exchange of client data.
241.5. The assignments shall be completed and approved as well as regularly revised by an
independent party which does not directly benefit from the decision on the extension or granting of
a credit.
241.6. A bank shall update the assignments at least once a year. Large and problem
exposures shall be revised more frequently. Having obtained material information about the
obligor or exposure, a bank shall start a new process of assignment.
241.7. The process of obtaining and updating the information about the obligor’s
characteristics, which affect PD, and the transaction characteristics which influence LGD and (or)
CF, shall be effective.
242. When exposure is assigned to class of retail exposures:
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242.1. Each exposure shall be assigned to a grade or a pool.
242.2. For the purpose of assigning exposures to grades or pools, a bank shall take into
account the following risk factors:
242.2.1.
the obligor’s characteristics;
242.2.2.
the transaction risk specifics, including the type of product and (or)
collateral; a bank shall clearly distinguish the cases in which the same collateral is used to secure
more than one exposure;
242.2.3.
delinquency status, unless a bank can demonstrate that delinquency is not a
significant factor of exposure risks.
242.3. The assignment of purchased receivables shall be carried out in observance of the
seller’s crediting practices and the diversification of the bank’s clientele.
242.4. A bank shall update assignments of obligors and exposures at least annually, or,
when exposures are assigned to pools, shall review pool’s loss characteristics and delinquency
status.
242.5. A bank shall update at least annually individual exposures of the representative
sample per each identified risk pool, to ensure that their assignment to a respective pool is
maintained correctly.
243. A bank which uses the slotting criteria approach for the specialised lending
exposures, shall observe the requirements of Part 9.5 of this Section.
244. A bank shall have specific definitions, processes and criteria for assigning exposures
to grades or pools within a rating system:
244.1. The grade or pool definitions and criteria shall be sufficiently detailed to allow
those charged with assigning ratings to consistently assign obligors or exposures posing similar
risk to the same grade or pool. This consistency shall exist across lines of business, departments
and geographic locations.
244.2. The documentation of the assignment process shall allow third parties to understand
and replicate the assignments of exposures to grades or pools and to evaluate the appropriateness
of the assignments to a grade or a pool.
244.3. The criteria shall also be consistent with the bank's internal lending standards and
its policies for handling troubled obligors and exposures.
245. A bank shall take all relevant information into account in assigning obligors and
exposures to grades or pools. Information shall be current and shall enable the bank to forecast the
future performance of the exposure. The less information a bank has, the more conservative shall
be assignments to grades or pools. If a bank uses an external rating as a primary factor determining
an internal rating assignment, the bank shall ensure that it considers other relevant information.
246. A bank shall document the situations in which human judgement may override the
inputs or outputs of the assignment process and the personnel responsible for approving these
overrides. A bank shall document all actual overrides and the personnel responsible. A bank shall
analyse the performance of the exposures whose assignments have been overridden by every
responsible person.
9.1.3. Requirements for the use of models
247. If a bank uses statistical models to assign obligors and exposures to grades or pools,
then:
247.1. The model shall have good predictive power and capital requirements calculated
using such model are not distorted. The input variables shall form a reasonable and effective basis
for the resulting predictions and the model shall not have material biases.
247.2. A bank shall have in place a process for vetting data inputs into the model, which
includes an assessment of the accuracy, completeness and appropriateness of the data.
247.3. The data used to build the model shall be representative for the population of the
bank's actual obligors or exposures.
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247.4. A bank shall have a regular cycle of model validation that includes monitoring of
model performance and stability, review of model specification and testing of model outputs
against outcomes.
247.5. A bank shall complement the statistical model by human judgement and human
oversight to review model-based assignments and to ensure that the models are used appropriately.
Review procedures shall aim at finding and limiting errors associated with model weaknesses.
Human judgements shall take into account all relevant information not considered by the model.
The bank shall document how human judgement and model results are to be combined.
248. A bank, which for the capital requirement calculation purpose applies external
models, shall:
248.1. document the relevance of external models in the capital requirement calculation
process (e.g., external models may be used in the validation process, the external models’ outputs
may be used as input variables in the process of assignment of obligors or exposures to grades or
risk pools, or as input variables in the credit risk parameters’ quantification process, etc.), the
extent of application of these models and describe:
248.1.1.
respective portfolios or sub-portfolios thereof to which external models are
applied;
248.1.2.
the manner of application of external models;
248.1.3.
the reasons for application of external models (e.g., lack of default or
internal data);
248.2. demonstrate full understanding of external models used in the capital requirement
calculation process, including :
248.2.1.
methodical assumptions and structure of external models, including the
opportunities of the models, their weaknesses and appropriateness for the estimation of the bank’s
risk parameters;
248.2.2.
expert revision of the external models’ outputs and documentation of
adjustments;
248.2.3.
accumulate internal experience during the period of application of external
models;
248.3. demonstrate that external models are suitable for the bank’s exposures and
assignment process for the purpose of applying IRB Approach, i.e.:
248.3.1.
a bank shall demonstrate how external data used during the development of
models are associated with the risk profiles of the Bank’s internal portfolios or sub-portfolios
thereof.
248.3.2.
Where external models are used for the obligor or exposure assignment to
grades or risk pools, the outcomes of external models may be adjusted on the basis of expert
judgement to ensure more precise assignment of the obligors or exposures to grades or risk pools.
248.3.3.
The use of external models shall not relieve a bank from the application of
the respective minimum requirements established for the IRB Approach. In order to conform to
such requirements, the bank shall adjust the external models’ outcomes (e.g., make adjustments on
the basis of quality information or mathematically).
9.1.4. Documentation of rating systems
249. Bank’s documentation shall evidence compliance with requirements set forth in
Parts 5.1, 6.1 and 7.1 and par. 9 of Section II, Chapter IV. A bank shall document:
249.1. the design and operational details of its rating systems, including portfolio
differentiation, rating criteria, responsibilities of parties that rate obligors and exposures, frequency
of assignment reviews, and management oversight of the rating process;
249.2. the rationale for and analysis supporting its choice of the internal rating criteria;
249.3. all major changes in the process of assignment of obligors and exposures to grades
or risk pools (such documentation shall support identification of changes made to the process of
assignment of obligors and exposures to grades or risk pools subsequent to the last review by the
Bank of Lithuania which covered the assessment of the credit risk management);
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249.4. the organisation of rating assignment including the rating assignment process and
the internal control structure;
249.5. specific definitions of default and loss used internally and demonstrate consistency
with the definitions set out in these Regulations;
249.6. statistical models used in the process of assignment of obligors and exposures to
grades or risk pools, elaborating on:
249.6.1.
the theory, assumptions and/or mathematical and empirical basis of the
assignment of risk parameters to obligor grades, facility grades or pools , and the data source(s)
used to estimate the model;
249.6.2.
the model’s validation process (also including model tests with data
excluded from data sample used for the development of the model, i.e. including out-of-time and
out-of-sample tests);
249.6.3.
any circumstances under which the model does not work effectively.
250. Use of external models shall not exempt a bank from documentation.
9.1.5. Data maintenance
251. A bank shall shall collect and store data on different aspects of their internal ratings
as required under legal acts of the Bank of Lithuania regulating the disclosure of banking
information.
252. For exposures to central governments and central banks, institutions and corporates, a
bank shall collect and store data on:
252.1. complete rating histories on obligors and recognised guarantors;
252.2. the dates of the assignment to grades;
252.3. the key data and methodology used to assign to grades;
252.4. persons responsible for assignment to grades;
252.5. the identity of obligors and exposures that defaulted;
252.6. the date and circumstances of such defaults;
252.7. data on the PDs and realised default rates associated with rating scale’s grades and
rating transitions;
252.8. banks not using own estimates of LGDs and (or) CFs shall collect and store data on
comparisons of realised LGDs and realised CFs to the values of LGDs and CFs the application of
which is required by the Bank of Lithuania.
253. Banks using own estimates of LGDs and (or) CFs shall collect and store data on:
253.1. facility grades, LGD and CF per each rating scale;
253.2. the dates of exposures’ assignment to grades and estimation of appropriate
parameters;
253.3. the key data and methodology used to derive the facility ratings and LGD and CF
estimates;
253.4. persons who assigned exposures to grades and the persons who provided LGD and
CF estimates;
253.5. data on the quantified and realised LGDs and CFs associated with each defaulted
exposure;
253.6. data on the LGD of the exposure before and after evaluation of the effects of a
guarantee and (or) credit derivative, for those banks that reflect the credit risk mitigating effects of
guarantees or credit derivatives through LGD;
253.7. data on the components of loss for each defaulted exposure.
254. For retail exposures bank shall collect and store data on:
254.1. data used in the process of assignment of exposures to grades or pools;
254.2. data on the quantified PDs, LGDs and CFs associated with facility grades or pools;
254.3. the identity of obligors and exposures that defaulted;
254.4. for defaulted exposures – data on the grades or pools to which the exposure was
assigned over the year prior to default and the realised outcomes on LGD and CF;
254.5. data on loss rates for qualifying revolving retail exposures.
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9.1.6. Stress tests used in assessment of capital adequacy
255. A bank perform stress testing, when possible events or future changes in economic
conditions are identified that could have unfavourable effects on a bank’s credit exposures and
assessment of the bank’s ability to withstand such changes.
256. A bank shall regularly perform a credit risk stress test to assess the effect of certain
specific conditions on its total capital requirements for credit risk. The test shall be one chosen by
the bank itself. The test to be employed shall be meaningful and reasonably conservative,
considering at least the effect of mild recession scenarios. A bank shall assess migration in its
ratings under the stress test scenarios. Stressed portfolios shall contain the vast majority of a bank's
total exposure. Banks employing the method referred to in par. 142, shall consider as part of their
stress testing framework the impact of a deterioration in the credit quality of protection providers
(in particular of those protection providers which do not satisfy the protection provider‘s
qualification criteria set forth in Section III, Chapter IV).
9.2. Quantification of risk parameters
257. In quantifying the values risk parameters, a bank shall observe the requirements of
Part 9.2 and specific quantification requirements for PD, LGD and CF according to Parts 5–8,
Section II, Chapter IV.
9.2.1. Definition of default
258. In quantifying all risk parameters of a respective exposure class, a bank shall apply
the same definition of default.
259. A default shall be considered to have occurred with regard to a particular obligor
when either or both of the two following events has taken place:
259.1. A bank considers that the obligor is unlikely to pay its credit obligations to the
bank, parent bank or any of its controlled financial undertakings in full, without recourse by the
bank to actions such as realising collateral (if held).
259.2. the obligor is past due more than 90 days on any material credit obligation to the
bank, the parent bank or any of its controlled financial undertakings, excluding the cases when the
exposure amount balance does not exceed LTL 100, or another amount which the bank considers
insignificant.
260. Elements to be taken as indications of unlikeliness to pay shall include:
260.1. A bank puts the credit obligation on non-accrued status.
260.2. A bank makes a value adjustment resulting from a significant perceived decline in
credit quality.
260.3. A bank sells the credit obligation at a material credit-related economic loss
(exceeding 5% of the net value of exposure balance). Only obligor’s credit risk-related losses shall
be taken into account. When a bank sustains losses due to other reasons (e.g., upon change of
interest rates), such loss shall not be taken into account.
260.4. A bank restructures the exposure due to the worsening of the obligor’s financial
condition and incurs financial losses.
260.5. A bank has initiated the procedure of the declaration of the obligor's insolvency in
respect of an obligor's credit obligation to the bank, the parent bank or any of the bank‘s controlled
financial undertakings.
260.6. On motion of the obligor or third party a bankruptcy or another similar procedure
has been initiated against the obligor, where this would avoid or delay repayment of a credit
obligation to the bank, the parent bank or any of the bank‘s controlled financial undertakings .
260.7. A bank may identify other additional elements of the likeliness of default.
261. For overdrafts, days past due commence once an obligor has breached an advised
limit, has been advised a limit smaller than current outstandings, or has drawn credit without
authorisation and the underlying amount is material.
262. Days past due for credit cards commence on the minimum payment due.
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263. A bank that uses external data that is not itself consistent with the definition of
default, shall introduce the appropriate adjustments to achieve broad equivalence with the
definition of default.
264. If the bank considers that a previously defaulted exposure is such that no trigger of
default continues to apply, the bank shall rate the obligor or exposure as they would for a nondefaulted exposure. Should the definition of default subsequently be triggered, another default
would be deemed to have occurred.
265. A bank shall document its additional criteria according to which an obligor is
recognised as defaulting on its obligations and enable the third party, where necessary, to verify
the cases of default on the basis of such criteria.
266. In the case of retail exposures bank may apply the definition of default at an
exposure level and not at an obligor level.
9.2.2. Overall requirements for quantification
267. In quantifying PD, LGD, CF and expected loss (EL), a bank shall incorporate all
relevant data, information and methods. The risk parameters shall be :
267.1. derived using both historical experience and empirical evidence, and not based
purely on expert considerations;
267.2. plausible and intuitive and shall be based on the material drivers of the respective
risk parameters. The less data a bank has the more conservative should be its quantification of
risk parameters.
268. In quantifying own risk parameters, a bank shall:
268.1. be able to provide a breakdown of its loss experience (in terms of default frequency,
actual LGD, CF, or expected loss (EL) by the factors it sees as the drivers of the respective risk
parameters. The bank shall demonstrate that its historical estimates are representative of long run
experience;
268.2. ensure that exposures used for the purpose of calculating risk parameters are
representative of the bank’s current exposures;
268.3. demonstrate that the economic or market conditions that underlie the data are
relevant to current and foreseeable conditions;
268.4. number of exposures in the sample and the data period used for quantification shall
be sufficient to provide the bank with confidence in the accuracy and robustness of its estimates;
268.5. take into account changes in crediting practice or debt recovery process during data
collection period;
268.6. demonstrate that crediting standards and other related characteristics of the bank’s
activities during the data collection period are representative of the existing characteristics of the
bank’s activities;
268.7. add to its risk parameters a margin of conservatism that is related to the expected
range of estimation errors. Where methods and data are less satisfactory and the expected range of
errors is larger, the margin of conservatism shall be larger;
268.8. take into account the effects of technical progress, new data and other information,
as soon as it becomes available to the bank and make respective adjustments to the risk
parameters;
268.9. once a year, or when the respective new information becomes available, revise the
risk parameters and make respective adjustments thereto.
269. When a bank uses different risk estimates for the calculation of risk weights and for
internal purposes, such situation shall be documented and their reasonableness shall be
demonstrated to the competent authority.
270. A bank shall make appropriate adjustments to the data that have been collected prior
to the date of implementation of Directive 2006/48/EC and are inconsistent with the requirements
of Section II, Chapter IV of these Regulations, so that the required consistency is achieved.
271. If a bank uses data that is pooled across banks it shall demonstrate to the Bank of
Lithuania that:
52
271.1. the rating systems and criteria of other banksin the pool are similar with its own;
271.2. the pool is representative of the portfolio for which the pooled data is used;
271.3. pooled data is used consistently in the bank for the calculation of risk parameters;
271.4. it has sufficient in-house understanding of its rating systems, including effective
ability to monitor and audit the process of assignment to grades or pools. The bank shall remain
responsible for the integrity of its rating systems.
9.2.3. Minimum requirements for assessing the effect of guarantees and credit
derivatives
272. The effect of guarantees and credit derivatives on LGD shall be assessed in
observance of provisions of this Chapter for:
272.1. exposures to central governments and central banks, institutions and corporates,
where own estimates of LGD are used;
272.2. retail exposures.
273. Where a bank using a permanent exemption applies the Standardised Approach for
exposures to central governments and central banks or institutions, guarantees issued by these
entities shall be subject to the requirements of Section III, Chapter IV.
274. For retail exposures requirements of this Chapter shall also apply for PD estimates
and for the assignment of exposures to grades or risk pools.
275. Guarantors shall be considered as recognised for the capital requirement calculation
purposes, when:
275.1. a bank has clearly specified criteria for the types of guarantors;
275.2. guarantors satisfy requirements applicable to the process of assignment.
276. The guarantee shall be considered as recognised for the capital requirement
calculation purposes, when it is:
276.1. evidenced in writing;
276.2. non-cancellable on the part of the guarantor;
276.3. in force until the obligation is satisfied in full (to the extent of the amount and tenor
of the guarantee);
276.4. legally enforceable against the guarantor in a jurisdiction where the guarantor has
assets to attach and enforce a judgement.
277. A bank shall have clearly specified criteria for adjusting grades, pools or LGD
estimates, and, in the case of retail and eligible purchased receivables, the process of assignment
exposures to grades or pools, to reflect the impact of guarantees for the calculation of risk
weighted exposure amounts. These criteria shall:
277.1. satisfy requirements applicable to the process of assignment;
277.2. be plausible and intuitive;
277.3. address the guarantor's ability and willingness to perform under the guarantee;
277.4. take into account the likely timing of any payments from the guarantor;
277.5. reflect the degree to which the guarantor's ability to perform under the guarantee is
correlated with the obligor's ability to repay;
277.6. address the extent to which residual risk to the obligor remains.
278. Credit derivatives shall satisfy the requirements established in this Chapter for
guarantees. In relation to a mismatch between the underlying obligation and the reference
obligation of the credit derivative or the obligation used for determining whether a credit event has
occurred, the requirements set out under par. 350 shall apply.
279. The criteria shall address the payout structure of the credit derivative and
conservatively assess the impact this has on the level and timing of recoveries. The bank shall
consider the extent to which other forms of residual risk remain.
9.3. Requirements for purchased receivables
53
280. Risk parameters shall be estimated in consideration of all information available to the
bank with regard to the quality of purchased receivables, as well as all data obtained from the
seller or third parties.
281. The structure of the facility shall ensure that under all foreseeable circumstances the
bank has effective ownership and control of all cash remittances from the receivables.
282. When the obligor makes payments directly to a seller or servicer, the bank shall
verify regularly that payments are forwarded completely and within the contractually agreed terms.
283. A bank shall have procedures to ensure that ownership over the receivables and cash
receipts is protected against bankruptcy stays or legal challenges that could materially delay the
lender's ability to liquidate or assign the receivables or retain control over cash receipts.
284. A bank shall monitor both the quality of the purchased receivables and the financial
condition of the seller and servicer:
284.1. A bank shall assess the correlation among the quality of the purchased receivables
and the financial condition of both the seller and servicer.
284.2. A bank shall have in place internal policies and procedures that provide adequate
safeguards to protect against any contingencies.
284.3. A bank shall assign an internal risk rating for each seller and servicer.
284.4. A bank shall have clear and effective policies and procedures for determining seller
and servicer eligibility.
284.5. A bank or its agent shall conduct periodic reviews of sellers and servicers in order
to verify the accuracy of reports from the seller or servicer, detect fraud or operational weaknesses,
and verify the quality of the seller's credit policies and servicer's collection policies and
procedures. The findings of these reviews shall be documented.
284.6. A bank shall assess the characteristics of the purchased receivables pools, including
over-advances; history of the seller's arrears, bad debts, and bad debt allowances; payment terms,
and potential contra accounts.
284.7. A bank shall have effective policies and procedures for monitoring on an aggregate
basis single-obligor concentrations both within and across purchased receivables pools.
284.8. A bank shall ensure that it receives from the servicer timely and sufficiently
detailed reports of receivables ageings and dilutions to ensure compliance with the bank's
eligibility criteria and advancing policies governing purchased receivables, and provide an
effective means with which to monitor and confirm the seller's terms of sale and dilution.
284.9. A bank shall have systems and procedures for detecting deteriorations in the seller's
financial condition and purchased receivables quality at an early stage, and for addressing
emerging problems proactively. In particular, the bank shall have clear and effective policies,
procedures, and information systems to monitor covenant violations, and clear and effective
policies and procedures for initiating legal actions and dealing with problem purchased
receivables.
285. A bank shall have clear and effective policies governing purchased receivables and
procedures governing the control thereof. In particular, written internal policies shall specify all
material elements of the receivables purchase programme, including:
285.1.
the advancing rates;
285.2.
eligible collateral;
285.3.
necessary documentation;
285.4.
concentration limits;
285.5.
the way cash receipts are to be handled.
286. The receivables purchase programme shall be developed with due regard to the seller
and servicer's financial condition, risk concentrations, and trends in the quality of the purchased
receivables and the seller's customer base, and internal systems shall ensure that funds are
advanced only against specified supporting collateral and documentation.
54
287. A bank shall have an effective internal process for assessing compliance of the
receivables purchase programme with all internal policies and procedures. The process shall
include:
287.1. regular audits of all critical phases of the bank‘s receivables purchase programme;
287.2. evaluations of back office operations, with particular focus on qualifications,
experience, staffing levels;
287.3. verification of the separation of duties between:
287.3.1.
the assessment of the seller and servicer and the assessment of the obligor;
287.3.2.
between the assessment of the seller and servicer and the field audit of the
seller and servicer;
287.4. supporting automation systems.
9.4. Requirements for the application of the internal models approach for equity
exposures
288. With a view to obtaining the permission of the Bank of Lithuania to use the internal
models approach for the capital requirement calculation purposes, a bank shall satisfy the
requirements of this Chapter.
289. For the purpose of calculating capital requirements, a bank shall meet the following
standards:
289.1. The estimate of potential loss shall be robust to adverse market movements relevant
to the long-term risk profile of the bank's specific holdings. The data used to represent return
distributions shall reflect the longest sample period for which data is available and meaningful in
representing the risk profile of the bank's specific equity exposures.
289.2. The data used shall be sufficient to provide conservative, statistically reliable and
robust loss estimates that are not based purely on subjective or judgmental considerations. The
shock employed provides a conservative estimate of potential losses over a relevant long-term
market or business cycle. The bank shall combine empirical analysis of available data with
adjustments based on a variety of factors in order to attain model outputs that achieve appropriate
realism and conservatism.
289.3. In constructing Value at Risk (VaR) models estimating potential quarterly losses,
bank may use quarterly data or convert shorter horizon period data to a quarterly equivalent using
an analytically appropriate method supported by empirical evidence and through a well-developed
and documented thought process and analysis. Such an approach shall be applied conservatively
and consistently over time. Where only limited relevant data is available the bank shall add
appropriate margins of conservatism.
289.4. The models used shall be able to capture adequately all of the material risks
embodied in equity returns including both the general market risk and specific risk exposure of the
bank's equity portfolio. The internal models shall adequately explain historical price variation,
capture both the magnitude and changes in the composition of potential concentrations, and be
robust to adverse market environments. The population of risk exposures represented in the data
used for estimation shall be closely matched to or at least comparable with those of the bank's
equity exposures.
289.5. The internal model shall be appropriate for the risk profile and complexity of a
bank's equity portfolio. Where a bank has material holdings with values that are highly non-linear
in nature the internal models shall be designed to capture appropriately the risks associated with
such instruments.
289.6. The mapping of individual positions to proxies, market indices, and risk factors
shall be plausible, intuitive, and conceptually sound.
289.7. A bank shall demonstrate through empirical analyses the appropriateness of risk
factors, including their ability to cover both general and specific risk.
289.8. The estimates of the return volatility of equity exposures shall incorporate relevant
and available data, information, and methods. Independently reviewed internal data or data from
external sources (including pooled data) shall be used).
55
289.9. A bank shall have a rigorous and comprehensive stress-testing programme in place.
290. With regard to the development and use of internal models for capital requirement
purposes, a bank shall establish policies, procedures, and controls to ensure the integrity of the
model and modelling process. These policies, procedures, and controls shall include the following:
290.1. full integration of the internal model into the overall management information
systems of the bank and in the management of the banking book equity portfolio. Internal models
shall be fully integrated into the bank's risk management infrastructure if they are particularly
used:
290.1.1.
in measuring and assessing equity portfolio performance (including the riskadjusted performance);
290.1.2.
allocating internal capital to equity exposures;
290.1.3.
evaluating overall capital adequacy and the investment management
process;
290.2. established management systems, procedures, and control functions for ensuring the
periodic and independent review of all elements of the internal modelling process. These reviews
shall assess the accuracy, completeness, and appropriateness of model inputs and results and focus
on both finding and limiting potential errors associated with known weaknesses and identifying
unknown model weaknesses. Such reviews maybe conducted by an internal independent unit, or
by an independent external third party;
290.3. adequate systems and procedures for monitoring investment limits and the risk
exposures of equity exposures;
290.4. the units responsible for the design and application of the model shall be
functionally independent from the units responsible for managing individual investments;
290.5. bank staff shall be adequately qualified for the application of the Value-at-risk
(VaR) model.
9.5. Requirements for the application of the slotting criteria approach for specialised
lending exposures
9.5.1. Assignment of specialised lending exposures to exposure types
291. A bank shall assign the specialised lending exposures to one of the following
exposure types:
291.1. project finance exposures;
291.2. object finance exposures;
291.3. commodities finance exposures;
291.4. income producing real estate (commercial or residential) finance exposures.
292. Project finance exposures – exposures in which the primary source of repayment
comprises cash flows from the funded project:
292.1. In such transactions exposure shall be exclusively or almost exclusively paid out of
the money generated for the output produced by such entity, for example, the electricity sold by a
power plant.
292.2. This type of financing is usually for large, complex and expensive projects (such as
power plants, chemical processing plants, transportation infrastructure, environment and
telecoms).
292.3. The borrower is usually a special purpose entity, that is permitted to perform no
function other than developing, owning and operating the facility.
292.4. Such exposure where the repayment depends primarily on a well established,
diversified, creditworthy and contractually obligated buyer shall be considered a collateralised
buyer’s exposure, rather than a special lending exposure.
293. Object finance exposures refer to a method of funding the acquisition of tangible
assets (ships, aircraft, etc.), where the repayment is dependent on the cash flows generated by the
specific assets that have been pledged to the lending bank for the acquisition of which such
financing had been provided:
56
293.1. A primary source of these cash flows might be rental (lease) contracts with one or
several third parties.
293.2. Such exposure where the borrower's financial condition and debt-servicing capacity
enables it to repay the exposure without undue reliance on the specifically pledged assets shall not
be considered a specialised lending exposure.
294. Commodities finance exposures refer to structured short-term lending to finance the
acquisition of exchange-traded commodities (such as crude oil, metals or crops), reserves or
receivables, the repayment whereof is dependent upon the proceeds of the sale of these
commodities and the borrower has no other independent possibilities to repay the exposure:
294.1. Such funding is designated to compensate for weak credit quality of the borrower.
In assigning such exposure to appropriate grade of internal rating scale, a bank shall take into
account its self-liquidation nature and the borrower’s skill in structuring the transaction rather
than the borrower’s credit quality as such.
294.2. Such lending should be distinguished from financing of other more diversified
reserves or receivables of corporate borrowers. A bank shall be able to rate the credit quality of
such corporate borrowers based on their broader ongoing operations.
295. Income-producing real estate financing refers to real estate financing exposures
where the prospects of repayment depend primarily on the cash flows generated by real estate
pledged to the lending bank for the acquisition of which such financing had been provided:
295.1. The primary source of these cash flows shall be rental (lease) payments or the sale
of such asset.
295.2. The borrower may be a special–purpose entity, an operating company focused on
real estate construction or similar area, or an operating company with sources of revenue other
than real estate.
295.3. The distinguishing characteristic of these exposures shall be the strong positive
correlation between the prospects of repayment and the recovered amount in the event of default.
9.5.2. Assignment of risk weights for specialised lending exposures
296. A bank shall be exempt from requirement to have the obligors rating scale to be used
for quantification of the risk of the obligor's default. Each specialised lending exposure shall be
assigned to the respective grade of the internal rating scale. The internal rating scale of specialised
lending exposures should comprise at least 4 grades for non-defaulting borrowers and minimum 1
grade for defaulting borrowers.
297. Each grade of internal rating scale of specialised lending exposures shall be attributed
to one of the following risk categories:
297.1.
strong rating of specialised lending exposures;
297.2.
good rating of specialised lending exposures;
297.3.
satisfactory rating of specialised lending exposures;
297.4.
weak rating of specialised lending exposures;
297.5.
default.
298. The grades of the internal rating scale for exposure types referred to in items 297.1297.4 shall be assigned in observance of the assignment criteria specified per each exposure type
in Tables 1-6, Annex 6 to the International Convergence of Capital Measurement and Capital
Standards: A Revised Framework issued by Basel Committee on Banking Supervision. Internal
grades to defaulting borrowers shall be assigned to the exposure category indicated in item 297.5.
299. Risk weights for specialised lending exposures shall be assigned according to Table
12:
Table 12
Remaining
Category 1
Category 2
Category 3
Category 4
Category 5
maturity
(strong)
(good)
(satisfactory)
(weak)
(default)
Less than
2,5 years
50%
70%
115%
250%
0%
57
Equal
or
more than
70%
90%
115%
250%
0%
2,5 years
300. A bank shall approve and document the methodologies and criteria applied:
300.1. for assigning the specialised lending exposures to the types specified in paragraph
291;
300.2. for assigning the specialised lending exposures to the internal ratings scale’s grades;
300.3. for assigning the internal ratings scale’s grades to risk categories referred to in
paragraph297.
301. A bank shall document the cases of assignment of the specialised lending exposures
to the types specified in par. 291 and to the internal ratings scale’s grades as well as for assigning
the internal ratings scale’s grades to risk categories, the rationales for such assignments, the
process of performed reviews of the specialised lending exposures and their results.
302. On a regular basis (at least once annually) a bank shall revise the specialised lending
exposures, with a view to determining whether all IRB Approach related requirements provided
for in Section II, Chapter IV are met. A bank shall revise at least:
302.1.
the applicable assignment methodologies;
302.2.
the assignments to the types referred to in paragraph 291;
302.3.
the assignments to all grades of the internal rating scale;
302.4.
the assignments of the internal rating scale’s grades to risk categories;
302.5.
validation.
9.6. Corporate governance and oversight
303. The bank board shall approve all material aspects of the process of assignment of
obligors and exposures to grades or risk pools and of risk parameters quantification process.
304. The bank board shall possess a general understanding of the bank's rating systems
and detailed comprehension of its associated management reports.
305. Internal ratings-based analysis of the bank's credit risk profile shall be an essential
part of the system of reporting to the bank board. Reporting frequencies shall depend on the
significance and type of information and the level of the recipient. Reporting shall include at least:
305.1. distribution of obligors and exposures by grades and pools;
305.2. migratiojn across grades;
305.3. estimation of the relevant risk parameters per grade;
305.4. comparison of quantified risk parameters and respective actual amounts;
305.5. stress-test results.
9.6.1. Credit risk control
306. The bank‘s credit risk control unit shall be independent from the personnel and
management functions responsible for originating or renewing exposures:
306.1. The personnel of the credit risk control unit may not engage in the activities of
functions responsible for originating or renewing exposures.
306.2. The bank‘s credit risk control unit shall report directly to bank‘s board.
306.3. The principle of separation of the credit risk control function and functions
responsible for originating or renewing exposures must be observed up to the chief executive of
the bank board.
307. The credit risk control unit shall:
307.1. notify to the bank board material changes or exceptions from established policies
that will materially impact the operations of the bank's rating systems;
307.2. regularly apprise the bank board about performance of the rating process, areas
needing improvement, and the status of efforts to improve previously identified deficiencies;
307.3. furnish the bank board with regular reports on internal ratings-based analysis of the
bank's credit risk profile.
308. The bank‘s credit risk control unit shall have a good understanding of the rating
systems designs and operations and shall ensure, on an ongoing basis that the rating systems are
58
operating properly, also the adequacy of the credit risk control and effective use of the IRB
Approach. The bank‘s credit risk control unit shall perform regular internal-ratings based credit
risk analysis, regularly produce and analyse reports of such analysis. The unit shall be responsible
for the design or selection, implementation, oversight and performance of the rating systems. The
areas of responsibility for the credit risk control unit (-s) shall include:
308.1. testing and monitoring grades and pools;
308.2. implementing procedures to verify that grade and pool definitions are consistently
applied across departments and geographic areas;
308.3. reviewing the rating criteria to evaluate if they remain predictive of risk;
308.4. guaranteeing that validation of the structure of the bank’s rating systems,
assignment process, quantification of risk parameters as well as other processes is carried out in
the manner established by the Bank of Lithuania;
308.5. reviewing any changes to the process of assignment of obligors and exposures to
grades or risk pools and of quantification of risk parameters, including the reasons for the changes;
308.6. documenting any changes to the process of assignment and of quantification of risk
parameters, assignment criteria and risk parameters of individual grades’ and storing such
documents;
308.7. production and analysis of summary reports from the bank's rating systems;
308.8. active participation in the design (selection), implementation and validation of
models used in the processes of assignment and quantification of risk parameters;
308.9. regular supervision and changes of models used in the processes of assignment and
quantification of risk parameters.
309. Banks using pooled data of the financial group or with other banks, may outsource
the following services in observance of requirements of the Regulations for the Outsourcing
approved by Resolution No 99 of 10 June 2004 by the Board of the Bank of Lithuania (“Valstybes
žinios” (Official Gazette), 2004, No 98–3688):
309.1. production of information relevant to testing and monitoring grades and pools;
309.2. production and analysis of summary reports from the bank's rating systems;
309.3. production of information relevant to review of the assignment criteria to evaluate
if they remain predictive of risk;
309.4. documentation of changes to the assignment process, assignment criteria or
individual parameters of grades or pools;
309.5. production of information relevant to ongoing review and alterations to models
used in the process of assignment to grades or pools.
310. Banks, which use pooled data of several banks, when outsourcing the services
supplementary to their activities, shall ensure that the Bank of Lithuania have access to all
relevant information from the third party that is necessary for examining compliance with the
requirements of these Regulations.
311. Internal audit or another comparable independent auditor shall review at least
annually the bank‘s rating systems and their application, including the operations of the credit
function and the quantification of PD, LGD, CF and expected loss (EL). Internal audit or another
comparable independent auditor shall assess the adherence to the requirements of these
Regulations.
PART III
EFFECTS OF COLLATERAL ON CAPITAL REQUIREMENT FOR CREDIR RISK
312. Requirements of this Section shall apply to banks using the Standardised
Approach, or using the IRB Approach, but not using their own estimates of LGD and
conversion factors (CF) for the purpose of calculating the capital adequacy. Banks applying the
Standardised Approach according to Section I, Chapter IV or the IRB Approach according to
Section II, Chapter IV, but not using their own estimates of LGD and CF may recognise credit
risk mitigation under this Section calculating risk-weighted exposure amounts for the purposes
59
specified in par. 21 or, where appropriate, calculating the expected losses for the purposes
indicated in items 10.2 and 18.4. In the context of this Section a lending bank means a bank
holding an exposure emerging from loans or other lending transactions.
313. When the effects of collaterals have already been included for the purpose of
calculating the risk-weighted exposure amounts according to the requirements of Sections I or
II of Chapter IV, additional estimations pursuant to Section III, Chapter IV shall not be
required:
313.1. The calculation of risk-weighted exposure amounts and, where appropriate,
expected loss amount may be adjusted in accordance with Parts 3-7 of this Section, if:
313.1.1. there is no exposure subject to credit risk mitigation the risk-weighted exposure
amount (or expected loss amount) of which exceeds the risk-weighted exposure amount (or
expected loss amount) of identical exposure not subject to credit risk mitigation;
313.1.2. the effects of collaterals have already been taken into account for the purposes of
Sections I or II of Chapter IV.
313.2. A lending bank applies credit protection and takes respective actions, adheres to the
procedures and strategy to ensure that credit protection arrangements in all respective
jurisdictions are legally valid and enforceable.
313.3. A lending bank takes all respective actions to ensure effectiveness of credit
protection and management of related risk.
313.4. In order to recognise assets used for funded credit protection purposes, such assets
must be of sufficient liquidity and relatively stable in value to ensure adequate credit protection
in the long-term perspective in observance of the method used to calculate risk-weighted
exposure amounts and permissible degree of eligibility. Eligible assets are specified in Part 1,
Section III.
313.5. In case of funded credit protection a lending bank (or custodian of assets) in the
event of the borrower’s default, insolvency or bankruptcy or in any other credit-related case
specified in transaction documents, shall have the right to liquidate or take over in due time the
assets used as collateral. Degree of correlation between the value of assets used as collateral and
credit quality of the borrower may not be too high.
313.6. In order to recognise a counterparty issuing guarantee in case of unfunded credit
protection, such counterparty must be sufficiently reliable and collateral arrangement must be
legally effective and enforceable in respective jurisdictions to ensure adequate credit protection
achieved in observance of the method used to calculate risk-weighted exposure amounts and
permissible degree of eligibility.
313.7. Eligible protection providers and types of collateral arrangements are specified in
Part 1, Section III.
1. Recognition of collateral
314. Collateral arrangements referred to in this Section shall be recognised as
eligible only when the requirements set forth in Part 2, Section III, Chapter IV are met.
315. The following collateral contracts may be recognised as eligible:
315.1. the on-balance sheet netting of mutual claims,
315.2. for banks the Financial Collateral Comprehensive Method according to Part 3,
Section III, may recognise bilateral netting contracts covering repurchase transactions, securities or
commodities lending or borrowing transactions; to be recognised the collateral taken and securities
or commodities borrowed within such agreements must comply with the eligibility requirements
for collateral (this provision shall apply to the extent it does not contradict other provisions of this
document).
316. When credit risk mitigation method is based on the bank’s right to sell or retain
assets, recognition shall depend upon whether risk-weighted exposure amounts and, where
applicable, expected loss amounts are calculated according to the provisions of Section I or
Section II of Chapter IV. In addition, the recognition shall depend upon application of a
financial collateral simple method or financial collateral comprehensive method as specified in
60
Section III, Chapter IV. In case of repurchase transactions and securities or commodities
lending or borrowing transactions, the recognition shall also depend upon whether a
transaction is included in a banking or trading book. The following financial collaterals may be
recognised as eligible:
316.1. cash on deposit with, or cash assimilated instruments held by, the lending bank
(i.e. deposit certificates or other similar instruments issued by the lending bank);
316.2. debt securities issued by central governments or central banks, which securities
have a credit assessment (rating) by an ECAI corresponding to 1–4 CQS;
316.3. debt securities issued by institutions, which securities have a credit assessment
(rating) by an ECAI corresponding to 1–3 CQS;
316.4. debt securities issued by other entities, which securities have a credit assessment
(rating) by an ECAI corresponding to 1–3 CQS;
316.5. debt securities with a short-term credit assessment (rating) by an ECAI
corresponding to 1–3 CQS;
316.6. equities or convertible bonds that are included in main indexes of recognised
exchanges;
316.7. gold;
316.8. debt securities issued by institutions which securities do not have a credit
assessment (rating) by an eligible ECAI may be recognised as eligible collateral if they fulfil the
following criteria:
316.8.1. they are listed on a recognised exchange;
316.8.2. they qualify as senior debt;
316.8.3. all other rated issues by the issuing institution of the same seniority have a credit
assessment (rating) by an ECAI corresponding to 1–3 CQS;
316.8.4. the lending bank has no information to suggest that the issue would justify a credit
assessment below that indicated in subitem 316.8.3;
316.8.5. the bank can demonstrate that the market liquidity of the instrument is sufficient for
these purposes.
316.9. Units in collective investment undertakings, if:
316.9.1. they have a daily public price quote;
316.9.2. the collective investment undertaking is limited to investing in instruments
specified under items 316.1-316.8. The use (or potential use) by a collective investment
undertaking of derivative instruments to hedge permitted investments shall not prevent units in that
undertaking from being eligible.
317. For the purpose of the Financial Collateral Comprehensive Method, equities or
convertible bonds not included in a main index but traded on a recognised exchange may be
recognised as eligible collateral.
318. debt securities issued by central governments or central banks referred to in item
316.2 shall also include:
318.1. debt securities issued by multilateral development banks to which a 0% risk weight
is assigned under Section I, Chapter IV;
318.2. debt securities issued by international organisations which are assigned a 0% risk
weight under Section I, Chapter IV;
318.3. debt securities issued by regional governments or local authorities referred to in par
59
318.4. debt securities issued by public sector entities referred to in paragraph 61 .
319. debt securities issued by institutions referred to in item 316.3 shall also include:
319.1. debt securities issued by regional governments or local authorities other than those
referred to in par. 59;
319.2. debt securities issued by other (excluding those specified in item 318.1) multilateral
development banks other than those.
61
If the collective investment undertaking is not limited to investing in instruments that are
eligible for recognition under points 316.1-316.8, units may be recognised with the value of the
eligible assets as collateral under the assumption that the CIU has invested to the maximum
extent allowed under its mandate in non-eligible assets. In cases where non-eligible assets can
have a negative value due to liabilities or contingent liabilities resulting from ownership, the
credit institution shall calculate the total value of the non-eligible assets and shall reduce the
value of the eligible assets by that of the non-eligible assets in case the latter is negative in total.
320.Where a security has two credit assessments (ratings) by eligible ECAIs, the less
favourable assessment shall be deemed to apply, In cases where a security has three
assessments (ratings) – the two most favourable assessments shall be deemed to apply,
and if the two most favourable credit assessments are different, the less favourable of the
two shall be deemed to apply.
321. Deposits with other banks (other than in the bank holding an exposure) , pledged life
assurance policies, and instruments of institutions repurchased on request may be
recognised as eligible collateral.
322. For the purpose of the Financial Collateral Comprehensive Method, equities or
convertible bonds not included in a main index but traded on a recognised exchange
may be recognised as eligible collateral, as well as CIUs, provided that conditions
requiring that investment of these undertakings is limited to investing in instruments that
are eligible for recognition under items 316.1-316.8, and into equities or convertible
bonds not included in a main index but traded on a recognised exchange, and CIUs units
have a daily public price quote. The use (or potential use) by a collective investment
undertaking of derivative instruments to hedge permitted investments shall not prevent
units in that undertaking from being eligible.
If the collective investment undertaking is not limited to investing in instruments that are
eligible for recognition under point 7 and 8 and the items mentioned in point (a) of this point,
units may be recognised with the value of the eligible assets as collateral under the assumption
that the CIU has invested to the maximum extent allowed under its mandate in non-eligible
assets. In cases where non-eligible assets can have a negative value due to liabilities or
contingent liabilities resulting from ownership, the credit institution shall calculate the total
value of the non-eligible assets and shall reduce the value of the eligible assets by that of the
non-eligible assets in case the latter is negative in total.
323. For the purpose of applying the IRB Approach, additionally eligible for the
recognition may be real estate collateral, receivables (with an original maturity of less than one
year; eligible receivables do not include those associated with securitisations, sub-participations or
credit derivatives or amounts owed by affiliated parties), and leasing. For the purpose of these
Regulations, leases will be treated the same as loans collateralised by the type of property leased,
as described in this Section.
324. Banks implementing the IRB approach, may also recognise as eligible collateral
shares in Finnish residential housing companies operating in accordance with the Finnish Housing
Company Act of 1991 or subsequent equivalent legislation in respect of residential property which
is or will be occupied or let by the owner, as residential real estate collateral, provided that
conditions of Part 2, Section III are met.
325. The following parties may be recognised as eligible providers of guarantees and credit
derivatives:
325.1. central governments and central banks;
325.2. regional governments or local authorities;
325.3. public sector entities, claims on which are treated as claims on central governments under
Section I, Chapter IV;
325.4. multilateral development banks;
325.5. international organisations exposures to which a 0% risk weight is assigned;
325.6. institutions;
62
325.7. other corporate entities, including parent, controlled undertakings or other institutions
connected with a bank have a credit assessment (rating) by a recognised ECAI (where IRB
Approach is used – internal rating) corresponding to 1, 2 CQS.
326. For the purpose of applying the IRB Approach, a guarantee shall be recognised as eligible
only when a guarantor is internally rated in observance of Section II, Chapter IV.
327. Institutions, insurance and reinsurance undertakings and export credit agencies which fulfil
the following conditions may be recognised as eligible providers of credit protection which
qualify for the treatment set out in par. 142, Section II, Chapter IV, if:
327.1. the protection provider has sufficient expertise in providing unfunded credit protection;
327.2. the protection provider is regulated in a manner equivalent to the rules laid down in this
Directive, or had, at the time the credit protection was provided, a credit assessment (rating) by a
recognised ECAI) corresponding to 3 CQS;
327.3. the protection provider had, at the time the credit protection was provided, or for any
period of time thereafter, an internal rating with a PD equivalent to or lower than 2 CQS;
327.4. the provider has an internal rating with a PD not lower than that associated with 3 CQS;
328. Credit protection provided by export credit agencies shall not benefit from any explicit
central government counter-guarantee.
329. The following types of credit derivatives, and instruments that maybe composed of such
credit derivatives or that are economically effectively similar, maybe recognised as eligible:
329.1. credit default swaps;
329.2. total return swaps;
329.3. credit linked notes to the extent of their cash funding.
330. Where a bank buys credit protection through a total return swap and records the net
payments received on the swap as net income, but does not record offsetting deterioration in the
value of the asset that is protected (either through reductions in fair value or by an addition to
reserves), the credit protection shall not be recognised as eligible.
331. When a bank conducts an internal hedge using a credit derivative — i.e. hedges the
credit risk of an exposure in the non-trading book with a credit derivative booked in the trading
book — in order for the protection to be recognised as eligible for the purposes of this Annex the
credit risk transferred to the trading book shall be transferred out to a third party or parties. In such
circumstances, subject to the compliance of such transfer with the requirements for the recognition
of credit risk mitigation, the rules for the calculation of risk-weighted exposure amounts and
expected loss amounts where unfunded credit protection is acquired shall be applied.
2. Minimum requirements for eligibility of collateral
332. The bank must have adequate risk management processes to control those risks to
which the bank may be exposed as a result of carrying out credit risk mitigation practices.
333. Notwithstanding the presence of credit risk mitigation, the bank must undertake full
credit risk assessment of the underlying exposure and be in a position to demonstrate the fulfilment
of this requirement. In the case of repurchase transactions and/or securities or commodities lending
or borrowing transactions the underlying exposure shall, for the purposes of this point only, be
deemed to be the net amount of the exposure.
334. For on-balance sheet netting agreements (other than master netting agreements
covering repurchase transactions, securities or commodities lending or borrowing transactions
and/or other capital market-driven transactions) to be recognised as eligible, the following
conditions shall be satisfied:
334.1. the netting of exposures related with granted loans and deposits witn the lending bank;
334.2. they must be legally effective and enforceable in all relevant jurisdictions, including in the
event of the insolvency or bankruptcy of a counterparty;
334.3. the bank must be able to determine at any time those assets and liabilities that are subject to
the on-balance sheet netting agreement;
334.4. the bank must monitor and control the risks associated with the termination of the credit
protection;
63
334.5. the bank must monitor and control the relevant exposures on a net basis.
335. For master netting agreements covering repurchase transactions and/or securities or
commodities lending or borrowing transactions and/or other capital market driven transactions to
be recognised, they:
335.1. shall be legally effective and enforceable in all relevant jurisdictions, including in the event
of the bankruptcy or insolvency of the counterparty;
335.2. give the non-defaulting party the right to terminate and close-out in a timely manner all
transactions under the agreement upon the event of default, including in the event of the
bankruptcy or insolvency of the counterparty;
335.3. provide for the netting of gains and losses on transactions closed out under a master
agreement so that a single net amount is owed by one party to the other.
335.4. satisfy the requirements of par. 336.
336. For the financial collateral specified in par. 316 to be recognised as eligible under all
Approaches and Methods the following requirements shall be met:
336.1. The credit quality of the obligor and the value of the collateral must not have a
material positive correlation.
For example, securities issued by the obligor, or any related group entity, shall not be
eligible as loan collateral. This notwithstanding, the obligor's own issues of covered bonds may be
recognised as eligible when they are posted as collateral for repurchase transactionsBanks shall
fulfil any contractual and statutory requirements in respect of, and take all steps necessary to
ensure, the enforceability of the collateral arrangements under the law applicable to their interest in
the collateral. Banks shall have conducted sufficient legal review confirming the enforceability of
the collateral arrangements in all relevant jurisdictions. They shall re-conduct such review as
necessary to ensure continuing enforceability.
336.2. The collateral arrangements shall be properly documented, with a clear and robust
procedure for the timely liquidation of collateral.
336.3. Banks shall employ robust procedures to control risks arising from the use of collateral
(including risks of reduced credit protection, valuation risks, risks associated with the termination
of the credit protection, concentration and other risks) and analyse the interaction with their overall
risk profile.
336.4. The bank shall have documented policies and practices concerning the types and amounts
of collateral accepted.
336.5. The bank shall calculate the market value of the collateral, and revalue it accordingly, with
a minimum frequency of once every six months and whenever there is a reason to believe that
there has occurred a significant decrease in its market value.
336.6. Where the collateral is held by a third party, the bank must take reasonable steps to ensure
that the third party segregates the collateral from its own assets.
337. For the recognition of real estate collateral the following conditions shall be met:
337.1. The mortgage or charge shall be enforceable in all jurisdictions which are relevant at the
time of the conclusion of the credit agreement, and the mortgage or charge shall be properly filed
on a timely basis. The arrangements shall reflect a perfected lien (i.e. all legal requirements for
establishing the pledge shall be fulfilled). The protection agreement and the legal process
underpinning it shall enable the bank to realise the value of the protection within a reasonable
timeframe.
337.2. The value of real estate does not significantly depend upon the risk of the borrower, and the
borrower’s risk does not significantly depend upon real estate or project performance, i.e. it
depends upon the borrower’s ability to repay the loan from other sources.
337.3. The value of the property shall be monitored on a frequent basis and at a minimum once
every year for commercial real estate and once every three years for residential real estate. More
frequent monitoring shall be carried out where the market is subject to significant changes in
conditions. Statistical methods maybe used to monitor the value of the property and to identify
property that needs revaluation. The property valuation shall be reviewed by an independent valuer
64
when information indicates that the value of the property may have declined materially relative to
general market prices. For loans exceeding LTL 10 358 400, or 5 % of the bank capital the
property valuation shall be reviewed by an independent valuer at least every three years.
337.4. The types of residential and commercial real estate eligible by the bank and its lending
policies in this regard shall be clearly documented.
337.5. The bank shall have in place the procedures which shall be implemented to monitor
adequate insurance against damage of property taken as protection.
338. The requirement set forth in item 337.2 with regard to significant dependence of the
borrower‘s risk on securing property or results of roject activities may be disregarded when
property is located in another EU Member State (outside Lithuania) the supervisory authorities
whereof do not apply such requirement.
339. For financial collateral to be eligible under the Financial Collateral Simple Method, in
addition to the requirements set forth in par. 336, the requirement that the residual maturity of the
protection must be at least as long as the residual maturity of the exposure (par. 437) shall be met.
340. For the recognition of receivables as collateral the following conditions shall be met:
340.1. The legal mechanism by which the collateral is provided shall be robust and effective and
ensure that the lender has clear rights over the proceeds.
340.2. The bank must take all steps necessary to ensure its rights to receivables. The bank shall
have a first priority claim over the collateral, however receivables may be recognised as eligible
collateral also in cases when by virtue of applicable laws the bank is not granted such priority
right.
340.3. The banks shall have conducted sufficient legal review confirming the enforceability of the
collateral arrangements in all relevant jurisdictions.
340.4. The collateral arrangements must be properly documented, with a clear and robust
procedure for the timely collection of collateral. The bank's procedures shall ensure that any legal
conditions required for declaring the default of the borrower and timely collection of collateral are
observed. In the event of the borrower's financial distress or default, the bank shall have legal
authority to sell or assign the receivables to other parties without consent of the receivables
obligors.
340.5. The bank must have a sound process for determining the credit risk associated with the
receivables. Such a process shall include, among other things, analyses of the borrower's business
and industry and the types of customers with whom the borrower does business. Where the bank
relies on the borrower to ascertain the credit risk of the customers, the bank must review the
borrower's credit practices to ascertain their soundness and credibility.
340.6. The margin between the amount of the exposure and the value of the receivables must
reflect all appropriate factors, including the cost of collection, concentration within the receivables
pool pledged by an individual borrower, and potential concentration risk within the bank's total
exposures. The bank must maintain a continuous monitoring process appropriate to the
receivables. Additionally, compliance with loan covenants, environmental restrictions, and other
legal requirements shall be reviewed on a regular basis.
340.7. The receivables pledged by a borrower shall be diversified and not be unduly correlated
with the borrower. Where there is material positive correlation, the attendant risks shall be taken
into account in the setting of margins for the collateral pool as a whole.
340.8. Receivables from affiliates of the borrower (including controlled undertakings and
employees) shall not be recognised as risk mitigants.
340.9. The bank shall have a documented process for collecting receivable payments in distressed
situations. The requisite facilities for collection shall be in place, even when the bank normally
looks to the borrower for collections.
341. For the exposures arising from leasing transactions to be treated as collateralised by the type
of property leased, the following conditions shall be met:
341.1. Conditions set out in par. 337 for the recognition as collateral of the type of property leased.
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341.2. There shall be robust risk management on the part of the lessor (including appropriate
monitoring of the value of the security) with respect to the use to which the leased asset is put, its
age and the planned duration of its use.
341.3. There shall be in place a robust legal framework establishing the lessor's legal ownership of
the asset and its ability to exercise its rights as owner in a timely fashion.
341.4. Where this has not already been ascertained in calculating the LGD level, the difference
between the value of the unamortised amount and the market value of the security must not be so
large as to overstate the credit risk mitigation attributed to the leased assets.
342. To be eligible as collateral , deposits with a third party institution (other than the
lending bank) shall meet the following conditions:
342.1. The borrower’s claim against another credit institution is openly pledged or
assigned to the lending bank and such pledge or assignment is legally effective in
observance of all legal provisions regulating this process.
342.2. Another credit institution is notified of the pledge or assignment.
342.3. As a result of the notification, another credit institution is able to make payments
solely to the lending bank or to other parties only with the lending bank’s consent.
342.4. The pledge or assignment is unconditional and irrevocable.
343. For life insurance policies pledged to the lending credit institution to be recognised,
all the following conditions shall be met:
343.1. the life insurance policy is openly pledged or assigned to the lending credit
institution;
343.2. the company providing the life insurance is notified of the pledge or assignment
and as a result may not pay amounts payable under the contract without the consent of the
lending credit institution;
343.3. the lending credit institution has the right to cancel the policy and receive the
surrender value in the event of the default of the borrower;
343.4. the lending credit institution is informed of any non-payments under the policy by
the policy-holder;
343.5. the credit protection is provided for the maturity of the loan. Where this is not
possible because the insurance relationship ends before the loan relationship expires, the credit
institution must ensure that the amount deriving from the insurance contract serves the credit
institution as security until the end of the duration of the credit agreement;
343.6. the pledge or assignment is legally effective and enforceable in all jurisdictions
which are relevant at the time of the conclusion of the credit agreement;
343.7. the surrender value is declared by the company providing the life insurance and is
non-reducible;
343.8. the surrender value is to be paid in a timely manner upon request;
343.9. the surrender value cannot be requested without the consent of the credit
institution;
343.10. the company providing the life insurance is subject to Directive 2002/83/EC and
Directive 2001/17/EC of the European Parliament and of the Council or is subject to
supervision by a competent authority of a third country which applies supervisory and
regulatory arrangements at least equivalent to those applied in the Community.
344. Requirements to be met by guarantees and credit derivatives to become eligible as
credit protection facilities shall be as follows:
344.1. The credit protection shall be direct.
344.2. The extent of the credit protection shall be clearly defined and incontrovertible.
344.3. The guarantee must be legally effective and enforceable in all jurisdictions
which are relevant at the time of the conclusion of the credit agreement.
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344.4. The credit protection contract shall not contain any clause, the fulfilment of
which is outside the direct control of the lender, that:
344.4.1. would allow the protection provider unilaterally to cancel the protection;
344.4.2. would increase the effective cost of protection as a result of deteriorating
credit quality of the protected exposure;
344.4.3. could prevent the protection provider from being obliged to pay out in a timely
manner in the event that the original obligor fails to make any payments due; or
344.4.4.could allow the maturity of the credit protection to be reduced by the protection
provider.
344.5. The bank shall satisfy the Bank of Lithuania that it has systems in place to
manage potential concentration of risk arising from the bank's use of guarantees and credit
derivatives. The bank must be able to demonstrate how its strategy in respect of its use of credit
derivatives and guarantees interacts with its management of its overall risk profile.
345. Where an exposure is protected by a guarantee which is counter-guaranteed by a
central government or central bank, a regional government or local authority, a public sector
entity, claims on which are treated as claims on the central government in whose jurisdiction
they are established, a multilateral development bank or an international organisation, to which
a 0 % risk weight is assigned, the exposure may be treated as protected by a guarantee provided
by the entity in question, provided the following conditions are satisfied:
345.1. the counter-guarantee shall cover all credit risk elements of the claim;
345.2. both the original guarantee and the counter-guarantee meet the requirements for
guarantees set out in pars. 344 and 347 except that the counter-guarantee need not be direct.
345.3. The bank has proved the Bank of Lithuania, that the cover is robust and that nothing
in the historical evidence suggests that the coverage of the counter-guarantee is less than
effectively equivalent to that of a direct guarantee by the entity in question.
346. The treatment set out in par. 345 also applies to an exposure which is not counterguaranteed by an entity listed in that point if that exposure's counter-guarantee is in turn directly
guaranteed by one of the listed entities and the conditions listed in that point are satisfied.
347. Additional requirements for guarantees:
347.1. On the qualifying default of and/or non-payment by the counterparty, the
lending bank shall have the right to pursue, in a timely manner, the guarantor for any monies due
under the claim in respect of which the protection is provided. Payment by the guarantor shall not
be subject to the lending bank first having to pursue the obligor. In the case of unfunded credit
protection covering residential mortgage loans, the requirements in subitem 344.4.2 and in the first
subparagraph of this paragraph have only to be satisfied within 24 months.
347.2. The guarantee shall be an explicitly documented obligation assumed by the
guarantor.
347.3. The guarantee shall cover all types of payments the obligor is expected to make
in respect of the claim. Where certain types of payment are excluded from the guarantee, the
recognised value of the guarantee shall be adjusted to reflect the limited coverage.
348. In the case of guarantees provided in the context of mutual guarantee schemes
recognised for these purposes by the Bank of Lithuania or provided by or counter-guaranteed by
entities referred to in par. 345, the requirements in item 347.1 shall be considered to be satisfied
where either of the following conditions are met:
348.1. The lending bank has the right to obtain in a timely manner a provisional
payment by the guarantor calculated to represent a robust estimate of the amount of the economic
loss, including losses resulting from the non-payment of interest and other types of payment
which the borrower is obliged to make, likely to be incurred by the lending bank proportional to
the coverage of the guarantee.
348.2. The lending bank can demonstrate that the loss-protecting effects of the
guarantee, including losses resulting from the non-payment of interest and other types of
payments which the borrower is obliged to make, justify such treatment.
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349. For a credit derivative to be recognised the following conditions shall also be met:
349.1. The credit events specified under the credit derivative shall at a minimum
include:
349.1.1. the failure to pay the amounts due under the terms of the underlying obligation
that are in effect at the time of such failure (with a grace period that is closely in line with or
shorter than the grace period in the underlying obligation);
349.1.2. the bankruptcy, insolvency or inability of the obligor to pay its debts, or its
failure or admission in writing of its inability generally to pay its debts as they become due, and
analogous events;
349.1.3. the restructuring of the underlying obligation involving forgiveness or
postponement of principal, interest or fees that results in a credit loss event (i.e. value adjustment
or other similar debit to the profit and loss account).
349.2. where credit events specified in the credit derivative agreement do not include
restructuring of the underlying obligation as described in point 349.1.2, credit protection may
nonetheless be recognised subject to a reduction in recognised value as specified in Part 3,
Section III.
349.3. in the case of credit derivatives allowing for cash settlement, a robust valuation
process shall be in place in order to estimate loss reliably. There shall be a clearly specified period
for obtaining post-credit-event valuations of the underlying obligation;
349.4. if the protection purchaser’s right and ability to transfer the underlying
obligation to the protection provider is required for settlement, the terms of the underlying
obligation shall provide that any required consent to such transfer may not be unreasonably
withheld.
349.5. The identity of the parties responsible for determining whether a credit event has
occurred shall be clearly defined. This determination shall not be the sole responsibility of the
protection provider. The protection buyer shall have the right/ability to inform the protection
provider of the occurrence of a credit event.
350. A mismatch between the underlying obligation and the reference obligation under the
credit derivative (i.e. the obligation used for the purposes of determining cash settlement value or
the deliverable obligation) or between the underlying obligation and the obligation used for
purposes of determining whether a credit event has occurred is permissible only if the following
conditions are met:
350.1. the reference obligation or the obligation used for purposes of determining
whether a credit event has occurred, as the case may be, ranks pari passu with or is junior to the
underlying obligation;
350.2. the underlying obligation and the reference obligation or the obligation used for
purposes of determining whether a credit event has occurred, as the case maybe, share the same
obligor (i.e., the same legal entity) and there are in place legally enforceable cross-default or
cross-acceleration clauses.
351. To be eligible for the treatment set out in par. 142, Section II, Chapter IV, credit
protection deriving from a guarantee or credit derivative shall meet the following conditions:
351.1. the underlying obligation shall be to:
351.1.1. a corporate exposure, excluding insurance and reinsurance
undertakings;
351.1.2. an exposure to a regional government and local authority or public
sector entity which is not treated as belonging to the group of exposures to a central
governments or central banks according to item 123.3 of these Regulations;
351.1.3. an exposure to a small or medium sized entity, classified as a retail
exposure.
351.2. The bank’s obligors shall not be members of the same group as the protection
provider.
351.3. The exposure shall be hedged by one of the following instruments:
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351.3.1. single-name unfunded credit derivatives or single-name guarantees;
351.3.2. first-to-default basket products — the treatment shall be applied to the
asset within the basket with the lowest risk-weighted exposure amount;
351.3.3. nth-to-default basket products — the protection obtained is only
eligible for consideration under this framework if eligible (n-1)th default protection has also be
obtained or where (n-1) of the assets within the basket has/have already defaulted. Where this is
the case the treatment shall be applied to the asset within the basket with the lowest risk-weighted
exposure amount.
351.4. The credit protection meets the requirements set out in pars. 344, 344.5, 347,
348 and 349.
351.5. the risk weight that is associated with the exposure prior to the application of the
treatment in Section II, Chapter IV does not already factor in any aspect of the credit protection.
351.6. The bank shall have the right and expectation to receive payment from the
protection provider without having to take legal action in order to pursue the counterparty for
payment. To the extent possible, a bank shall take steps to satisfy itself that the protection
provider is willing to pay promptly should a credit event occur.
351.7. The purchased credit protection shall absorb all credit losses incurred on the
hedged portion of an exposure that arise due to the occurrence of credit events outlined in the
contract.
351.8. If the payout structure provides for physical settlement, then there shall be legal
certainty with respect to the deliverability of a loan, bond, or contingent liability. If a bank intends
to deliver an obligation other than the underlying exposure, it shall ensure that the deliverable
obligation is sufficiently liquid so that the bank would have the ability to purchase it for delivery
in accordance with the contract.
351.9. The terms and conditions of credit protection arrangements shall be legally
confirmed in writing by both the protection provider and the bank.
351.10. The bank shall have a process in place to detect excessive correlation between
the creditworthiness of a protection provider and the obligor of the underlying exposure due to
their performance being dependent on common factors beyond the systematic risk factor.
351.11. In the case of protection against dilution risk, the seller of purchased
receivables shall not be a member of the same group as the protection provider.
3. Calculation of capital requirement in consideration of eligible credit risk mitigation
352. Amounts of exposures secured by credit risk mitigation arrangements, which satisfy
the requirements of Parts 1 and 2, Section III, Chapter IV, may be adjusted to take into account the
effects of such credit risk mitigation arrangements.
353. For exposures secured by financial collaterals the bank may apply one of the two
exposure value measurement methods: Financial Collateral Simple Method or the Financial
Collateral Comprehensive Method. The schemes of application of these two methods are provided
in Annexes 5 and 6.
354. Cash and securities purchased, borrowed or received under a repurchase transaction
shall be treated as collateral.
355. Investments in credit linked notes issued by the lending bank may be treated as cash
collateral.
356. Loans and deposits with the lending bank subject to on-balance sheet netting are to be
treated as cash collateral.
357. For protected and unprotected exposures the risk weights specified in Section I,
Chapter IV shall apply, assuming that collateral is the bank’s assets, except for exemptions
referred to in pars. 358, 373, 376 and 410.
358. For the purpose of Financial Collateral Comprehensive Method, the capital
requirement for those portions of exposures which are secured against financial collateral, shall not
be calculated.
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359. A credit institution shall not use both the Financial Collateral Simple Method and
the Financial Collateral Comprehensive Method, unless for the purposes of paragraphs 118 and
121. A bank institutions shall demonstrate to the competent authorities that this exceptional
application of both methods is not used selectively with the purpose of achieving reduced
minimum capital requirements and does not lead to regulatory arbitrage.
360. The Financial Collateral Simple Method may not be applied for the calculation of the
counterparty’s credit risk capital requirement, as specified in pars. 669 – 671.
361. The Financial Collateral Simple Method may apply only when the risk-weighted
exposures are calculated according to the standardized approach.
362. For the purpose of calculating fully adjusted exposure value (E*) of exposures
subject to respective master netting agreements covering repurchase transactions and/or
securities or commodities lending or borrowing transactions and/or other capital market-driven
transactions, the bank may use volatility adjustments calculated either according to the standard
volatility adjustments approach or volatility adjustments’ own estimates approach, as
established under the financial collateral comprehensive method. Using own estimates method
the same conditions and requirements shall apply as in case of application of the financial
collateral comprehensive method.
362.1. The net position in each type of security or commodity shall be calculated by
subtracting from the total value of the securities or commodities of that type lent, sold or provided
under the master netting agreement, the total value of securities or commodities of that type
borrowed, purchased or received under the agreement.
362.2. For the purposes of item 362.1, „type of security“ means securities which are
issued by the same entity, have the same issue date, the same maturity and are subject to the same
terms and conditions and are subject to the same liquidation periods.
362.3. The net position in each currency, other than the settlement currency of the
master netting agreement, shall be calculated by subtracting from the total value of securities
denominated in that currency lent, sold or provided under the master netting agreement added to
the amount of cash in that currency lent or transferred under the agreement, the total value of
securities denominated in that currency borrowed, purchased or received under the agreement
added to the amount of cash in that currency borrowed or received under the agreement.
362.4. The volatility adjustment appropriate to a given type of security or cash position
shall be applied to the absolute value of the positive or negative net position in the securities of
that type.
362.5. The foreign exchange risk volatility adjustment shall be applied to the net positive
or negative position in each currency other than the settlement currency of the master netting
agreement.
362.6. The fully adjusted exposure value E* shall be calculated according to the following
formula:
E* = max {0, [(∑(E) - ∑(C)) + ∑(| net position per each type of securties | x Hsec) + (∑|Efx|
x Hfx)]}
E – is the exposure value for each separate exposure under the agreement that would apply
in the absence of the credit protection.
C – is the value of the securities or commodities borrowed, purchased or received or the
cash borrowed or received in respect of each such exposure.
∑(E) – is the sum of all Es under the agreement.
∑(C) – is the sum of all Cs under the agreement.
Efx – is the net position (positive or negative) in a given currency other than the settlement
currency of the agreement.
Hsec – is the volatility adjustment appropriate to a particular type of security.
Hfx – is the foreign exchange volatility adjustment.
E* – is the fully adjusted exposure value.
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363. As an alternative in calculating the fully adjusted exposure value (E*) resulting from
the application of an eligible master netting agreement covering repurchase transactions, securities
or commodities lending or borrowing transactions, and/or other capital market driven transactions
other than derivative transactions, banks may be permitted to use an internal models approach
which takes into account correlation effects between security positions subject to the master
netting agreement as well as the liquidity of the instruments concerned. Internal models used in
this approach shall provide estimates of the potential change in value of the unsecured exposure
amount (∑E - ∑C).
364. A bank may choose to use an internal models approach independently of the choice it
has made between the standardised or IRB Approach for the calculation of risk-weighted exposure
amounts. However, if a bank seeks to use an internal models approach, it must do so for all
counterparties and securities, excluding immaterial portfolios where it may use the Supervisory
volatility adjustments approach or the Own estimates volatility adjustments approach.
365. The internal models approach is available to banks that have received recognition for
an internal risk-management model. Banks which have not received supervisory recognition for
use of such a model, may apply to the Bank of Lithuania for recognition of an internal riskmeasurement model. Recognition shall only be given if the Bank of Lithuania is satisfied that the
bank’s risk-management system for managing the risks arising on the transactions covered by the
master netting agreement is conceptually sound and implemented with integrity and that, in
particular, the following qualitative standards are met:
365.1. The internal risk-measurement model used for calculation of potential price
volatility for the transactions is closely integrated into the daily risk-management process of the
bank and serves as the basis for reporting risk exposures to senior management of the bank.
365.2. The bank has a risk control unit that is independent from business trading units
and reports directly to senior management. The unit must be responsible for designing and
implementing the bank’s risk-management system. It shall produce and analyse daily reports on
the output of the risk-measurement model and on the appropriate measures to be taken in terms of
position limits.
365.3. The daily reports produced by the risk-control unit are reviewed by a level of
management with sufficient authority to enforce reductions of positions taken and of overall risk
exposure.
365.4. The bank has sufficient staff skilled in the use of sophisticated models in the risk
control unit.
365.5. The bank has established procedures for monitoring and ensuring compliance
with a documented set of internal policies and controls concerning the overall operation of the
risk-measurement system.
365.6. The bank’s models have a proven track record of reasonable accuracy in
measuring risks demonstrated through the back-testing of its output using at least one year of data.
365.7. The bank frequently conducts a rigorous programme of stress testing and the
results of these tests are reviewed by senior management and reflected in the policies and limits it
sets.
365.8. The bank must conduct, as part of its regular internal auditing process, an
independent review of its risk-measurement system. This review must include both the activities
of the business trading units and of the independent risk-control unit.
365.9. At least once a year, the bank must conduct a review of its risk-management
system.
365.10. The internal model shall meet the requirements set out in pars. 750–752.
366. The calculation of the potential change in value shall be subject to the following
minimum standards:
366.1. at least daily calculation of the potential change in value;
366.2. a 99th percentile, one-tailed confidence interval;
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366.3. a 5-day equivalent liquidation period, except in the case of transactions other
than securities repurchase transactions or securities lending or borrowing transactions wherea10day equivalent liquidation period shall be used;
366.4. an effective historical observation period of at least one year except where a
shorter observation period is justified by a significant upsurge in price volatility;
366.5. three-monthly data set updates.
367. It shall be required that the internal risk-measurement model captures a sufficient
number of risk factors in order to capture all material price risks.
368. The banks may use empirical correlations within risk categories and across risk
categories if they demonstrate to the satisfaction of the supervisory authority for measuring
correlations is sound and implemented with integrity.
369. The fully adjusted exposure value (E*) for banks using the Internal models approach
shall be calculated according to the following formula:
E* = max {0, [(∑E - ∑C) + (internal value-at-risk model (VaR) result)]}.
E – is the exposure value for each separate exposure under the agreement that would apply
in the absence of the credit protection.
C – is the value of the securities borrowed, purchased or received or the cash borrowed or
received in respect of each such exposure.
∑(E) – is the sum of all Es under the agreement.
∑(C) – is the sum of all Cs under the agreement.
370. In calculating risk-weighted exposure amounts using internal models, banks shall use
the previous business day’s model output.
371. For the purpose of applying the standardised approach and IRB Approach, E* as
calculated under pars. 362–368, shall be taken as the exposure value of the exposure to the
counterparty arising repurchase transactions, securities or commodities lending or borrowing
transactions and/or other capital market-driven transactions covered by master netting agreements
subject to the master netting agreement.
372. For the purpose of applying Financial Collateral Simple Method, the capital
requirement for that part of exposure which is secured by financial collateral shall be calculated
in observance of the following provisions:
371.1. the recognised financial collateral shall be assigned a value equal to its market
value.
372.2. the exposure value of an off-balance sheet item listed in Part 3, Section I, Chapter
IV shall be 100 % of its value rather than the exposure value indicated in Part 3, Section I,
Chapter IV;
372.3. the unsecured part of exposure shall be equal to the difference between the
exposure and its secured part.
373. The risk weight of the collateralised portion determined according to Section I,
Chapter IV in observance of the provision of par. 357 shall be a minimum of 20% (i.e. even if
according to Section I, Chapter IV the risk weight is 0%, the risk weight assigned to the
collateralised portion of the exposure shall be 20%) except as specified in pars. 374–376.
374. For the purpose of calculating the capital requirement for repurchase and securities or
borrowing transactions, a risk weight of 0% shall be assigned to the collateralised portion of the
exposure which arises from from concluded transactions which satisfy the criteria listed in par.
410. If the counterparty to the transaction is not a core market participant a risk weight of 10%
shall be assigned.
375. For the purpose of application of the Financial Collateral Simple Method to OTC
derivatives subject to daily marking-to-market, a risk weight of 0% shall be assigned to the
exposure values for the derivative instruments listed in Annex 7 and subject to daily marking-tomarket, collateralised by deposits, where there is no currency mismatch. A risk weight of 10%
shall be assigned to the extent of the collateralisation to the exposure values of such transactions
collateralised by debt securities issued by central governments or central banks, regional
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governments or local authorities, multilateral development banks and international organisations,
which are assigned a 0% risk weight under Section I, Annex IV.
376. For the purpose of application of the Financial Collateral Simple Method a risk weight
of 0% shall be assigned to the collateralised portion of other transactions, where the exposure and
the collateral are denominated in the same currency and either the collateral is cash on deposit or
debt securities issued by central governments or central banks, regional governments or local
authorities, multilateral development banks and international organisations, which are assigned a
0% risk weight under Section I, Annex IV and its market value has been discounted by 20%.
377. For the purpose of application of the Financial Collateral Comprehensive Method,
subject to the treatment for currency mismatches in the case of OTC derivatives transactions set
out in par. 378, where collateral is denominated in a currency that differs from that in which the
underlying exposure is denominated, an adjustment reflecting currency volatility shall be added to
the volatility adjustment appropriate to the collateral.
378. In the case of OTC derivatives transactions covered by netting agreements recognised
by the Bank of Lithuania under Part 5.3.6, Section VI, Chapter V, a volatility adjustment reflecting
currency volatility shall be applied when there is a mismatch between the collateral currency and
the settlement currency. Even in the case where multiple currencies are involved in the
transactions covered by the netting agreement, only a single volatility adjustment shall be applied.
379. For the purpose of application of the Financial Collateral Comprehensive Method,
the capital requirements for the portion of the exposure unsecured by financial collateral
arrangements shall be calculated in several stages (pars. 380 and 382). Determining the value of
the financial collateral for the purposes of this method, volatility adjustment shall apply to the
market value of collateral to take into consideration price volatility.
380. Firstly the volatility-adjusted value of the collateral (CVA) shall be calculated as
follows:
CVA = C x (1 – HC – HFX),
C – value of securities or borrowed, purchased or received commodities or borrowed or
received cash (deposits).
HC – volatility adjustment appropriate to the collateral.
HFX – volatility adjustment appropriate to currency mismatch.
381. Secondly The volatility-adjusted value of the exposure shall be calculated as follows
(EVA):
EVA = E x (1 + HE),
E – exposure value as would be determined under Sections I and II, Chapter IV, as
appropriate if the exposure was not collateralised. When the standardized approach is applied to
off-balance sheet items listed in Part 3, Section I, Chapter IV, a risk weight of 100% shall apply,
rather than risk weights specified in Section I, Chapter IV. When applying the IRB Approach, a
conversion factor of 100% (rather than the conversion factors indicated in Section II, Chapter
IV) shall be used. In the case of OTC derivative transactions EVA=E.
HE – volatility adjustment appropriate to the exposure.
382. Thirdly, the fully adjusted exposure value (E*) shall be calculated taking into account
volatility and the risk-mitigating effects of the collateral:
E* = max{0,[EVA – CVAM]}
EVA – volatility-adjusted exposure amount.
CVAM – CVA further adjusted for any maturity mismatch.
E* – uncollateralized portion of exposure, to which the weight referred to in Section I,
Chapter IV shall be assigned. For the purpose of calculating the capital requirement for off-balance
sheet claims indicated in Part 3, Section I, Chapter IV E* shall be the value assigned weights
applicable to the off-balance sheet claims indicated in Section I, Chapter IV.
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383. When the IRB Approach is applied, LGD* shall be calculated according to the
formula:
LGD*=MAX{0,LGDx[E*/E]}
LGD – default loss calculated in observance of the requirements set forth in Section II,
Chapter IV if the exposure was not collateralised.
E* – exposure, calculated under par. 382.
LGD* – value used for the purposes specified in Section II, Chapter IV.
384. The collateralised real estate property shall be valued by an independent valuer at or
less than the market value.
385. Where the mortgaged property is not subject to any senior claims, the bank shall take
it into account for the purpose of measuring the value of real estate as of the collateral. Moreover,
the bank shall take into account the results of value updates mentioned in item 337.2.
386. Where the ratio of the value of the real estate used for mortgage to the exposure value
is less than 30%, LGD* exposure shall be considered as uncollateralized.
387. Where the ratio of the value of the real estate used for mortgage to the exposure value
exceeds 140%, the exposure shall be assigned LGD of 35%.
388. Where the ratio of the value of the real estate used for mortgage to the exposure value
exceeds 30%, but less than 140%, the exposure shall be considered to be two exposures with one
of them satisfying the requirement of par. 387. LGD applicable to that part which satisfies the
requirements of the aforementioned paragraph shall equal to 35%, whereas LGD for the remainder
of the exposure shall be calculated in the manner set forth in par.386.
389. The value of receivables shall be the amount receivable.
390. Where the ratio of receivables used for collateralisation purposes to the exposure is
less than 0%, LGD* exposure shall be considered as uncollateralized.
391. Where the ratio of receivables used for collateralisation purposes to the exposure
value is larger than 140%, the exposure shall be assigned LGD of 35%.
392. Where the ratio of receivables used for collateralisation purposes to the exposure
exceeds 0%, but is less than 140%, the exposure shall be considered to be two exposures with one
of them satisfying the requirement of par. 391. LGD applicable to that part which satisfies the
requirements of the aforementioned paragraph shall equal to 35%, whereas LGD for the remainder
of the exposure shall be calculated in the manner set forth in par. 390.
393. Where the claim to real estate or receivables used for collateralisation purposes is not
a senior claim, LGD of 65% may apply to the collateralised portions in observance of the
provisions set forth under pars. 386–389.
394. Banks may be authorised to assign under the alternative treatment of mortgaged
residential property, which does not apply to the property located in Lithuania, a risk weight of
50%, provided the competent authorities of the Member States in which the property is locates,
authorise such treatment.
395. A bank, which applies the IRB Approach, shall be required to subdivide the
volatility-adjusted value of the exposure (i.e. the value after the application of the volatility
adjustment) into parts each covered by only one type of collateral. That is, the bank must divide
the exposure into the portion covered by eligible financial collateral, the portion covered byreal
estate property collateral, the portion covered by receivables, and the unsecured portion, as
relevant.
396. Deposits with a bank (other than the bank holding the exposure) may be treated as
a guarantee issued by by the bank.
397. Pledged life assurance policies may be treated as a guarantee by the company
providing the life assurance. The portion of the exposure collateralised by the current surrender
value of life assurance policy shall be either of the following:
397.1. subject to the risk weights specified in Annex 11 applying standardised approach;
397.2. assigned an LGD of 40 % where the exposure is subject to IRB approach but not subject
to the bank’s own estimates of LGD.
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In case of a currency mismatch, the current surrender value shall be reduced according
to paragraph 402, the value of the credit protection being the current surrender value of the life
insurance policy.
398. Institution instruments repurchased on request, may be treated as a guarantee by
the issuing institution.
399. The value of the protection of instruments referred to in par. 398 shall beequal to
the nominal value, where the instrument will be repurchased at its nominal value.
400. Where the instrument referred to in par. 398 will be repurchased at market value,
the value of the protection shall be the value of the instrument valued in the same way as the
debt securities specified in par. 316.8.
401. The value of unfunded credit protection (G) shall be the amount that the protection
provider has undertaken to pay in the event of the default or non-payment of the borrower or on
the occurrence of other specified credit events. In the case of credit derivatives which do not
include as a credit event restructuring of the underlying obligation involving forgiveness or
postponement of principal, interest or fees that result in a credit loss event (e.g. value adjustment,
the making of a value adjustment or other similar debit to the profit and loss account):
401.1. where the value of the credit protection shall be reduced by 40% amount that the
protection provider has undertaken to pay is not higher than the exposure value;
401.2. the value of the credit protection shall be no higher than 60% of the exposure
value and the amount that the protection provider has undertaken to pay is higher than the
exposure value.
402. Where the guarantee or credit risk derivative instrument and exposure are
denominated in different currencies, then the value of the guarantee shall be adjusted according to
the formula:
G*=G x (1 – HFX),
G* – adjusted value of the guarantee or credit risk derivative instrument,
G – value of the guarantee,
HFX – the exposure volatility adjustment for any currency mismatch between.
403. Where the guarantee or credit risk derivative instrument and exposure are
denominated in the same currency, then G* = G.
404. For any currency mismatch between the guarantee or credit risk derivative instrument
or exposure, the bank may choose volatility adjustments to be applied (i.e. Supervisory and Own
estimates of volatility adjustments).
405. Under the IRB Approach, the guarantor’s PD or PD which falls within the PD interval
established for the guarantor and the obligor, is allowed to be assigned to the guaranteed portion of
exposure.
406. Under the IRB Approach, the uncollateralized portion of the exposure shall be subject
to the obligor’s PD and to the exposure’s LGD.
4. Volatility adjustments
407. A bank may choose to use the Supervisory volatility adjustments approach or the Own
Estimates Approach. When banks seek to use the Own Estimates Approach, they must do so for
the full range of instrument types, excluding immaterial portfolios (where they may use the
Supervisory volatility adjustments approach).
408. Where the exposure consists of a number of recognised items, the volatility
adjustment (H) shall be calculated as follows:
H =  (ai x Hi),
i – a separate financial collateral,
ai – the proportion of an item to the collateral as a whole,
Hi – a volatility adjustment applicable to a separate financial collateral.
409. All volatility adjustments calculated under Section III, Chapter IV – means volatility
adjustments in the first instance calculated on the basis of daily revaluation. If the frequency of
revaluation is less than daily, larger volatility adjustments shall be applied. These shall be
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calculated by scaling up the daily revaluation volatility adjustments, using the following “square
root of time” formula:
N R  (TM  1)
H  HM
TM
H – volatility adjustment to be applied,
HM – volatility adjustment, where there is daily revaluation,
NR – actual number of business days between revaluations,
TM – liquidation period for the type of transaction in question.
410. In relation to repurchase transactions and securities lending or borrowing
transactions, where a bank uses the standard volatility adjustments approach or the own
estimates approach and where the conditions set out in items of this paragraph are met, banks
apply a 0% volatility adjustment. This option is not available in respect of banks using the
internal models approach set out in this Section. If supervisory authorities of other Member
States of the EU allow applying the approach specified in this paragraph to transactions of
repurchase of securities issued by local government authorities or to lending or borrowing
transactions, the bank shall have the right to apply the same approach to equivalent
transactions.
410.1. both the exposure and the collateral are cash or debt securities issued by central
governments or central banks which under the standardised approach are eligible for a 0% risk
weight;
410.2. both the exposure and the collateral are denominated in the same currency;
410.3. either the maturity of the transaction is no more than one day or both the
exposure and the collateral are subject to daily marking-to-market or daily remargining;
410.4. it is considered that the time between the last marking-to-market before a failure
to remargin by the counterparty and the liquidation of the collateral shall be no more than four
business days;
410.5. the transaction is settled across a settlement system proven for that type of
transaction;
410.6. the documentation covering the agreement is standard market documentation for
repurchase transactions or securities lending or borrowing transactions in the securities concerned;
410.7. the transaction is governed by documentation specifying that if the counterparty
fails to satisfy an obligation to deliver cash or securities or to deliver margin or otherwise defaults,
then the transaction is immediately terminable;
410.8. the counterparty is considered a “core market participant”. Core market
participants shall include the following entities:
410.8.1. the entities mentioned in item 316.2, exposures to which are assigned a
0% risk weight;
410.8.2. institutions;
410.8.3. other financial companies (including insurance companies) exposures to which
are assigned a 20% risk weight under the standardised approach or which (in the case of banks
calculating risk-weighted exposure amounts and expected loss amounts under the IRB Approach)
do not have a credit assessment by a recognised ECAI and are internally rated as having a PD
equivalent to that associated with the credit assessments of ECAIs determined to be associated
with CQS 2 or above;
410.8.4. regulated CIUs, i.e. that are subject to capital or leverage requirements;
410.8.5. pension funds;
410.8.6. recognised clearing organisations.
4.1. Supervisory volatility adjustments
411. Volatility adjustments for exposures or financial collaterals the revaluation of which is
carried out daily based on the transaction liquidation period are specified in Annexes 3 and 4.
412. For secured lending transactions the liquidation period shall be 20 business days, for
repurchase transactions (except insofar as such transactions involve the transfer of commodities or
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guaranteed rights relating to title to commodities) and securities lending or borrowing transactions
the liquidation period shall be 5 business days, for other capital market driven transactions, the
liquidation period shall be10 business days.
413. For non-eligible securities or for commodities lent or sold under repurchase
transactions or securities or commodities lending or borrowing transactions, the volatility
adjustment is the same as for non-main index equities listed on a recognised exchange.
414. For eligible units in CIUs the volatility adjustment shall be calculated having regard to
the liquidation periods. The weighted average volatility adjustments would apply to the assets in
which the fund has invested. If the assets in which the fund has invested are not known to the
bank, the volatility adjustment is the highest volatility adjustment that would apply to any of the
assets in which the fund has the right to invest.
415. For eligible unrated debt securities issued by institutions the volatility adjustments
shall be the same as for securities issued by institutions or corporates with an external credit
assessment associated with CQS 2 or 3.
4.2. Own estimates of volatility adjustments
416. For the purpose of this method, adjustments shall be determined by banks
themselves in observance of requirements set forth in this Chapter.
417. When debt securities have a credit assessment from a recognised ECAI equivalent to
investment grade or better, banks shall be allowed to calculate a volatility estimate for each
category of security.
418. In determining relevant categories, banks shall take into account the type of issuer of
the security the external credit assessment of the securities, their residual maturity, and their
modified duration. Volatility estimates must be representative of the securities included in the
category by the bank.
419. For debt securities having a credit assessment from a recognised ECAI equivalent to
below investment grade, and for other eligible collateral, the volatility adjustments must be
calculated for each individual item.
420. Banks using the Own estimates approach must estimate volatility of the collateral or
foreign exchange mismatch without taking into account any correlations between the unsecured
exposure, collateral and/or exchange rates.
421. Banks when determining the adjustments shall take into account the type of the issuer
of securities, external credit risk assessment of securities, their residual maturity and modified
duration. Volatility adjustments shall be representative of the distinguished categories of securities.
422. In calculating the volatility adjustments, a 99th percentile one-tailed confidence
interval shall be used.
423. The liquidation period shall be 20 business days for secured lending transactions; 5
business days for repurchase transactions, except insofar as such transactions involve the transfer
of commodities or guaranteed rights relating to title to commodities and securities lending or
borrowing transactions, and 10 business days for other capital market driven transactions.
424. Banks may use volatility adjustment numbers calculated according to shorter or longer
liquidation periods, scaled up or down to the liquidation period set out in par. 423 for the type of
transaction in question, using the square root of time formula:
HM  HN TM / TN
TM – is the relevant liquidation period;
HM – is the volatility adjustment for the relevant liquidation period;
HN – is the volatility adjustment based on the liquidation period TN.
425. Banks shall take into account the illiquidity of lower-quality assets. The liquidation
period shall be adjusted upwards in cases where there is doubt concerning the liquidity of the
collateral. They shall also identify where historical data may understate potential volatility, e.g., a
pegged currency. Such cases shall be dealt with by means of a stress scenario.
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426. The historical observation period (sample period) for calculating volatility
adjustments shall be a minimum length of one year. For banks that use a weighting scheme or
other methods for the historical observation period, the effective observation period shall be at
least one year (that is, the weighted average time lag of the individual observations shall not be
less than 6 months). A bank shall be required to calculate its volatility adjustments using a shorter
observation period if this is justified by a significant upsurge in price volatility.
427. Banks shall update their data sets at least once every three months and shall also
reassess them whenever market prices are subject to material changes. This implies that volatility
adjustments shall be computed at least every three months.
428. The volatility estimates shall be used in the day-to-day risk management process of
the bank including in relation to its internal exposure limits.
429. If the liquidation period used by the bank in its day-to-day risk management process is
longer than that set out in this Part for the type of transaction in question, the bank’s volatility
adjustments shall be scaled up in accordance with the square root of time formula set out in par.
409.
430. The bank shall have established procedures for monitoring and ensuring compliance
with a documented set of policies and controls for the operation of its system for the estimation of
volatility adjustments and for the integration of such estimations into its risk management process.
431. An independent review of the bank’s system for the estimation of volatility
adjustments shall be carried out regularly in the bank’s own internal auditing process. A review of
the overall system for the estimation of volatility adjustments and for integration of those
adjustments into the bank’s risk management process shall take place at least once a year and shall
specifically address, at a minimum:
431.1. the integration of estimated volatility adjustments into daily risk management;
431.2. the validation of any significant change in the process for the estimation of
volatility adjustments;
431.3. the verification of the consistency, timeliness and reliability of data sources used
to run the system for the estimation of volatility adjustments, including the independence of such
data sources;
431.4. the accuracy and appropriateness of the volatility assumptions.
5. Treatment of financial collaterals, guarantees and credit risk derivatives under
maturity mismatches
5.1. Maturity mismatch definition
432. For the purposes of calculating risk-weighted exposure amounts, a maturity mismatch
occurs when the residual maturity of the credit protection is less than that of the protected
exposure.
433. Where there is a maturity mismatch, maturity adjustment is applied, however, the
collaterals and guarantees shall not be recognised where the remaining maturity of the protection is
less than 3 months and is less than remaining maturity of an exposure or original maturity is less
than 1 year. Protection also shall not be recognised when exposure is short term exposure and, in
applying IRB approach, subject to a one–day floor rather than a one-year floor in respect of the
maturity value.
434. For the purpose of these Regulations the effective maturity of the underlying shall be
the longest possible remaining time before the obligor is scheduled to fulfil its obligations. The
maximum effective maturity shall be 5 years, excluding the provision of par. 435 subject to which
the maturity of the credit protection shall be the time to the earliest date at which the protection
may terminate or be terminated.
435. Where there is an option to terminate the protection which is at the discretion of the
guarantor, protection provider (in case of financial derivatives) or obligor, for which a guarantee is
issued, and the terms of the guarantee arrangement contain a positive incentive for the bank to call
the transaction before contractual maturity, the maturity of the guarantee shall be taken to be the
time to the earliest date at which that option maybe exercised.
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436. Where a credit derivative is not prevented from terminating prior to expiration of any
grace period required for a default on the underlying obligation to occur as a result of a failure to
pay the maturity of the protections shall be reduced by the amount of the grace period.
5.2. Treatment of financial collaterals upon maturity mismatches
437. If for the purpose of applying the Financial Collateral Simple Method, the protection
maturity is shorter the maturity of the exposure, the collateral shall not be recognised.
438. If for the purpose of applying the Financial Collateral Comprehensive Method there is
a maturity mismatch, the value of the financial collateral shall be adjusted to maturity according to
the following formula:
CVAM = CVA x (t – t*)/(T – t*),
CVAM – maturity-adjusted value of the credit protection,
CVA – volatility adjusted value of the credit protection (where calculating according to par.
380, CVA exceeds the exposure, then CVAM = exposure),
t – residual maturity of the credit protection agreement (if t >T, then t = T),
T – residual maturity of the exposure (if T >5, then T = 5),
t* = 0,25.
5.3. Treatment of guarantees and credit derivatives upon maturity mismatches
439. The maturity mismatch must be reflected in the adjusted value of the guarantee
according to the following formula:
GA = G* x (t – t*)/(T – t*),
GA – amount of the guarantee or credit derivative adjusted to maturity,
G* – adjusted amount of the protection (equivalent of CVA, where calculating according to
par. 380, G* exceeds the exposure, then G* = exposure),
t – residual maturity of the credit protection agreement (if t >T, then t = T),
T – residual maturity of the exposure (if T >5, then T = 5),
t*=0,25.
440. When the bank transfers part of exposure risk to one or more tranches, riskweighted exposure amounts and expected loss amounts shall be calculated in observance of
provisions of Section IV. The lowest threshold, below which credit protection is deemed not to
be triggered if a credit event occurs, as specified in point 460.3.1, shall be equal to retained first
loss position and increase risk transfer to tranches.
441. Where for the capital requirements calculation purposes the guarantor or credit
protection provider (in case of a financial derivative) shares the exposure-related losses with a
bank in proportions specified in the guarantee agreement, the secured portion of the exposure
(equal to GA) shall be assigned the guarantor’s risk weight, and to the unsecured portion – the
obligor’s risk weight. These risk weights shall be the second counterparty’s risk weights
expressed in percent and specified in Section I, Chapter IV. Where for the capital requirements
calculation purposes the guarantor or credit protection provider (in case of a financial
derivative) bears all of the exposure-related losses, the secured portion of the exposure (equal to
GA) shall be assigned the guarantor’s risk weight. This risk weight shall be the second
counterparty’s risk weight expressed in percent and specified in Section I, Chapter IV. When
applying standardised approach to off-balance sheet items listed in Part 3, Section I, Chapter IV
the risk weight of 100 % shall be used rather than risk weights specified in Section I, Chapter
IV. For the purpose of IRB approach a 100% coonversion factor shall apply (rather than
factors indicated in Section II, Chapter IV).
442. Guarantees of the central governments and central banks of the European Union
Member States denominated in the domestic currency of the relevant central government and
central banks, shall be assigned a 0% risk weight, where the exposure is denominated in the same
currency.
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443. Where the IRB Approach is applied, the secured portion of the exposure may be
assigned the guarantor’s PD or such PD, which falls within the range of PDs established for the
guarantor or credit protection provider (in case of a financial derivative) and obligor.
444. Where the IRB Approach is applied, the unsecured portion of the exposure shall be
assigned the obligor’s PD and LGD of the exposure.
6. Combinations of credit risk mitigation under the Standardised Approach
445. Where there if more than one form of credit risk mitigation covering a single
exposure, a bank shall be required to subdivide the exposure into parts covered by each type of
credit risk mitigation tool, and the capital requirement for each portion must be calculated
separately.
446. When credit protection provided by a single protection provider has differing
maturities, the exposure shall be subdivided into parts according to the principle set forth in par.
445.
7. Basket CRM techniques
447. Where a bank obtains credit protection for a number of exposures under terms that the
first default among the exposures shall trigger payment and that this credit event shall terminate
the contract, the bank may modify the calculation of the risk-weighted exposure amounts and, as
relevant, the expected loss amount of the exposure which would, in the absence of the credit
protection, produce the lowest risk-weighted exposure amount if the credit protection effects
would not be taken into account, but only if the exposure value is less than or equal to the value of
the credit protection.
448. Where the nth default among the exposures triggers payment under the credit
protection, the bank purchasing the protection may only recognise the protection for the
calculation of risk-weighted exposure amounts and, as relevant, expected loss amounts if
protection has also been obtained for defaults 1 to n-1 or when n-1 defaults have already occurred.
In such cases, the methodology shall follow that set out in par.1 for first-to-default derivatives
appropriately modified for nth-to-default products.
449. Provisions of this Chapter and Annex 13 shall apply to banks acting as initiators,
sponsors and investors for the purposes of securitisation transactions.
PART IV
SECURITISATION
1. General provisions
449. Provisions of this Chapter shall apply to the banks, who act as originators, sponsors
and investors in securitisation transactions.
450. Risk-weighted exposure amounts for securitisation positions shall be calculated using
the Standardised Approach or the IRB Approach depending upon the approach applicable to the
exposure class to which the underlying pool of securitised exposures would be assigned.
451. Where securitisation transaction complies with the requirements for recognition of
significant credit risk transfer:
451.1. Risk-weighted exposure amounts for securitisation positions shall be calculated in
observance of the provisions of Part 5, Section IV, Chapter IV.
451.2. In the case of a traditional securitisation, the risk-weighted amounts of underlying
exposures, and, as relevant, expected loss amounts of underlying exposures may be excluded from
calculations.
451.3. In the case of a synthetic securitisation, the risk-weighted amounts of underlying
exposures, and, as relevant, expected loss amounts of underlying exposures may be calculated in
observance of the provisions of Part 4, Section IV, Chapter IV.
452. Where securitisation transaction does not comply with the requirements for
recognition of significant credit risk transfer :
452.1. Risk-weighted exposure amounts for securitisation positions shall not be calculated.
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452.2. the risk-weighted amounts of underlying pools, and, as relevant, expected loss
amounts of underlying pools shall be calculated in observance of the provisions of Sections I or II,
Chapter IV.
453. Where both, the Standardised Approach or the IRB Approach is applied to the
underlying pool of the securitised exposures, the securitisation positions shall be subject to the
application of the approach which predominates for the underlying pool.
454. The underlying pool may comprise one or more securitised exposures. The following
may be the securitised exposures:
454.1. loans and obligations;
454.2. asset backed commercial papers ;
454.3. mortgage backed commercial papers ;
454.4. corporate bonds;
454.5. equities;
454.6. other exposures.
455. Securitisation positions may be:
455.1. asset backed commercial papers ;
mortgage backed commercial papers ;
455.2. credit enhancement;
455.3. liquidity facility;
455.4. interest rate and currency swaps;
455.5. credit derivative;
455.6. tranched cover exposures.
456. Where the underlying exposure belongs to different securitisation tranches, exposure
of each tranche shall be treated as a separate securitisation position.
457. Where a credit protection for a securitisation position is provided by a non-originator
bank, the latter shall calculate the capital requirements for the protected portion of position as the
investor in such transaction.
458. An originator bank, which calculates risk-weighted amounts of securitisation positions
according to Part 5, Section IV, Chapter IV, and the sponsor bank may not provide the implied
support with a view to reducing the actual and potential losses of investors. For the originator bank
or a sponsor bank, which does not fulfil this requirement, the risk-weighted exposure amounts
calculated in respect of its positions in a securitisation may be limited to the risk-weighted
exposure amounts which would be calculated for the securitised exposures had they not been
securitised. A bank shall be required to make public announcements as to the potential support
provided by it specifying the effects thereof on the bank’s capital requirement.
2. Requirements for recognition of significant credit risk transfer
459. The originator bank of a traditional securitisation may exclude securitised
exposures from the calculation of risk-weighted exposure amounts and expected loss amounts if
either of the following conditions is fulfilled: significant credit risk associated with the
securitised exposures is considered to have been transferred to third parties (requirements of
items 1, 2 or 3 of Annex 12 should be satisfied) or the originator bank applies a 1 250 % risk
weight to all securitisation positions it holds in this securitisation or deducts these securitisation
positions from own funds according to subparagraph 10.4. In addition to the requirements listed
in this paragraph all of the following must be met:
459.1. The securitisation documentation reflects the economic substance of the
transaction.
459.2. The securitised exposures are put beyond the reach of the originator bank
and its creditors, including in bankruptcy and receivership. This shall be supported by the opinion
of qualified legal counsel.
459.3. The securities issued do not represent payment obligations of the
originator bank.
459.4. The transferee is a securitisation special-purpose entity.
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459.5. The originator bank does not maintain effective or indirect control over the
transferred exposures. An originator shall be considered to have maintained effective control over
the transferred exposures if it has the right to repurchase from the transferee the previously
transferred exposures in order to realise their benefits or if it is obligated to re-assume transferred
risk. The originator bank’s retention of servicing rights or obligations in respect of the exposures
shall not of itself constitute indirect control of the exposures.
459.6. Where there is a clean-up call option, the following conditions are
satisfied:
459.6.1. The clean-up call option is exercisable at the discretion of the originator bank.
459.6.2. The clean-up call option may only be exercised when 10 % or less of the original
value of the exposures securitised remains unamortized.
459.6.3. The clean-up call option is not structured to avoid allocating losses to credit
enhancement positions or other positions held by investors.
459.6.4. The clean-up call option is not structured to provide credit enhancement.
459.7. The securitisation documentation does not contain clauses that:
459.7.1. require positions in the securitisation to be improved by the originator bank
(other than in the case of early amortisation provisions) including but not limited to altering the
underlying exposures or increasing the yield payable to investors in response to a deterioration in
the credit quality of the securitised exposures.
459.7.2. The bank should increase the yield payable to holders of positions in response to a
deterioration in the credit quality of the underlying pool.
460. An originator bank of a synthetic securitisation may calculate risk-weighted
exposure amounts, and, as relevant, expected loss amounts, for the underlying exposures in
accordance with Part 4, Section IV, Chapter IV, if either of the following is met: significant
credit risk is considered to have been transferred to third parties either through funded or
unfunded credit protection requirements of items 1, 2 or 3 of Annex 12 should be satisfied) or
the originator bank applies a 1 250 % risk weight to all securitisation positions he holds in this
securitisation or deducts these securitisation positions from own funds according to
subparagraph 10.4. In addition to the requirements listed in this paragraph all of the following
must be met:
460.1. The securitisation documentation reflects the economic substance of the
transaction.
460.2. The credit protection by which the credit risk is transferred complies with
the eligibility and other requirements under Section III, Chapter IV for the recognition of such
credit protection. A special purpose entity shall not be recognised as eligible unfunded protection
provider.
460.3. The instruments used to transfer credit risk do not contain terms or
conditions that:
460.3.1. impose significant materiality thresholds below which credit protection is
deemed not to be triggered if a credit event occurs;
460.3.2. allow for the termination of the protection due to deterioration of the credit
quality of the underlying exposures;
460.3.3. other than in the case of early amortisation provisions, require positions in the
securitisation to be improved by the originator bank;
460.3.4. increase the bank’ cost of credit protection or the yield payable to holders of
positions in the securitisation in response to a deterioration in the credit quality of the underlying
pool.
460.4. An opinion is obtained from qualified legal counsel confirming the enforceability
of the credit protection in all relevant jurisdictions.
461. A bank may employ additional requirements for recognition of significant risk
transfer.
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462. Where the significant credit risk is not transferred by the originator bank and an
exposure is not recognised as a securitisation exposure with regard to the originator bank, such
exposure shall be recognised with regard to the investor bank.
3. ECAI credit risk assessments
463. For the purposes of calculating risk-weighted amounts for securitisation positions a
bank may use credit assessments (ratings) of ECAI which has been recognised as eligible.
464. A bank may nominate one or more eligible ECAIs the credit assessments (ratings) of
which shall be used (a “nominated ECAI”).
465. A bank must use credit assessments (ratings) from nominated ECAIs consistently in
respect of its securitisation positions.
466. Where a position has two credit assessments (ratings) by nominated ECAIs, the bank
shall use the less favourable credit assessment (rating).
467. Where a position has more than two credit assessments (ratings) by nominated ECAIs,
the two most favourable credit assessments shall be used. If the two most favourable assessments
(ratings) are different, the least favourable of the two shall be used.
468. A bank may not use an ECAI’s credit assessments (ratings) for its positions in some
tranches and another ECAI’s credit assessments (ratings) for its positions in other tranches within
the same structure that may or may not be rated by the first ECAI).
469. Where in observance of provisions of Section III, Chapter IV, the eligible credit
protection is provided directly to a special-purpose entity and that protection is reflected in the
credit assessment of a position by a nominated ECAI, the risk weight associated with that credit
assessment maybe used. If the protection is not eligible under provisions of Section III, Chapter
IV, the credit assessment shall not be recognised. In the situation where the credit protection is not
provided to the special-purpose entity but rather directly to a securitisation position, the credit
assessment shall not be recognised.
4691. ECAI credit risk assessments related with structural financial instruments may be
applied by banks only when ECAI undertake to disclose publicly the impact of underlyging
exposures to such assessments.
4. Calculation of risk-weighted amounts and expected loss amounts for underlying
exposures securitised in a synthetic securitisation
470. Risk-weighted exposure amounts for the underlying exposures in observance of
provisions of Part 5, Section IV, Chapter IV. Risk-weighted amounts of the entire pool of
underlying exposures shall be calculated in observance of the aforementioned provisions,
including provisions pertaining to the eligibility of credit risk mitigation. For example, if a
tranche is transferred to a third party by means of unfunded credit protection instruments, the
risk weight of such third party shall apply to that tranche for the purpose of calculation of riskweighted exposure amounts of the originator bank.
471. For banks applying the IRB Approach to the underlying exposures, the expected loss
amount in respect of such underlying exposures shall be zero.
472. Treatment of maturity mismatches:
472.1. For the purposes of calculating risk-weighted exposure amounts any maturity
mismatch between the credit protection giving rise to the transfer of risk and the securitised
exposures shall be taken into consideration.
472.2. The maturity of the securitised exposures shall be taken to be the longest maturity
of any of those exposures subject to a maximum of five years.
472.3. The maturity of the credit protection shall be determined in accordance with Annex
IV.
472.4. An originator bank shall ignore any maturity mismatch in calculating risk-weighted
exposure amounts for tranches appearing with a risk weighting of 1250%.
472.5. For all other tranches, the maturity mismatch treatment shall be applied in
accordance with the following formula:
RW* = [RW(SP) x (t-t*)/(T-t*)] + [RW(Ass) x (T-t)/(T-t*)]
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RW* – adjusted risk-weighted exposure amount;
RW(Ass) – risk-weighted exposure amounts for the underlying exposure if it had not been
securitised, calculated on a pro-rata basis;
RW(SP) – risk-weighted exposure amounts calculated under Section 5, Section IV if there
was no maturity mismatch;
T – maturity of the underlying exposures expressed in years;
t – maturity of credit protection. Expressed in years;
t* – 0,25.
5. Calculation of risk-weighted amounts for securitisation positions
473. The amount of position shall be determined as follows:
473.1. Where the Standardised credit risk assessment approach is used, the value
of an on-balance sheet securitisation position shall be its balance sheet value.
473.2. Where the IRB Approach is used, value of an on-balance sheet
securitisation position shall be measured gross of value adjustments.
473.3. the value of an off-balance sheet securitisation position shall be its
nominal value multiplied by 100% CF.
473.4. The value of a securitisation position arising from a derivative instrument
listed in Annex 7 shall be determined in accordance with Part 5.2, Section VI, Chapter V.
473.5. Where a securitisation position is subject to funded credit protection, the
value of that position may be modified in accordance with and subject to the requirements in
Section III, Chapter IV.
473.6. Where a bank has two or more overlapping positions in a securitisation, it
will be required to the extent that they overlap to include in its calculation of risk-weighted
amounts only the position or portion of a position producing the higher risk-weighted amount.
5.1. Standardised approach
474. For an originator bank or sponsor bank, the risk-weighted amounts calculated in
respect of its positions in a securitisation may be limited to the risk-weighted amounts which
would be calculated for the securitised exposures had they not been securitised subject to the
application of a 150% risk weight to all past due items and items belonging to regulatory high
risk categories.
475. Where a securitisation position is provided with credit protection, the risk-weighted
amount may be adjusted in observance of provisions of Section III, Chapter IV.
476. Where a risk weight of 1250% is applied to a securitisation position, a bank may
reduce its capital by the value of positionand exclude such position from calculation of riskweighted amounts. The value of position being deducted may be adjusted to the funded credit
protection effects. The amount of such position by 12,5 shall be deducted from calculation of the
maximum risk-weighted amount of the bank as specified in par. 747.
477. The risk-weighted amount of a rated securitisation position shall be calculated by
applying to the position value the risk weight according to Tables 13–14:
Table 13
Positions other than ones with short-term credit assessments (ratings)
Standard & Poor’s
From AAA From A+ From
From BB+ From B +
to AAto ABBB+ to
to BBBBBMoody’s Investors
From Aaa
From A1 From Baa1 From Ba1 to From B1
Service
to Aa3
to A3
to Baa3
Ba3
Fitch Ratings
From AAA From A+ From
From BB+
From B+
to AAto ABBB+ to
to BBBBBCQS
1
2
3
4
5
Risk weight
20%
50%
100%
350%
1250%
Table 14
Positions with short-term credit assessments (ratings)
84
Standard & Poor’s
A-1
A-2
A-3
All other ratings
Moody’s Investors
Service
Fitch Ratings
P-1
P-2
P-3
NP
F1
F2
F3
All other ratings
CQS
1
2
3
4
Risk weight
20%
50%
100%
1250%
478. Treatment of unrated positions:
478.1. A bank may apply the weighted-average risk weight that would be applied to the
securitised exposures multiplied by a concentration ratio. This concentration ratio is equal to the
sum of the nominal amounts of all the tranches divided by the sum of the nominal amounts of the
tranches junior to or pari passu with the tranche in which the position is held including that
tranche itself. For this treatment:
478.1.1. The resulting risk weight shall not be higher than 1250% or lower than any risk
weight applicable to a rated more senior tranche.
478.1.2. A bank should always be aware of the composition of the underlying pool of the
securitised exposures.
478.2. Where a bank is unable to determine the risk weights that would be applied to the
underlying exposures if they would not be securitised, it shall apply a risk weight of 1250% to the
unrated securitised position.
479. Where by virtue of the provisions of pars. 480–483 securitisation positions in a
second loss tranche or better in an ABCP programme are treated more favourably and the bank
holding such positions may use the highest of the risk weights which would apply to any of the
underlying exposures if they were not securitised:
479.1. A risk weight shall not be less than 100%.
479.2. The securitisation position shall be:
479.2.1. in a tranche which is economically in a second loss position or better in the
securitisation and the first loss tranche must provide meaningful credit enhancement to the
second loss tranche;
479.2.2. of a quality the equivalent of investment grade or better;
479.2.3. held by a bank which does not hold a position in the first loss tranche.
5.1.1. Treatment of unrated liquidity facilities
480. The risk-weighted amount for eligible liquidity facilities shall be determined as
follows:
480.1. multiplying nominal amount of the facility by 50%;
480.2. the highest of the risk weights which would apply to any of the underlying exposures if
they were not securitised shall be applied.
481. A liquidity facility shall be treated as eligible where the following conditions are met:
481.1. the liquidity facility documentation shall clearly identify and limit the circumstances under
which the facility maybe drawn;
481.2. it shall not be possible for the facility to be drawn so as to provide credit support by
covering losses already incurred at the time of draw — for example, by providing liquidity in
respect of exposures in default at the time of draw or by acquiring assets at more than fair value;
481.3. the facility shall not be used to provide permanent or regular funding for the securitisation;
481.4. repayment of draws on the facility shall not be subordinated to the claims of investors other
than to claims arising in respect of interest rate or currency derivative contracts, fees or other such
payments, nor be subject to waiver or deferral;
481.5. it shall not be possible for the facility to be drawn after all applicable credit enhancements
from which the liquidity facility would benefit are exhausted;
85
481.6. the facility must include a provision that results in an automatic reduction in the amount
that can be drawn by the amount of exposures that are in default, where default has the meaning
given to it under Part 9.2.1, Section II, Chapter IV;
481.7. the facility must include a provision that results in its termination if the average quality of
the pool falls below investment grade (where the underlying pool consists of rated instruments).
482. [Repealed by Resolution No 03-127 of the Board of the Bank of Lithuania of 21 October 2010 with
effect from 31 December 2010].
483. To determine value of cash advance facility, a conversion figure of 0% maybe applied
to the nominal amount of a facility provided that the repayment of draws on the facility are senior
to any other claims on the cash flows arising from the undwerlying exposures.
5.1.2. Additional capital requirements for securitisations of revolving exposures with
early amortisation provisions
484. An originator bank shall calculate an additional risk-weighted exposure amount when
it sells revolving exposures into a securitisation that contains an early amortisation provision.
485. Early amortisation provision – contractual condition according to which upon
occurrence of expected events the investor’s exposures should be paid up before expiration of the
original maturity of issued securities.
486. For securitisation structures where the securitised exposures comprise revolving and
non-revolving exposures, an originator bank shall apply the treatment to that portion of the
underlying pool containing revolving exposures.
487. Originator‘s interest means the value of that notional part of a pool of drawn amounts
sold into a securitisation, the proportion of which in relation to the amount of the total pool sold
into the structure determines the proportion of the cash flows generated by principal and interest
collections and other associated amounts which are not available to make payments to those
having securitisation positions.
488. The originator’s interest may not be subordinate to the investors’ interest.
489. Investors’ interest means the value of the remaining notional part of the pool of drawn
amounts.
490. The originator bank shall calculate a risk-weighted amount in respect of the sum of
the originator's interest and the investors' interest.
491. The exposure of the originator bank, associated with its rights in respect of the
originator’s interest, shall not be considered a securitisation position but as a pro rata exposure to
the securitised exposures as if they had not been securitised.
492. The originator bank shall calculate the risk-weighted exposure amount with respect to
the investor‘s part multiplying the latter by a respective CF and weighted-average of risk weights,
which would be applied to the underlying exposures if they were not securitised.
493. Originators shall be exempt from calculation of additional capital requirements in the
following instances:
493.1. when investors remain fully exposed to all future draws by borrowers so
that the risk on the underlying facilities does not return to the originator bank even after an early
amortisation event has occurred;
493.2. where any early amortisation provision is solely triggered by events not
related to the performance of the securitised assets or the originator bank, such as material changes
in tax laws or regulations.
494. For an originator bank the risk-weighted exposure amounts shall be no greater than
the greater of:
494.1. the risk-weighted exposure amounts calculated in respect of its positions in
the investors’ interest;
494.2. the risk-weighted exposure amounts that would be calculated in respect of
the securitised exposures by a bank holding the exposures as if they had not been securitised.
86
495. Net gains arising from the capitalisation of future income relating to the securitised
exposures, providing credit enhancements for the securitisation positions shall be deducted from
the bank’s capital disregarding the maximum amount indicated in par. 494.
496. In the case of securitisations of uncommitted retail exposures , where the early
amortisation is triggered by the excess spread level falling to a specified level, a bank to determine
CF shall compare the three-month average excess spread level with the excess spread levels at
which excess spread is required to be trapped according to Table 15.
497. Where the securitisation does not require excess spread to be trapped, the trapping
point is deemed to be 4.5 percentage points greater than the excess spread level at which an early
amortisation is triggered.
Table 15
Securitisations subject to a Securitisations subject to a
controlled
non-controlled
early
amortisation early amortisation provision
provision
3 months average excess
CF
CF
spread
Above level A
0%
0%
Level A
1%
5%
Level B
2%
15%
Level C
10%
50%
Level D
20%
100%
Level E
40%
100%
Level A means levels of excess spread less than 133,33% of the trapping level of excess
spread but not less than 100% of that trapping level;
Level B means levels of excess spread less than 100% of the trapping level of excess
spread but not less than 75% of that trapping level;
Level C means levels of excess spread less than 75% of the trapping level of excess spread
but not less than 50% of that trapping level;
Level D means levels of excess spread less than 50% of the trapping level of excess spread
but not less than 25% of that trapping level; and
Level E means levels of excess spread less than 25% of the trapping level of excess spread.
498. An early amortisation provision shall be considered to be controlled where the
following conditions are met:
498.1. the originator bank has an appropriate capital/liquidity plan in place to
ensure that it has sufficient capital and liquidity available in the event of an early amortisation;
498.2. throughout the duration of the transaction there is pro-rata sharing between
the originator's interest and the investor's interest of payments of interest and principal, expenses,
losses and recoveries based on the balance of receivables outstanding at one or more reference
points during each month;
498.3. the amortisation period is considered sufficient for 90% of the total debt
(originator’s and investors’ interest) outstanding at the beginning of the early amortisation period
to have been repaid or recognised as in default;
498.4. the speed of repayment is no more rapid than would be achieved by
straight-line amortisation over the period amortisation.
499. Securitisation of non-retail exposures and committed retail exposures, subject to a
controlled early amortisation provision, shall be subject to a conversion figure of 90 %.
500. Securitisation of non-retail exposures and committed retail exposures, subject to a
non-controlled early amortisation provision, shall be subject to a conversion figure of 100%.
87
5.2. IRB Approach
501. For the purposes of calculating the risk-weighted exposure amounts, a bank may use:
501.1. the Ratings Based Method for rated positions or positions in respect of
which an inferred rating may be used;
502.2. the Supervisory Formula Method for unrated positions. A bank other than
an originator bank or a sponsor bank may only use the Supervisory Formula Method with the
approval of the Bank of Lithuania;
503.3. the Internal Assessment Approach for ABCP positions, having obtained
permission of the Bank of Lithuania;
502. For the purpose of calculating the risk-weighted amount of unrated positions or
positions in respect of which an inferred rating may not be used, a risk weight of 1250% shall be
used in the following instances:
502.1. in the case of an originator or sponsor bank unable to calculate KIRB and
which has not obtained approval to use the Internal Assessment Approach for positions in ABCP
programmes;
502.2. in the case of a bank other than an originator or sponsor bank, which has
not obtained approval of the Bank of Lithuania to use the Supervisory Formula Method for ABCP
exposures.
503. Where an originator bank, a sponsor bank or any other bank is able to calculate K IRB,
the maximum amount of its risk-weighted securitisation positions may be lower than KIRB.
504. KIRB – 8% of the risk-weighted exposure amounts that would be calculated in respect
of the securitised exposures, had they not been securitised, plus the amount of expected losses
associated with those exposures.
505. The risk-weighted amount of securitisation positions which are subject to a risk
weight of 1250% may be reduced by the amount of value adjustments of the underlying exposures
multiplied by 12,5.
506. The risk-weighted amount of securitisation positions may be reduced by the amount
of value adjustments of the securitisation position multiplied by 12,5.
507. Where a securitisation position is subject to a risk weight of 1250%, a bank may, as
an alternative to including the position in their calculation of risk-weighted amounts, deduct from
own funds the value of the position:
507.1. The amount of such position subtracted from own funds may be calculated
as the ratio of risk-weighted amount received after respective reductions under pars. 503–506, to
the risk weight of 1250%.
507.2. The amount of position subtracted from own funds may be adjusted to the
effects of the funded credit protection.
507.3. where the Supervisory Formula Method is used to calculate risk-weighted
amounts and L< KIRBR, o [L+T] > KIRBR, the position may be treated as two positions with L equal
to KIRBR for the more senior of the positions.
507.4. The amount of position subtracted from own funds times 12,5 shall be
excluded from calculation of the maximum amount of risk-weighted exposures.
5.2.1. Ratings Based Method
5.2.1.1. Treatment of rated exposures
508. Under the Ratings Based Method, the risk-weighted amount of a rated securitisation
position shall be calculated by applying to the position value the risk weight determined in
accordance with Tables 16 and 17 times 1,06.
Table 16
Standard &
Poor’s
Positions other than ones with short-term credit assessments
Moody’s
Fitch Ratings CQS
Positions in the
Other
Investors
most senior
positions
Service
tranche, where
N>= 6
N<6
88
AAA
From AA+ to
AAA+
A
ABBB+
BBB
BBBBB+
BB
BBFrom B+
Table 17
Standard &
Poor’s
A-1
A-2
A-3
Other
ratings
Aaa
From Aa1 to
Aa3
AAA
1
7%
From AA+
2
8%
to
AAA1
A+
3
10%
A2
A
4
12%
A3
A5
20%
Baa1
BBB+
6
35%
Baa2
BBB
7
60%
Baa3
BBB8
100%
Ba1
BB+
9
250%
Ba2
BB
10
425%
Ba3
BB11
650%
From B1
From B+
12
1250%
Positions with short term credit assessments
Moody’s
Fitch
CQS
Positions in the
Investors
Ratings
most senior
Service
tranche, where
N>=6
P-1
F1
1
7%
P-2
F2
2
12%
P-3
F3
3
60%
NP
Other ratings
4
1250%
12%
15%
20%
25%
18%
20%
35%
50%
75%
100%
250%
425%
650%
1250%
35%
35%
35%
50%
75%
100%
250%
425%
650%
1250%
Other
positions
N<6
12%
20%
75%
1250%
20%
35%
75%
1250%
N – the effective number of securitised exposures.
509. When determining whether a position is in the most senior tranche of a securitisation,
a bank shall not be required to take into consideration amounts due under interest rate or currency
derivative contracts, fees due, or other similar payments.
510. [Repealed by Resolution No 03-127 of the Board of the Bank of Lithuania of 21 October 2010 with
effect from 31 December 2010].
511. For the purpose of calculating N, securitised multiple exposures to one obligor must
be treated as one exposure:
(  EAD i ) 2
i
N 
 EAD i2
i
EADi – the sum of the exposure values of all exposures to the ith obligor.
512. In the case of resecuritisation, for the purpose of calculating N, the bank must look at
the number of securitisation positionsand not the number of underlying exposures in the original
pools from which the underlying securitisation positions stem.
513. If the portfolio share associated with the largest exposure is available, the bank may
compute N as follows:
N= 1/ C1
514. The value and risk-weighted amount of securitisation position may be adjusted in
observance of requirements established in Chapter IV for the standardised approach.
5.2.1.2. Requirements established for the use of inferred ratings for unrated positions
515. An unrated position shall be attributed an inferred credit assessment equivalent to the
credit assessment of the rated position. To this end the following requirements should be met:
89
515.1. the reference rated position must be subordinate in all respects to the
unrated securitisation position;
515.2. the reference rated position must be the most senior position in respect of
all the other which are in all respects subordinate to the unrated securitisation position.
515.3. the maturity of the reference rated positions must be equal to or longer
than that of the unrated position in question;
515.4. on an ongoing basis, any inferred rating must be updated to reflect any
changes in the credit assessment of the reference positions.
5.2.2. Supervisory Formula Method
516. The calculated risk weight for a securitisation position may not be less than 7%.
517. The risk weight to be applied to the securitisation position shall be:
12.5 x (S[L+T] – S[L]) / T
when x  Kirbr
x

S[ x]  
ω(Kirbr  x)/Kirbr
 when Kirbr  x
Kirbr  K[x]  K[Kirbr]  d  Kirbr/ω1  e
h
 (1  Kirbr / ELGD) N
c
 Kirbr /(1  h)
v
f
( ELGD  Kirbr ) Kirbr  0.25 (1  ELGD) Kirbr
N
 v  Kirbr 2
(1  Kirbr ) Kirbr  v
2 



c



1 h
(1  h)



a
(1  c )c
1
f
 g c
b
 g  (1  c )
d
 1  (1  h)  (1  Beta[ Kirbr ; a, b])
g

K [ x ]  (1  h)  ((1  Beta[ x; a, b]) x  Beta[ x; a  1, b] c )
Kirbr – is the ratio of KIRB to the sum of the values of the underlying exposures expressed
in decimal form;
T – the thickness of the tranche in which the position is held;
L – the credit enhancement level;
ELGD – LGD of a currency unit;
 = 1000;
 = 20;
beta [x;a,b] – refers to the cumulative beta distribution with parameters a and b evaluated
at x.
518. T shall be measured as the ratio of the nominal amount of the tranche to the sum of
values of securitised exposures. Calculating T, exposure value of financial derivatives indicated
in Annex No 7, when current replacement cost value is not positive, shall be equal to potential
future credit exposure calculated according to Chapter V.
519. L shall be measured as the ratio of the nominal amount of all tranches subordinate to
the tranche in which the position is held to the sum of the values of the underlying exposures. For
90
the purpose of calculating L, amounts due by counterparties to derivative instruments listed in
Annex 7 that represent tranches more junior than the tranche in question may be measured at their
current replacement cost (without the potential future credit exposures) in calculating the
enhancement level).
520. ELGD shall be calculated as follows:
i LGDi  EADi
ELGD 
 EADi
i
LGDi – represents the average LGD associated with all exposures to the ith obligor.
521. In the case of resecuritisation, an LGD of 100% shall be applied to the securitised exposures.
522. When default and dilution risk for purchased receivables are treated in an aggregate manner
within a securitisation, ELGD shall be calculated as a weighted average of the LGD for default
risk and the 75% LGD for dilution risk. These weights shall be the stand-alone capital charges for
the default risk and dilution risk respectively.
523. Simplified inputs:
523.1. If the value of the largest securitised exposure 3% of the sum of the values of the
securitised exposures, a bank may set LGD= 50%. N may be calculated as:
1


 C  C1 
N   C1 Cm   m
 max{1  m C1 , 0 }
 m 1 

 or
N=1/ C1.
Cm – the ratio of the sum of the values of the largest “m” underlying exposures to the sum
of the values of all underlying exposures .
523.2. For securitisations involving retail exposures, a bank shall be allowed to use the
simplifications: h =0 and v =0.
5.2.2.1. Credit risk mitigation
524. A bank may use the collaterals recognised as eligible under Section III, Chapter IV.
525. In case of full credit protection the following requirements shall be observed:
525.1. A bank shall determine the effective risk weight of the position by dividing the riskweighted amount of the position by the value of the position and multiplying the result by 100.
525.2. In the case of funded credit protection, the risk-weighted amount of the securitisation
position shall be calculated by multiplying the funded protection-adjusted amount of the position
(E*, as calculated under provisions of Chapter IV applying requirements established for the
standardised approach) by the effective risk weight.
525.3. In the case of unfunded credit protection, the risk-weighted amount of the securitisation
position shall be calculated by multiplying the guarantee amount adjusted for any currency
mismatch and maturity mismatch (in accordance with the provisions of Section III, Chapter IV) by
the risk weight of the guarantor and adding this to the amount arrived at by multiplying the
amount of the securitisation position by effective risk weight.
526. In case of partial protection of position the following requirements shall be observed:
526.1. If the credit risk mitigation covers the first loss or losses on a proportional basis on the
securitisation position, the bank may follow the requirements established for the full credit
protection.
526.2. In other cases, the bank shall treat the securitisation position as two or more positions with
the uncovered portion being considered the position with the lower credit quality:
526.2.1. In the case of funded credit protection, the risk-weighted amount for uncollateralized
portion of the position amount shall be calculated in observance of provisions of pars. 516–523,
subject to the modifications that T shall be determined as the ratio of adjusted amount of the
securitisation position to the total notional amount of the underlying pool.
526.2.2. In the case of unfunded credit protection, the risk-weighted amount for uncollateralized
portion of the position amount shall be calculated in observance of provisions of pars. 516–523,
91
subject to the modifications that T shall be reduced by amount g, equal to the ratio of guarantee
amount adjusted for any currency mismatch and maturity mismatch to the sum of amounts of
underlying exposures.
526.3. In the case of unfunded credit protection the risk weight of the protection provider shall be
applied to the collateralised portion of the position amount.
5.2.3. Internal assessment approach
527. A bank may obtain the permission of the Bank of Lithuania to use the internal assessment
approach for ABCP exposures only if its satisfies the following requirements:
527.1. The commercial papers issued from the ABCP programme shall be rated positions.
527.2. Internal assessment of the credit quality of the position shall reflect the publicly available
assessment methodology of one or more eligible ECAIs, for the rating of securities backed by the
exposures of the type securitised. Quantitative elements used must be at least as conservative as
those used in the relevant assessment methodology of the ECAIs in question.
527.3. The bank shall take into consideration relevant published ratings methodologies of the
eligible ECAIs that rate the commercial paper of the ABCP programme.
527.4. In developing its internal assessment methodology the bank shall take into consideration
relevant published ratings methodologies of the eligible ECAIs that rate the commercial paper of
the ABCP programme. This consideration shall be documented by the bank and updated regularly.
527.5. The bank’s internal assessment methodology shall include rating grades. There shall be a
correspondence between such rating grades and the credit assessments of eligible ECAIs. This
correspondence shall be explicitly documented.
527.6. The internal assessment methodology shall be used in the bank’s internal risk management
processes, including its decision making, management information and capital allocation
processes.
527.7. Internal or external auditors, an ECAI, or the bank's internal credit review or risk
management function shall perform regular reviews of the internal assessment process and the
quality of the internal assessments of the credit quality of the bank's exposures to an ABCP
programme. If the bank's internal audit, credit review, or risk management functions perform the
review, then these functions shall be independent of the ABCP programme business line, as well
as the customer relationship.
527.8. The bank shall track the performance of its internal ratings over time to evaluate the
performance of its internal assessment methodology and shall make adjustments, as necessary, to
that methodology when the performance of the exposures routinely diverges from that indicated by
the internal ratings.
527.9. The ABCP programme shall incorporate underwriting standards in the form of credit and
investment guidelines. In deciding on an asset purchase, the ABCP programme administrator shall
consider the following factors:
527.9.1. the type of asset being purchased;
527.9.2. the type and monetary value of the positions arising from the provision of liquidity
facilities and credit enhancements;
527.9.3. the loss distribution, and;
527.9.4. the legal and economic isolation of the transferred assets from the entity selling the
assets.
527.10. A credit analysis of the asset seller’s risk profile shall be performed and shall include
analysis of past and expected future financial performance, current market position, expected
future competitiveness, leverage, cash flow, interest coverage and debt rating. In addition, a
review of the seller’s underwriting standards, servicing capabilities, and collection processes
shall be performed.
527.11. The ABCP programme’s underwriting standards shall establish minimum asset
eligibility criteria that, in particular:
527.11.1. exclude the purchase of assets that are significantly past due or defaulted;
527.11.2. limit excess concentration to individual obligor or geographic area; and;
92
527.11.3. limits the tenor of the assets to be purchased.
527.12. ABCP programme shall have collections policies and processes that take into account
the operational capability and credit quality of the servicer. The ABCP programme shall mitigate
seller and servicer risk.
527.13. the aggregated estimate of loss on an asset pool that the ABCP programme is
considering purchasing must take into account all sources of potential risk, such as credit and
dilution risk. If the seller-provided credit enhancement is sized based only on credit-related
losses, then a separate reserve shall be established for dilution risk, if dilution risk is material for
the particular exposure pool. In addition, in sizing the required enhancement level, the program
shall review several years of historical information, including:
527.13.1. losses;
527.13.2. delinquencies;
527.13.3. dilutions of receivables;
527.13.4. turnover rate of the receivables;
527.14. The ABCP programme shall incorporate structural features into the purchase of
exposures in order to mitigate potential credit deterioration of the underlying portfolio.
528. The internal ratings shall be associated with the respective ECAI grades. The notional
amount of unrated exposures shall be assigned the risk weight associated with the respective
ECAI grade based on the internal assessment approach.
5.2.4. Treatment of unrated liquidity facilities
529. . [Repealed by Resolution No 03-127 of the Board of the Bank of Lithuania of 21 October 2010 with effect from
31 December 2010].
530. To determine its value, a conversion figure of 0% maybe applied to the nominal amount of a
liquidity facility that is unconditionally cancellable provided that the repayment of draws on the
facility are senior to any other claims on the cash flows arising from the underlying exposures.
531. When a bank is unable to calculate risk-weighted amounts of underlying exposures, if they
had not been securitised, then in exceptional cases, upon having obtained the permission of the
Bank of Lithuania, the bank may apply to the eligible liquidity facility the highest risk weights of
the underlying exposures, calculated in observance of Section I, Chapter IV. In such case the
amount of the eligible liquidity facility shall be determined as follows:
531.1. a conversion figure of 50% may be applied to the nominal amount of a liquidity facility
with an original maturity of one year or less;
531.2. a notional amount of the facility which may be drawn only in the event of a general market
disruption shall be multiplied by 20%.
531.3. In other cases the notional amount shall be multiplied by 100%.
5.2.5. Additional capital requirements for securitisations of revolving exposures with
early amortisation provisions
532. For the purpose of calculating the additional capital requirements, the bank shall observe the
respective provisions applicable to the standardised approach and requirements of this Chapter.
533. The originator’s interest shall be calculated as the sum of:
533.1. the value of the respective portion of that part of the pool of drawn amounts, the proportion
of which in relation to the amount of the total pool determines the proportion of the cash flows
generated by principal and interest collections and other associated amounts which are not
available to make payments to those having securitisation positions;
533.2. the value of the pro rata part of the pool of undrawn amounts of credit lines, the drawn
amounts of which have been sold into a securitisation;
534. the originator’s interest shall not be subordinate to the investors’ interest.
535. The investors’ interest shall be calculated as the sum of:
535.1. the value of the portion of the pool of drawn amounts which is not held by the originator;
535.2. the value of the portion of the pool of undrawn amounts which is not held by the originator.
536. The position of the originator bank, associated with its rights in respect of the originator's
interest, shall not be considered a securitisation position but as a pro rata exposure to the
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securitised exposures as if they had not been securitised. The portion in the pool of undrawn
amounts held by the originator bank shall also be treated as pro rata exposure to undrawn
amounts.
CHAPTER V
CALCULATION OF CAPITAL REQUIREMENT FOR TRADING BOOK RISKS
PART V
TRADING ACTIVITIES OF THE BANK AND DESCRIPTION OF THE TRADING
BOOK
1. General provisions
537. The bank’s trading activities shall be defined in the bank’s strategy, and its trading policies
and procedures which shall be developed for the position or portfolio management purposes and
shall guarantee safe and effective use of trading instruments and management of related risks.
538. Observance of the trading policies and procedures shall be subject to regular internal audit.
539. The trading policies and procedures shall define:
539.1. the relevance of the reading business for the general strategy of the bank’s activities;
539.2. the rationale of the trading intent in consideration of the general financial conditions and
capital adequacy of the bank;
539.3. the list of transactions which are classified by the bank as trading and which will be
included in the trading book;
539.4. the list of transactions which are classified by the bank as non-trading and justification of
such classification;
539.5. the trading limits;
539.6. the list of used trading instruments and the rationale for including them in the trading book.
539.7. assessment of risks, which is likely to arise from such business;
539.8. procedures to be followed by the bank in measuring, managing and controlling the market
risk;
539.9. the procedure for moving financial instruments from the trading to the banking book (and
vice versa), the rationale for such movements (where a financial instrument is moved from the
trading to the banking book for hedging purposes, the capital requirement for market risk shall not
be calculated).
539.10. the management information system.
540. The trading policies shall be approved by the bank board. The bank must familiarise the bank
council with these policies and furnish them to the Bank of Lithuania. The trading policies without
permission of the Bank of Lithuania may be amended at least once during the financial year and at
the beginning of the financial year. The bank board must assess the trading policies making
respective adjustments where appropriate.
541. The trading book of a bank may consist of:
541.1. the bank’s positions in financial instruments, commodities, commodity derivatives held by
right of ownership with trading intent;
541.2. positions arising from trading in financial instruments, commodities, commodity derivatives
the settlement for which is not effected immediately, or where the settlement for which had
already effected, but they have not yet been delivered and positions arising from lending and
borrowing transactions in financial instruments or commodities included in the trading book.
541.3. Positions arising to receivables or charges, commissions, interest and dividends which are
directly related with the trading book’s positions.
541.4. Matched transactions, relating to financial instruments, derivatives, commodities and
commodity derivatives.
541.5. Trading-related repo-style fixed-term transactions that a bank accounts for in its non-trading
book maybe included in the trading book for capital requirement purposes so long as all such repo94
style transactions are included. For this purpose, trading-related repo-style transactions should
satisfy the definition of positions held with trading intent and requirements applicable to them and
both legs are in the form of either cash or securities includable in the trading book. Regardless of
where they are booked, all repo-style transactions are subject to a non-trading book counterparty
credit risk charge.
541.6. Other positions provided for in the bank’s trading book policies.
542. Positions (portfolio) held with trading intent shall comply with the following requirements:
542.1. there must be a clearly documented trading strategy approved by senior management,
which shall include expected holding horizon;
542.2. there must be clearly defined policies and procedures for the active management of the
position, which shall include the following:
542.2.1. positions entered into on a trading desk;
542.2.2. position limits are set and monitored for appropriateness;
542.2.3. dealers have the autonomy to enter into (manage) the position within agreed limits and
according to the approved strategy;
542.2.4. positions are reported to senior management as an integral part of the bank’s risk
management process;
542.2.5. positions are actively monitored with reference to market information sources and an
assessment made of the marketability or hedge-ability of the position or its component risks,
including the assessment of, the quality and availability of market inputs to the valuation process,
level of market turnover, sizes of positions traded in the market.
542.3. there must be clearly defined policy and procedures to monitor the position against the
bank's trading strategy (including the monitoring of turnover and stale positions in the bank's
trading book).
543. A bank shall establish and maintain systems and controls sufficient to provide prudent and
reliable valuation estimates.
544. Systems and controls shall include at least the following elements:
544.1. documented policies and procedures for the process of valuation; clearly defined
responsibilities of the various areas involved in the determination of the valuation, sources of
market information and review of their appropriateness, frequency of independent valuation,
timing of closing prices, procedures for adjusting valuations, month end verification procedures;
544.2. reporting lines for the department accountable for the valuation process that are clear and
independent (i.e. independent of the front office).
2. Prudent valuation methods
545. Marking to market is the at least daily valuation of positions at readily available close out
prices that are sourced (e.g., exchange prices, screen prices, or quotes from several independent
reputable brokers).
546. When marking to market, the more prudent side of bid/offer shall be used unless the bank is a
significant market maker in the particular type of financial instrument or commodity in question
and it can close out at mid market.
547. Where marking to market is not possible, a bank must mark to model their
positions/portfolios before applying trading book capital treatment. Marking to model is defined as
any valuation which has to be benchmarked, extrapolated or otherwise calculated from a market
input.
548. The following requirements must be complied with when marking to model:
548.1. The bank’s managers shall be aware of the elements of the trading book which are subject
to mark to model and shall understand the materiality of the uncertainty this creates.
548.2. Market inputs shall be sourced, where possible, in line with market prices, and the
appropriateness of the market inputs of the particular position being valued and the parameters of
the model shall be assessed on a frequent basis.
548.3. Where available, valuation methodologies which are accepted market practice for particular
financial instruments or commodities shall be used.
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548.4. Where the model is developed by the bank itself, it shall be based on appropriate
assumptions, which have been assessed and challenged by suitably qualified parties independent of
the development process.
548.5. There shall be formal change control procedures in place and a secure copy of the model
shall be held and periodically used to check valuations.
548.6. The bank’s risk management function shall be aware of the weaknesses of the models used
and how best to reflect those in the valuation output.
548.7. The model shall be subject to periodic review to determine the accuracy of its performance
(e.g. assessing the continued appropriateness of assumptions, analysis of profit and loss versus risk
factors, comparison of actual close out values to model outputs).
548.8. For the purpose of item 548.4, the model shall be developed or approved independently of
the front office and shall be independently tested, including validation of the mathematics,
assumptions and software implementation.
549. Independent price verification should be performed in addition to daily marking to market or
marking to model. This is the process by which market prices or model inputs are regularly
verified for accuracy and independence. While daily marking to market may be performed by
dealers, verification of market prices and model inputs should be performed by a unit independent
of the dealing room, at least monthly (or, depending on the nature of the market/trading activity,
more frequently). Where independent pricing sources are not available or pricing sources are more
subjective, prudent measures such as valuation adjustments may be appropriate.
3. Valuation adjustments or reserves
550. A bank shall establish and maintain procedures for considering valuation
adjustments/reserves.
3.1. General standards
551. Valuation adjustments (reserves) shall be formally considered with regard to unearned credit
spreads, close-out costs, operational risks, early termination, investing and funding costs, future
administrative costs and, where relevant, model risk.
3.2. Standards for less liquid positions
552. Less liquid positions could arise from both market events and bank-related situations e.g.
concentrated positions and/or stale positions.
553. A bank shall consider several factors when determining whether a valuation reserve is
necessary for less liquid positions. These factors include the amount of time it would take to hedge
out the position/risks within the position, the volatility and average of bid/offer spreads, the
availability of market quotes (number and identity of market makers) and the volatility and
average of trading volumes, market concentrations, the aging of positions, the extent to which
valuation relies on marking-to-model, and the impact of other model risks.
554. When using third party valuations or marking to model, a bank shall consider whether to
apply a valuation adjustment. In addition, a bank shall consider the need for establishing reserves
for less liquid positions and on an ongoing basis review their continued suitability.
555. When valuation adjustments/reserves give rise to material losses of the current financial year,
these shall be deducted from bank’s original own funds .
556. Other profits/losses originating from valuation adjustments/reserves shall be included in the
calculation of “net trading book profits” and be added to/deducted from the additional own funds
eligible to cover market risk requirements.
557. Valuation adjustments/reserves which exceed those made under the accounting framework to
which the bank is subject shall be treated in accordance with par. 555 if they give rise to material
losses, or par. 556 otherwise.
558. Internal hedges may be eligible for including in the trading book. An internal hedge is a
position that materially or completely offsets the component risk element of a non-trading book
position or a set of positions. Positions arising from internal hedges are eligible for trading book
capital treatment, provided that they are held with trading intent and that the general criteria on
trading intent and prudent valuation, in particular:
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558.1. internal hedges shall not be primarily intended to avoid or reduce capital requirements;
558.2. internal hedges shall be properly documented and subject to particular internal approval and
audit procedures;
558.3. the internal transaction shall be dealt with at market conditions;
558.4. the bulk of the market risk that is generated by the internal hedge shall be dynamically
managed in the trading book within the authorised limits; and
558.5. internal transactions shall be carefully monitored and such monitoring must be ensured by
adequate procedures.
559. The treatment referred to in par. 558 shall apply without prejudice to the capital requirements
applicable to the “non-trading book leg” of the internal hedge.
The treatment referred to in par. 558 shall apply without prejudice to the capital requirements
applicable to the “non-trading book leg” of the internal hedge.
560. Notwithstanding the aforementioned treatment, when a bank hedges a non-trading book
credit risk exposure using a credit derivative booked in its trading book (using an internal
hedge), the non-trading book exposure is not deemed to be hedged for the purposes of
calculating capital requirements unless the bank purchases from an eligible third party
protection provider a credit derivative meeting the requirements set out in paragraph 348 with
regard to the non-trading book exposure. Where such third party protection is purchased and is
recognised as a hedge of a non-trading book exposure for the purposes of calculating capital
requirements and complies with the provisions of paragraph 677, neither the internal nor
external credit derivative hedge shall be included in the trading book for the purposes of
calculating capital requirements.
PART VI
CALCULATING CAPITAL REQUIREMENT FOR FOREIGN EXCHANGE RISK
1. Foreign exchange rate risk
1.1. Calculation of capital requirement for foreign exchange rate risk
561. If the sum of a bank’s total open position in foreign exchange exceeds 2% of the bank capital
necessary for covering its foreign exchange rate risk, it shall multiply the sum of its total open
foreign exchange position and its precious metals position by 8% ratio in order to calculate its
capital requirement against foreign exchange risk.
562. Firstly, the open position in each currency shall be calculated which shall consist of:
562.1. the net spot position, i.e. all asset items less all liability items, including accrued interest, in
the currency in question or, for gold, the net spot position in gold;
562.2. the net forward position, i.e. all amounts to be received less all amounts to be paid under
forward exchange and gold transactions, including currency and gold futures and the principal on
currency swaps not included in the spot position;
562.3. irrevocable guarantees (and similar instruments) that are certain to be called and likely to be
irrecoverable;
562.4. net future income/expenses not yet accrued but already fully hedged;
562.5. the delta coefficient of the total book of foreign currency and gold options (calculated
according to delta equivalent method under pars. 766-774);
562.6. positions in other derivatives.
563. Any positions which a bank has deliberately taken in order to hedge against the adverse effect
of the exchange rate on its capital ratio may be excluded from the calculation of net open currency
positions. Such positions should be of a non-trading or structural nature and their exclusion, and
any variation of the terms of their exclusion, shall require the consent of the Bank of Lithuania.
The same treatment subject to the same conditions as above maybe applied to positions which a
bank has which relate to items that are already deducted in the calculation of own funds.
97
564. For the purposes of the calculation of open positions, in respect of CIUs the actual foreign
exchange positions of the CIU shall be taken into account. A bank may rely on third party
reporting of the foreign exchange positions in the CIU, where the correctness of this report is
adequately ensured. If a bank is not aware of the foreign exchange positions in a CIU, it shall be
assumed that the CIU is invested up to the maximum extent allowed under the CIU's mandate in
foreign exchange and institutions shall, for trading book positions, take account of the maximum
indirect exposure that they could achieve by taking leveraged positions through the CIU when
calculating their capital requirement for foreign exchange risk. This shall be done by
proportionally increasing the position in the CIU up to the maximum exposure to the underlying
investment items resulting from the investment mandate. The assumed position of the CIU in
foreign exchange shall be treated as a separate currency according to the treatment of investments
in gold, subject to the modification that, if the direction of the CIU's investment is available, the
total long position may be added to the total long open foreign exchange position and the total
short position maybe added to the total short open foreign exchange position. There would be no
netting allowed between such positions prior to the calculation.
565. Transaction positions shall be accounted for at market value (in the national (domestic)
currency according to the exchange rates of foreign and national (domestic) currency established
on the reporting day by the Bank of Lithuania (the European Central Bank). Positions in forwards
may be reported at net current value (measuring future cash flows at current price). The net current
value calculation procedures shall be clearly defined in the trading policies of the bank.
566. The total open position in foreign currencies shall be calculated by summing up all short and
long positions in foreign currency held by the bank. The higher of these two totals shall be the
bank’s total open foreign exchange position.
1.2. Prudential requirements and their calculation
567. Banks must evaluate the maximum open position in one foreign currency (excluding
euros) and maximum overall open position in foreign currencies (excluding euros).
Requirements set forth in paragraphs 568 and 570 must be met on a daily basis.
568. Maximum open position in one foreign currency may not exceed 15% of bank capital
calculated in the manner established under Chapter II.
569. This ratio shall be calculated as follows: open position in foreign currency shall be divided by
bank capital calculated in the manned established under Chapter II (Tier I, Tier II and usable Tier
III capital) and multiplied by 100%.
570. Maximum overall (excluding euros) open position in foreign currencies (including precious
metals position) may not exceed 25 per cent of bank capital calculated in the manner established
under Chapter II.
571. This ratio shall be calculated as follows: overall open position in foreign currencies (including
precious metals position) divided by bank capital calculated in the manner established under
Chapter III (Tier I, Tier II and usable Tier III capital) and multiplied by 100%.
2. Position risk
2.1. Risks of debt instruments
572. Capital requirements shall apply to general and specific interest rate risk for trading book
positions in the following instruments (whether or not they carry coupons):
572.1. bonds, debt certificates;
572.2. convertible securities (such as preference shares and bonds). These are securities which on
discretion of the issuer or holder of securities may be exchanged into other securities (as a rule into
the issuer’s shares);
572.3. non-convertible preference securities.
572.4. certificates of deposit. They include issued debt securities evidencing that a placed deposit
corresponds to a certain sum in money with respective maturity and specified interest rate. These
instruments may be traded in the secondary money market;
572.5. T-bills;
572.6. commercial paper. These are not guaranteed short-term notes issued by enterprises;
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572.7. short-term debt securities;
572.8. floating rate notes;
572.9. foreign exchange forward contracts;
572.10. forward rate agreements (FRA). This is an agreement between two counterparties on the
interest rate on a loan or deposit of the planned agreed amount and maturity on the agreed future
date. On the agreed future date the client or the bank pays the difference between the interest rate
of the agreed future date and the present market interest rate;
572.11. repos or reverse repos; and;
572.12. credit derivatives;
572.13. derivatives based upon instruments covered by items 572.1-572.8.
573. Instruments which deviate from those covered by item 572, or which are considered
complex, shall be reflected in the trading policy of the bank.
2.1.1. Calculation of capital requirement for the risks of debt instruments
Net positions
574. The individual net position of the same financial instrument shall be generated by netting, by
value, long and short positions in the same financial instruments (pars. 572-573).
575. Short and long positions in one tranche of a financial instrument (pars. 572-573) may be
netted by value against another tranche of the same instrument only where relevant tranches:
575.1. rank pari passu in all respects (par. 576);
575.2.become fungible within 180 days and thereafter the debt instruments of one tranche (issue)
can be delivered in settlement of another tranche (issue). An instrument is considered to be the
same where it can be substituted by the another instrument of the same characteristics.
576. Financial instruments shall be considered to be the same, where:
576.1. the issuer is the same;
576.2. they have the equivalent ranking in a liquidation of the issuer; and;
576.3. they are denominated in the same currency and their coupon and maturity are the same.
577. Trading book positions in derivatives (excluding options, pars. 766-744) and all positions in
repos, reverse repos and similar products should be decomposed into their components within each
time band prior to calculation of individual net positions.
578. Notional positions (par. item 597.2) that arise from the decomposition of foreign currency
forwards, FRAs, swaps and other derivatives on the basis of residual term to final maturity, shall
be netted, when the positions:
578.1. are denominated in the same currency;
578.2. the difference of their coupons (if any) does not exceed 15 basis points;
578.3. the next fixing date, or residual maturity, correspond with the following limits given in
Table 18 below.
Table 18
Maturity/interest fixing date
Permissible mismatch
Less than 1 month hence
Same day
1 month to 1 year hence
Within 7 days
Over 1 year hence
Within 30 days
579. When calculating the specific and general interest rate risk capital requirement for each
individual currency, net positions shall be classified into different currencies in which they are
denominated.
2.1.1.1. Calculation of capital requirement for specific risks of debt instruments
580. In determining the capital requirement for specific interest rate risk each individual net
position, whether long or short, shall be multiplied by a respective capital requirement factor
which is determined according to its allocation amongst the following categories given in Table 19
to broadly reflect creditworthiness, and the resulting positions, whether long or short, shall be
summed up.
Table 19
99
Category
1*
2
3
4
Financial instrument
Specific risk capital
charge, %
Debt securities issued or guaranteed by 0.00 %
central governments, issued by central banks,
international
organisations,
multilateral
development banks or Member States'
regional government or local authorities
which would qualify for CQS 1 or which
would receive a 0% risk weight under Section
I, Chapter IV.
Debt securities issued or guaranteed by 0.25% proc. for debt
central governments, issued by central banks, instruments
with
international
organisations,
multilateral residual term to final
development banks or Member States' maturity 6 months or
regional governments or local authorities less.
which would qualify for CQS 2 or 3 under
Section I, Chapter IV, debt securities issued 1.00%
for
debt
or guaranteed by institutions which would instruments
with
qualify for CQS 2 or 3 under Section I, residual term to final
Chapter IV, debt securities issued or maturity greater than 6
guaranteed by institutions which would and up to and including
qualify for CQS 3 under par.69 of Section I, 24 months
Chapter IV, and debt securities issued or
guaranteed by corporates which would 1.60%
for
debt
qualify for CQS 1, 2 or 3 under Section I, instruments
with
Chapter IV).
residual term to final
Other qualifying items as defined in par. 583. maturity exceeding 24
months
Debt securities issued or guaranteed by 8.00%
central governments, issued by central banks,
international
organisations,
multilateral
development banks or Member States'
regional governments or local authorities or
institutions which would qualify for CQS 4 or
5 under Section I, Chapter IV, also debt
securities issued or guaranteed by institutions
which would qualify forCQS 3 under par. 68
of Section I, Chapter IV, debt securities
issued or guaranteed by corporates which
would qualify for CQS 4 under Section I,
Chapter IV.
Exposures for which a credit assessment
(rating) by a nominated ECAI is not
available.
Debt securities issued or guaranteed by 12.00%
central governments, issued by central banks,
international
organisations,
multilateral
development banks or Member States'
regional governments or local authorities or
institutions which would qualify for CQS 6
under Section I, Chapter IV, and and debt
100
securities issued or guaranteed by corporates
which would qualify for CQS 5, 6 under
Section I, Chapter IV.
*Interest rate futures, interest rate forwards and forward obligations to purchase or sell debt
instruments shall be assessed as combinations of respective long and short positions. For the
purpose of calculating capital requirement for specific interest rate risk of futures and forwards,
both borrowing and available assets shall be attributed to Category 1 of the Table (specific risk
capital charge of 0%). A forward obligation to purchase or sell a debt instrument shall be treated as
a combination of borrowing maturing on the day of delivery and long (current) position of the debt
instrument. For the purpose of calculating capital requirement for specific risk of forward contracts
to purchase a debt instrument the borrowing shall be attributed to Category 1 of the Table (specific
risk capital charge of 0%) and a debt instrument shall be attributed to the respective category of
Table 19.
581. For the bank which applies the method set forth under Section I, Chapter IV the exposure
shall have an internal rating with a PD equivalent to or lower than that associated with the
appropriate CQS indicated in Table 19.
582. Convertible securities, such as bonds and preference shares that are treated as debt
instruments shall receive the capital charge which applies to debt instruments issued by the same
issuers.
583. The qualifying debt instruments shall include:
583.1. long and short positions in assets qualifying for a CQS corresponding at least to
investment grade in the mapping process described in Section I, Chapter IV;
583.2. long and short positions in assets which have a PD which is not higher than that of the
assets referred to in item 583.1;
583.3. long and short positions in assets for which a credit assessment (rating) by a nominated
ECAI is not available and which meet the following conditions:
583.3.1. they are considered by the Bank of Lithuania to be sufficiently liquid;
583.3.2. their investment quality is, according to the bank's own discretion, at least equivalent to
that of the assets referred to under item 583.1;
583.3.3. they are listed on at least one regulated market in a Member State or on a stock
exchange in a third country provided that the exchange is recognised (item 4.28);
583.4. long and short positions in assets issued by another institution (which calculates capital
adequacy in accordance with the requirements set out in Directive 2006/48/EC) which , in the
opinion of the bank, is sufficiently liquid and has investment quality which, in the opinion of
the bank, corresponds at least to the investment grade of assets referred to in item 583.1;
583.5. securities issued by institutions which according to Section I, Chapter IV, shall qualify
for CQS 2 or higher. Such institutions must be subject to the regulation and supervision
procedure set out in Directive 2006/48/EC.
584. The manner in which the debt instruments are assessed shall be subject to scrutiny by the
Bank of Lithuania, which shall overturn the judgment of the bank if it considers that the
instruments concerned are subject to too high a degree of specific risk to be qualifying items.
585. The bank shall be required to apply the maximum weighting, i.e. 12% to instruments that
show a particular risk because of the insufficient solvency of the issuer.
2.1.1.2. Calculation of capital requirement for general risks of financial instruments
586. General interest rate risk capital requirement shall be calculated by one of the two standard
methods:
586.1. Maturity Ladder Approach;
586.2. Duration Approach.
587. Rationale of the selected method must be included in the trading policy of the bank.
2.1.1.2.1. Maturity Ladder Approach
588. The Maturity Ladder Approach shall apply in determining the maturity of financial
instruments and coupon interest by currency.
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589. The following steps shall be taken for each financial instrument denominated in different
currency:
589.1. Individual net position shall be allocated to one of the maturity banks in Table 20.
Table 20
Band – coupon of 3 Band – coupon of less Weighting, Assumed
% or more (coupon
Zone
than 3 %
%
interest rate
– interest paid on a
change, %
regular basis)
1
1 month and under
1 month and under
0,00
–
1-3 months
1-3 months
0,20
1,00
3-6 months
3-6 months
0,40
1,00
6-12 months
6-12 months
0,70
1,00
2
1-2 years
1 – 1,9 years
1,25
0,90
2-3 years
1,9 – 2,8 years
1,75
0,80
3-4 years
2,8 – 3,6 years
2,25
0,75
3
4-5 years
3,6 – 4,3 years
2,75
0,75
5-7 years
4,3 – 5,7 years
3,25
0,70
7-10 years
5,7 – 7,3 years
3,75
0,65
10-15 years
7,3 – 9,3 years
4,50
0,60
15-20 years
9,3 – 10,6 years
5,25
0,60
Over 20 years
10,6 – 12,0 years
6,00
0,60
12,0 – 20,0 years
8,00
0,60
Over 20,0 years
12,50
0,60
Fixed-rate financial instruments shall be allotted their maturity bands on the basis of the residual
time to their maturity.
Floating-rate financial instruments shall be allotted their maturity bands on the basis of the time
remaining to the re-determination of the coupon and the percentage rate of the coupon.
Positions with maturities of exactly 3 months, 6 months, etc. shall be assigned to the shorter
maturity band.
Distinguished shall be debt instruments with coupons of 3% or more, and financial instruments
with coupons of less than 3%.
Allocation of maturity bands to positions which deviate from the structures covered by Table 20,
or which may be considered complex, shall be described in the trading policy.
589.2. Calculated matched and unmatched positions by each maturity band.
Long positions multiplied by the capital requirements ratio and short positions multiplies by the
capital requirements ratio (the factors are taken from Table 3) shall be separately summed up. The
sum of long positions multiplied by the capital requirement ratio which corresponds to the sum of
long positions multiplied by the capital requirement ratio in the same maturity band shall be called
the matched risk-weighted position of one maturity band, and the remaining long or short position
shall be called the unmatched risk-weighted position for that band. Then the overall position of all
matched risk-weighted maturity bands is calculated.
589.3. Unmatched positions of different bands shall be used in determining
matched and unmatched positions for each zone (zone 1, 2 or 3).
The unmatched risk-weighted long position of each zone shall be calculated by summing
up unmatched risk-weighted long positions for maturity band of each zone specified in Table 20.
The unmatched risk-weighted short position of each zone shall be calculated by summing up
unmatched risk-weighted short positions for maturity band of each particular zone.
The portion of unmatched risk-weighted long position of a respective zone which is matched by
unmatched risk-weighted short position of the same zone shall be considered as matched riskweighted position of that zone. The portion of unmatched risk-weighted long or unmatched riskweighted short position of a respective zone which can not be matched in the aforementioned
manner shall be considered as unmatched risk-weighted position of that zone.
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589.4. Unmatched positions of zones shall be used in calculating matched and unmatched
offsetting positions between zones.
The sum of unmatched risk-weighted long (short) positions of zone 1 shall be matched with
unmatched risk-weighted long (short) positions of zone 2. The extent to which the unmatched
position in zones 1 and 2 are offsetting shall be described as the matched position between zones
1 and 2. After that any residual unmatched risk-weighted positions in zone 2 may be matched by
offsetting unmatched risk-weighted position of zone 3. The extent to which the unmatched
positions in zones 2 and 3 are offsetting shall be described as the matched position between zones
2 and 3.
589.5. The calculations above may be carried out in the reverse order (i.e. firstly calculating the
matched risk-weighted position of zone 2 and 3, followed by the position between zones 1 and 2).
589.6. Any residual unmatched risk-weighted positions in zone 1 shall be then matched by
offsetting unmatched residual positions in zone 3 resulting from matching the latter zone position
by offsetting the position of zone 2. The extent to which the unmatched positions in zones 1 and 3
are offsetting shall be described as the matched positions between zones 1 and 3.
589.7. Any residual unmatched positions following the matching as specified in items 589.4-589.6
shall then be summed to give the residual unmatched positions.
590. The general interest rate capital requirement shall be determined by summing up the results of
calculations covered by par. 589 multiplied by the weighting given in Table 21 below.
Table 21
Type of position
Sum of the matched weighted positions in all maturity bands
Matched weighted position in zone one
Matched weighted position in zone two
Matched weighted position in zone three
Matched weighted position between zones one and two and between
zones two and three
Matched weighted position between zones one and two and between
zones two and three
Matched weighted position between zones one and three
Residual unmatched weighted positions
Weight, %
10
40
30
30
40
40
150
100
2.1.1.2.2. Duration approach
591. The Duration Approach shall be based upon determining the modified duration of financial
instruments.
592. The following steps shall be taken for each currency:
592.1. The instrument’s yield-to-maturity at current market value shall be determined on the basis
of the market value for each individual net position of each fixed rate instrument (whether or not it
is coupon-bearing). For each individual net position in floating-rate instruments the market value
shall be used for determining a yield-to-maturity of the given instrument treating its final maturity
as being the date on which the coupon is next re-determined. The yield-to-maturity of the
instrument shall be its theoretical discount rate.
592.2. Afterwards calculated shall be the modified duration for each financial instrument:
D
Modified duration = –––––––,
1+i
t Ct
 ––––––
t =1 (1 + i )t
D = ––––––––––––––––––––,
n
Ct
n
103

t =1
––––––
(1 + i )t
D – duration of financial instrument;
Ct – cash flow (coupon or underlying) value during t period;
t – time periods of payment of the principal or coupon;
n – number of periods to maturity;
i – yield-to-maturity (item 592.1).
592.3. Individual net positions, at current market value, shall be allocated to one of three zones in
Table 22.
592.4. The current market value of each individual net position shall be multiplied by the modified
duration and the assumed change in the interest rate.
Table 22
Zone
Modified duration
Assumed interest
(in years)
(change in %)
One
1,0
>01
Two
0,85
> 1  3,6
Three
> 3,6
0,7
592.5. Subsequently calculated shall be the matched and unmatched positions as specified in items
589.2-589.7.
593. The results of the process outlined under par. 592 shall be then multiplied by the weighting
given in Table 23.
Table 23
Type of position
Weight, %
Matched duration-weighted position for each zone
2
Matched duration-weighted positions between zones
40
one and two
Matched duration-weighted positions between zones
40
two and three
Matched duration-weighted positions between zones
150
one and three
Residual unmatched duration-weighted positions
100
594. The weighted figures shall be then summed to give the general interest rate risk capital
requirement.
595. The general interest rate risk capital requirement shall be calculated as the sum total of the
specific interest rate risk capital requirement, the general interest rate risk capital requirement and
equity derivatives’ integrated interest rate risk capital requirement (see “Equity risk”).
2.1.1.3. Decomposition of financial derivatives (excluding options, see “Risk relating to
options”) and repos and reverse-repos when calculating the interest rate risk capital
requirement
596. When applying the Maturity Based Approach the exchange traded and OTC derivatives shall
be treated as two separate positions according to the two-legged approach.
2.1.1.3.1. The Two-legged Approach
597. The two-legged approach implies that financial instrument position is to be treated as two
separate positions:
597.1. a notional position representing the final maturity of the contract;
597.2. position representing the underlying instrument, or an equivalent notional instrument where
there is no underlying (e.g., an interest rate swap). The notional position shall be treated as a
government bond with maturity equal to the transaction.
Forwards
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598. FX forwards shall be treated as two separate positions: the paying currency and the receiving
currency. Each of these legs shall be treated as a zero-coupon government bond in its respective
currency.
599. A single deal shall therefore feed into two separate ladders with no offsetting between the
positions.
600. If the forward positions are not re-valued (not discounted), then the notional value of the
payment shall be inserted into the Maturity Band method.
601. If the forward positions are re-valued (discounted), the notional value of the payment may be
inserted into the methods provided for under the bank’s trading activity policy (Maturity Band or
Duration method).
Forward Rates Agreement (FRA)
602. FRAs and other financial instruments where the underlying is a money- market exposure,
shall be split into two legs:
602.1. the first leg shall represent the time to the expiry of the futures contract or the settlement
date of the FRA;
602.2. the second leg shall represent the time to expiry of the underlying instrument.
603. Each leg shall be treated as a zero-coupon government bond of the issuer:
603.1. for deposit futures, the size of each leg shall be the notional amount of the underlying
money-market exposure;
603.2. for FRAs, the size of each leg shall be the notional amount of the underlying money-market
exposure discounted to present value, however where the Maturity Band Method is employed the
notional amount may be used without discounting.
Bond futures
604. Bond futures shall be decomposed into two legs as follows:
604.1. the first leg shall be a zero-coupon government bond of the issuer. Its maturity shall be the
time to expiry of the futures or forward contract. Its size shall be the cash flow on maturity
discounted to present value (under the Duration Method), however where the Maturity band
Method is employed the notional amount should be used without discounting;
604.2. the second leg shall represent the underlying bond. Its maturity shall be that of the
underlying bond for fixed rate bonds or the time to the next reset for floating rate bonds.
605. For bond futures, the principal amount in the second leg shall be generated by treating it as
the notional underlying bond upon which the contract is based using the futures price times the
notional underlying amount.
Swaps
606.Swaps shall be decomposed into the following two legs:
606.1. Currency swaps shall be treated as having a fixed or floating leg in each currency.
606.2. Interest rate swaps shall also be split into two legs. Each leg shall be allocated a maturity
band (Table 20) equating to the time remaining to refixing.
607. Each of the legs may benefit from the application of netting.
Repos and reverse repos
608. A repo (or sell-buy or equity repo) involving exchange of a security for other financial
instruments shall be represented as a borrowing, i.e. a short position in a government bond with
maturity equal to the repo and coupon equal to the repo interest rate.
609. Securities owned before the repo shall still be included in the calculation of the relevant
capital requirement.
610. A reverse repo (or buy-sell or equity reverse repo) shall be represented as a loan, i.e. a long
position in securities with maturity equal to reverse repo and coupon equal to the repo interest rate.
2.2. Equity position risk
611. The capital requirements shall apply to the trading book positions related with the specific
and general equity position risk of the following financial instruments (including forward
positions):
611.1. shares;
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611.2. depository receipts to be converted into the underlying shares;
611.3. convertible preference securities, i.e. convertible preference equities shall be equities that
may be converted into another equity at the option of the issuer or the holder; non-convertible
preference equities shall be treated as debt securities (bonds);
611.4. convertible debt securities which convert into the financial instruments specified under
items 611.1-611.3 shall be treated as equities;
convertible debt securities shall be a debt instrument which carries the features of a bond,
but is convertible, at the option of the holder, usually into shares of the issuer);
convertible debt securities must be treated as equities, when:
- the date at which conversion may take place is less than 3 months ahead,
- the convertible is trading at a premium of less than 10%.
Otherwise, a bank must treat convertibles as debt items.
611.5. derivatives based on financial instruments set out under items 611.1-611.3.
2.2.1. Calculation of capital requirement for equity position risk
612. Net positions of equities denominated in foreign currency shall be translated into the national
currency at the rate of foreign currencies and litas fixed by the Bank of Lithuania (the European
Central Bank) on the reporting day.
2.2.1.1. Calculation of capital requirement for specific equity position risk
613. Net long and net short positions of financial instruments listed in par. 611 shall be calculated
in the manner described under pars. 574-578.
614. The sum of long and short positions shall be the overall position of the bank, whereas the
difference of these two positions – the net position.
615. The capital requirement for specific equity position risk shall be calculated multiplying the
overall position by 4% capital requirement.
616. Capital requirement of 2% against specific risk of equity positions shall apply to equities
which satisfy the following conditions:
616.1. the equities shall not be those of issuers which have issued only traded debt instruments
that currently attract an 8% or 12% requirement in Table19 or that attract a lower requirement
only because they are guaranteed or secured;
616.2. the equities shall be those used in developing liquid equity indices of recognised
exchanges;
616.3. no individual position shall comprise more than 10% of the value of the equity portfolio,
provided that the total of such positions does not exceed 50% of the portfolio.
In observance of the trading policy of the bank included in the calculation of the total portfolio
amount shall be positions in highly liquid equity indices of recognised exchanges, irrespective of
2% capital requirement applicable to the individually (see “Equity indices”).
2.2.1.2. Calculation of capital requirement for general equity position risk
617. The net equity position shall be calculated.
618. Net equity position shall be multiplied by the capital charge of 8%.
Measurement of underwriting of financial instruments when calcualting capital
requirements for position risks is given in Annex No 8 to these Regulations.
Equity index transactions
619. Matched long and short positions in each equity index listed in Annex 2 shall be summed
calculating the long or short position to which the specific and general position risk charges.
Specific position risk of equity indices
620. A 2 per cent charge shall apply to the net positions of equity indices of recognised stock
exchanges.
General position risk of equity indices
621. Positions in equity indices should also be included in the calculations of the general equity
risk for the relevant country based on the sum of the current market values of the underlying
financial instruments.
Positions in non-highly liquid indices
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622. Positions in notional indices or baskets of stocks (other than positions in equity indices of
recognised stick exchanges) shall be treated as a single position based on the sum of current
market values of the underlying instruments.
2.2.1.3. Treatment of derivatives when calculating the equity risk capital requirement
2.2.1.3.1. Equity futures, forwards and swaps
623. Derivative positions in equity futures, forwards and swaps, based on individual equities,
portfolios or equity indices, must be converted into notional underlying instruments, whether long
or short.
624. The overall equity risk capital requirement shall be the sum of specific equity risk capital
requirement and general equity risk capital requirement, including highly liquid and non-highly
liquid equity indices and capital requirement for notional underlying positions of derivatives listed
in par. 623.
2.2.1.3.2. Interest exposures embedded in equity derivatives (excluding options; pars.
766-774)
625. Embedded interest rate exposures in equity derivatives (excluding options, pars. 766-774)
shall be subject to the capital requirements based on the following:
Table 24
Risk weights,%
Residual maturity
0 – 3 months
0,20
3 – 6 months
0,40
6 –12 months
0,70
1 – 2 years
1,25
2 – 3 years
1,75
3 – 4 years
2,25
4 – 5 years
2,75
Over 5 years
3,75
626. Positions with maturities of exactly 3 months, 6 months, etc. shall be assigned to the shorter
maturity band.
627.The capital requirement shall be calculated for each notional underlying position, as the mark to
market value of that underlying position multiplied by the percentage in Table 24 above.
628. The capital requirement for all the notional interest rate positions under this treatment shall be
the sum of the absolute values of the individual capital requirements calculated above. This sum
(embedded interest rate risk in equity derivatives) shall then be included in the interest rate risk
capital requirement calculations.
2.3. Treatment of credit derivatives when calculating the capital requirement for equity
risk
629. When calculating the capital requirement for market risk of the party who assumes the credit
risk (the “protection seller”), unless specified differently, the notional amount of the credit
derivative contract must be used. For the purpose of calculating the specific risk charge, other than
for total return swaps, the maturity of the credit derivative contract is applicable instead of the
maturity of the obligation.
630. Positions shall be determined as follows:
630.1. A total return swap creates a long position in the general market risk of the reference
obligation and a short position in the general market risk of a government bond with a maturity
equivalent to the period until the next interest fixing and which is assigned a 0% risk weight under
Section I, Chapter IV. It also creates a long position in the specific risk of the reference obligation.
630.2. A credit default swap does not create a position for general market risk. For the purposes of
specific risk, the bank must record a synthetic long position in an obligation of the reference
entity, unless the derivative is rated externally and meets the conditions for a qualifying debt item,
in which case a long position in the derivative is recorded. If premium or interest payments are
due under the product, these cash flows must be represented as notional positions in government
bonds.
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630.3. A single name credit linked note creates a long position in the general market risk of the
note itself, as an interest rate product. For the purpose of specific risk, a synthetic long position is
created in an obligation of the reference entity. An additional long position is created in the issuer
of the note. Where the credit linked note has an external rating and meets the conditions for a
qualifying debt item, a single long position with the specific risk of the note need only be
recorded.
630.4. In addition to a long position in the specific risk of the issuer of the note, a multiple name
credit linked note providing proportional protection creates a position in each reference entity,
with the total notional amount of the contract assigned across the positions according to the
proportion of the total notional amount that each exposure to a reference entity represents. Where
more than one obligation of a reference entity can be selected, the obligation with the highest risk
weighting determines the specific risk. Where a multiple name credit linked note has an external
rating and meets the conditions for a qualifying debt item, a single long position with the specific
risk of the note need only be recorded.
630.5. A first-asset-to-default credit derivative creates a position for the notional amount in an
obligation of each reference entity. If the size of the maximum credit event payment is lower than
the capital requirement under the method in the first sentence of this point, the maximum payment
amount may be taken as the capital requirement for specific risk.
630.6. A second-asset-to-default credit derivative creates a position for the notional amount in an
obligation of each reference entity less one (that with the lowest specific risk capital requirement).
If the size of the maximum credit event payment is lower than the capital requirement under the
method in the first sentence of this point, this amount maybe taken as the capital requirement for
specific risk.
630.7. If a first or second-asset to default derivative is externally rated and meets the conditions
for a qualifying debt item, then the protection seller need only calculate one specific risk charge
reflecting the rating of the derivative.
630.8. For the party who transfers credit risk (the protection buyer), the positions are
determined as the mirror principle of the protection seller, with the exception of a credit linked
note (which entails no short position in the issuer). If at a given moment there is a call option in
combination with a step- up, such moment is treated as the maturity of the protection. In the
case of first-to-default credit derivatives and nth-to-default credit derivatives, the following
treatment applies instead of the mirror principle:
630.8.1. First-to-default credit derivatives: where an institution obtains credit protection for a
number of reference entities underlying a credit derivative under the terms that the first default
among the assets shall trigger payment and that this credit event shall terminate the contract,
the institution may offset specific risk for the reference entity to which the lowest specific risk
percentage charge among the underlying reference entities applies according to Table 19;
630.8.2. Nth-to-default credit derivatives: where the nth default among the exposures triggers
payment under the credit protection, the protection buyer may only offset specific risk if
protection has also been obtained for defaults 1 to n-1 or when n-1 defaults have already
occurred. In such cases, the methodology set out above for first-to-default credit derivatives
shall be followed appropriately modified for nth-to-default products.
2.3.1. Specific risk capital charges for trading book positions hedged by credit
derivatives
631. An allowance shall be given for protection provided by credit derivatives, when the value of
two legs always move in the opposite direction and broadly to the same extent. This will also be
the case in the following situations:
631.1. the two legs consist of completely identical instruments;
631.2. a long cash position is hedged by a total rate of return swap (or vice versa) and there is an
exact match between the reference obligation and the underlying exposure (i.e., the cash position).
The maturity of the swap itself may be different from that of the underlying exposure;
108
632. in situations referred to under par. 631, a specific risk capital charge should not be applied to
either side of the position.
633. An 80% offset will be applied when the value of two legs always move in the opposite
direction and where there is an exact match in terms of the reference obligation, the maturity of
both the reference obligation and the credit derivative, and the currency of the underlying
exposure. In addition, key features of the credit derivative contract should not cause the price
movement of the credit derivative to materially deviate from the price movements of the cash
position. To the extent that the transaction transfers risk, an 80% specific risk offset will be applied
to the side of the transaction with the higher capital charge, while the specific risk requirements on
the other side shall be zero.
634. Partial allowance shall be given when the value of two legs usually move in the opposite
direction. This would be the case in the following situations:
634.1. the position falls under point 631.2 but there is an asset mismatch between the reference
obligation and the underlying exposure. However, the positions meet the following requirements:
634.1.1. the reference obligation ranks pari passu with or is junior to the underlying obligation;
634.1.2. the underlying obligation and reference obligation share the same obligor and have legally
enforceable cross-default or cross-acceleration clauses;
634.2. the position falls under item 631.1 or par. 633, but there is a currency or maturity mismatch
between the credit protection and the underlying asset (currency mismatches should be included in
the normal reporting foreign exchange risk);
634.3. the position falls under par. 633, but there is an asset mismatch between the cash position
and the credit derivative. However, the underlying asset is included in the (deliverable) obligations
in the credit derivative documentation;
635. In each of those situations referred to in par. 634, rather than adding the specific risk capital
requirements for each side of the transaction, only the higher of the two capital requirements shall
apply.
636. In all situations not falling under pars. 631-634, a specific risk capital requirements will be
assessed against both sides of the positions.
Measurement of CIUs trading book positions calculating capital requirements for
market risk is given in Annex No 9.
3. Commodities risk
3.1. Calculating capital requirements for commodities risk
3.1.1. General provisions
637. Positions in gold or gold derivatives shall be considered as being subject to foreign exchange
risk and their market risk should be treated as foreign exchange rate risk or using internal market
risk assessment methods.
638. Commodity risk capital requirement shall be calculated using the maturity ladder approach.
639. Capital charges shall be calculated for each commodity separately. The commodity positions
shall be valued using the current spot price, expressed in the national currency at foreign currency
and litas exchange rate fixed by the Bank of Lithuania (the European Central Bank) on the
reporting date.
640. Positions of commodity derivatives shall be assigned to respective maturity bands according
to the maturity ladder approach by converting the positions into notional commodity positions and
assigning a maturity having regard to the following:
640.1. futures and forward positions relating to individual commodities shall be included as
notional amounts of barrels, kilos, etc.;
640.2. commodity swaps shall be incorporated as a series of positions equal to the notional amount
of the contract, with one position corresponding with each payment on the swap and slotted into
the maturity ladder accordingly. The positions shall be long positions if the bank is receiving a
cash flow and short positions if the bank is paying;
640.3. for commodity swaps where the legs are in different commodities, each leg should be
included in the relevant maturity ladder.
109
3.1.2. Maturity ladder approach
641. Each commodity position shall be expressed in terms of a standard unit of measurement. For
each commodity, one of the seven maturity banks included in Table 25 shall be assigned.
642. A set-off of long and short positions in a given commodity may be possible if they mature
within 10 days of each other. It shall not be required to include such positions in the maturity
ladder calculation.
643. Maturity bands and spread rates are given in Table 25 below:
Table 25
Spread rate, %
Maturity band
1.5
0  1 month
1.5
1  3 months
1.5
 3  6 months
1.5
 6  12 months
1.5
 1  2 years
1.5
 2  3 years
1.5
 3 years
644. The capital requirement shall be calculated as follows:
644.1. long and short positions of each time band shall be matched;
644.2. the sum of matched positions (.e. both long and short positions) shall be multiplied by the
spot price for that commodity; and
644.3. the result shall be multiplied by the spread rate for the band (1.5%).
645. Any remaining unmatched position in a time band shall be carried forward to the next time
band and respectively matched, etc.
646. A surcharge of 0.6% per cent of the net position carried forward shall be added in respect of
each time band that the net position is carried forward.
647. A capital charge of 15% shall be applied to remaining net open position after any offsetting
and matching.
For the purpose of calculating capital requirements for price risk of commodities banks
may apply simplified or extended maturity ladder approach in observance of Annex No 10 to
these Regulations.
4. Use of internal models to calculate capital requirements for credit risk
648. The Bank of Lithuania may allow banks to calculate their capital requirements for market risk
using their own internal risk-management models instead of or in combination with the methods
described above.
649. Recognition shall only be given if the bank’s risk-management system is conceptually sound
and implemented with integrity and that, in particular, the following qualitative and quantitative
standards are met.
650. A bank shall communicate to the Bank of Lithuania a notification about its intention to start
applying the Value-at-Risk (VaR) model for the purpose of calculations of the capital adequacy
requirement 12 months in advance of such application concurrently furnishing a substantiated
justification with regard to the conformity of the model with the qualitative and quantitative
requirements established for it and referred to in pars. 652 and 651. The principles for authorising
the application of VaR model shall be the same as the principles established for other internal
models by the Bank of Lithuania.
651. The VaR is the most widely used internal risk assessment methodology. VaR model is a
statistical model used for measuring potential risks of economical losses. The outcome of VaR
model – quantification of potential losses of the financial instruments portfolio for a certain period
and under a certain probability. VaR model may be used to assess the risks of foreign exchange
rate, interest rate, equities and commodities. VaR model may contribute to more accurate
diversification of risks and facilitate in maintaining effective process of the management of the
bank’s risks.
652. Qualitative standards for the internal model:
110
652.1. the internal risk-measurement model is closely integrated into the daily risk-management
process of the bank and serves as the basis for reporting risk exposures to senior management of
the bank;
652.2. the bank has a risk control unit that is independent from business trading units and reports
directly to senior management. The unit must be responsible for designing and implementing the
bank's risk-management system. It shall produce and analyse daily reports on the output of the
risk-measurement model and on the appropriate measures to be taken in terms of trading limits.
The unit shall also conduct the initial and on-going validation of the internal model;
652.3. the bank managers are actively involved in the risk-control process and the daily reports
produced by the risk-control unit are reviewed by a level of management with sufficient authority
to enforce both reductions of positions taken by individual traders as well as in the institution's
overall risk exposure;
652.4. the bank has sufficient numbers of staff skilled in the use of sophisticated models in the
trading, risk-control, audit and back-office areas;
652.5. the bank has established procedures for monitoring and control of the internal model
ensuring the compliance with the general risk management policies of the bank;
652.6. the internal-model related procedures must be documented in detail;
652.7. the bank frequently conducts a rigorous programme of stress testing and the results of these
tests are reviewed by senior management and reflected in the policies and limits it sets;
652.8. to assess the quality of the internal model, it should be subject to back-testing:
652.2.8.1. For the purpose of applying this method the daily operating result – profit (loss) – shall
be compared with the respective estimated measure generated by the bank’s internal model. If the
actual result of the specified period (Ract.) exceeds the estimated measure of the internal model
(VaRest.), it means that the internal model's accuracy is insufficient.
652.2.8.2. Each time when the actual result exceeds the respective estimated measures of the
internal model an overshooting shall be recorded:
Error = Ract. – VaRest. > 0.
652.2.8.3. Formal accounting for overshootings shall commence no later than from the first day of
the application of the internal model.
652.2.8.4. Large numbers of deviations from the actual measure (certain amount of overshootings
statistically may be inevitable and shall depend upon the confidence interval) show that the
internal model’s accuracy is insufficient.
652.9. At least once a year, the bank must conduct the internal audit of its overall riskmanagement process using the VaR model. The bank’s units included in the process of
development and implementation of the internal model shall not participate in this audit. The
internal audit shall consider the following:
652.9.1. the integration of market risk measures into daily risk management and the integrity of
the management information system;
652.9.2. efficiency of operations of the bank’s risk control unit;
652.9.3. soundness of market risk assessment procedures using the internal model;
652.9.4. validation of material changes of market risk assessment procedures using the internal
model;
652.9.5. reliability, accuracy, consistency and timeliness of the internal model data;
652.9.6. accuracy and appropriateness of the internal model assumptions (normal distribution,
volatility and correlation measures, etc.);
652.9.7. accuracy of risk sensitivity calculations for the financial portfolio of the bank;
652.9.8. procedures and outcomes of the internal model back-testing procedure.
652.10. Bankas shall have processes in place to ensure that their internal models have been
adequately validated by suitably qualified parties independent of the development process to
ensure that they are conceptually sound and adequately capture all material risks. The validation
shall be conducted (when the internal model is initially developed and when any significant
changes are made to the internal model. The validation shall also be conducted on a periodic basis
111
but especially where there have been any significant structural changes in the market or changes to
the composition of the portfolio which might lead to the internal model no longer being adequate.
Internal model validation shall not be limited to back-testing, but shall, at a minimum, also include
the following:
652.10.1. tests to demonstrate that any assumptions made within the internal model are
appropriate and do not underestimate or overestimate the risk;
652.10.2. in addition to the regulatory back-testing programmes, banks shall carry out their own
internal model validation tests;
652.10.3. the use of hypothetical portfolios to ensure that the internal model is able to account for
particular structural features that may arise, for example material basis risks and concentration
risk.
652.11. The information systems of a bank shall be consistent with the complexity of the internal
model and their specialists shall guarantee accurate integration of the internal model data and
assessment of the system as a whole in the following areas:
652.11.1. internal model system, data entry and storing system, market risk assessment results’
integration system, testing system, back-testing system;
652.11.2. system’s availability, possibilities to enter new data (also unexpected risks-related data),
system protection, network adequacy, system development opportunities;
652.11.3. statistical data relating to the process of development of the internal model.
652.12. It shall be recommended that the appropriateness of the internal model be assessed by
external audit.
653. For VaR model application purposes banks may use the following principal methods:
variation–co-variation method, historical simulation method, Monte Carlo simulation method.
653.1. Variation–co-variation method is a parametric method used to calculate the risk amount of
financial instruments assuming normal distribution of their market risk factors and portfolio profit
(loss); random variable value occurrence probability function, graphically interpreted as a
symmetric bell-shaper curve).
653.2. Historical simulation approach used to calculate market value of financial instruments on
the basis of data collected about changes (history) of market risk factors of the previous period.
653.3. Monte Carlo is used to simulate different scenarios of changes in market risk factors. Each
scenario generates likely market value of financial instruments for the selected future period.
654. For the purpose of calculating the capital adequacy requirement, a bank may apply VaR
model, if it satisfies the following quantitative requirements:
654.1. Market risk using VaR model shall be assessed at least on a daily basis.
654.2. VaR model shall rely on the following assumptions:
654.2.1. 99% confidence interval (range between two values of the measure being assessed to
which the latter belongs under a certain probability);
654.2.2. 10 business days holding period ( period fixed for holding a financial instrument with a
bank);
654.2.3. historical data of minimum 250 business days (shorter historical observation period may
be justified in the event of greater price variations);
654.3. Data shall be updated in a daily basis.
654.4. Correlations between the market risk categories and outside their limits may be allowed if
the bank demonstrates the soundness and integrity of the implemented system of calculation of
correlations.
654.5. A model shall capture significant risks arising from options or similar instruments.
655. The bank’s capital requirement for market risk calculated on a daily basis using VaR model
shall be equal to the higher of:
655.1. its previous day’s VaR measure plus, where appropriate, the incremental default risk
charge;
655.2. an average of the daily VaR on each of the preceding 60 business days, multiplied by the
factor of 3, increased by a plus-factor of between 0 and 1 (Table 26), depending on the number of
112
overshootings for the most recent 250 business days as evidenced by the back-testing results) and
plus, where appropriate, the incremental default risk charge.
Table 26
Number of recorded
Plus-factor
Multiplication factor
overshootings
Fewer than 5
0,00
3,00
5
0,40
3,40
6
0,50
3,50
7
0,65
3,65
8
0,75
3,75
9
0,85
3,85
10 and more
1,00
4,00
656. Using the multiplication factor, VaR measure shall be translated into the capital requirement
for market risk. The greater is the number of overshootings, the larger multiplication factor should
be applied to ensure higher capital requirement for the bank’s market risk.
657. For the purpose of calculating capital requirements for specific risk associated with traded
debt and equity positions, the bank may use its internal model if, in addition to compliance with
the conditions of this Part, the internal model meets the following conditions:
657.1. it explains the historical price variation in the portfolio;
657.2. it captures concentration (in terms of magnitude and changes of composition of the
portfolio);
657.3. it is robust to an adverse environment;
657.4. it is validated through back-testing aimed at assessing whether specific risk is being
accurately captured;
657.5. it captures name-related basis risk, that is institutions shall demonstrate that the internal
model is sensitive to material idiosyncratic differences between similar but not identical positions;
657.6. it captures event risk.
658. The bank shall meet the following conditions:
658.1. Where a bank is subject to event risk that is not reflected in its VaR measure, because it is
beyond the10-day holding period and 99 percent confidence interval (low probability and high
severity events), the bank shall ensure that the impact of such events is factored in to its internal
capital assessment.
658.2. The bank’s internal model shall conservatively assess the risk arising from less liquid
positions and positions with limited price transparency under realistic market scenarios. In
addition, the internal model shall meet minimum data standards. Proxies shall be appropriately
conservative and may be used only where available data is insufficient or is not reflective of the
true volatility of a position or portfolio.
659. The bank shall have an approach in place to capture, in the calculation of its capital
requirements, the default risk of its trading book positions tha tis incremental to the default risk
captured by the VaR measure as specified in the requirements of this paragraph. To avoid double
counting, a bank may, when calculating its incremental default risk charge, take into account the
extent to which default risk has already been incorporated into the VaR measure, especially for
risk positions that could and would be closed within10 days in the event of adverse market
conditions or other indications of deterioration in the credit environment. Where a bank captures
its incremental default risk through a surcharge, it shall have in place methodologies for validating
the measure.
660. A bank shall demonstrate that its approach meets soundness standards under the assumption
of a constant level of risk, and adjusted where appropriate to reflect the impact of liquidity,
concentrations, hedging and optionality.
661. A bank that does not capture the incremental default risk through an internally developed
approach shall calculate the surcharge through the standardised or internal ratings based method.
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5. Settlement and counterparty credit risk
5.1. Calculating capital requirements for settlement and counterparty credit risk
662. In the case of transactions in which debt instruments, equities, foreign currencies and
commodities (excluding repurchase and reverse repurchase agreements and securities or
commodities lending and securities or commodities borrowing) are unsettled after their due
delivery dates, an bank must calculate the price difference to which it is exposed, i.e. the
difference between the agreed settlement price for the instrument in question and its current
market value, where the difference could involve a loss for the bank.
663. It must multiply this difference by the appropriate factor in column A of Table 27 in order to
calculate its capital requirement.
Table 27
Number of working days after due
Factor, %
settlement date
5 –15
8
16 – 30
50
31 – 45
75
46 and more
100
664. Freed deliveries include transactions (other than repurchase and reverse repurchase
agreements, and securities and commodities lending and borrowing transactions), where it has paid
for securities, or commodities before receiving them or it has delivered securities or commodities
before receiving payment for them and in the case of cross-border transactions, one day or more
has elapsed since it made that payment or delivery.
Table 28
Transaction
Up to first
From first contractual
From 5 business
type
contractual
payment or delivery leg
days post
payment or
up to four days after
second contractual
delivery leg
second contractual
payment
payment or delivery leg or delivery leg until
extinction of the
transaction
Free
delivery
No capital
charge
Treated as an exposure
Deduct
value
transferred
plus current positive
exposure from own
funds
665. In applying a risk weight to free delivery exposures treated according to column 3 of Table
28, a bank using the IRB approach (Part II, Chapter IV), may assign PDs to counterparties, for
which they have no other non-trading book exposure, on the basis of the counterparty's external
rating. A bank using own estimates of LGDs may apply the LGDs indicated by the Bank of
Lithuania to free delivery exposures treated according to column 3 of Table 28 provided that it
applies it to all such exposures. Alternatively, a bank, using the IRB approach may apply the risk
weights of the standardised approach provided that it applies them to all such exposures or may
apply a 100% risk weight to all such exposures.
666. If the amount of positive exposure resulting from free delivery transactions is not material, a
bank shall apply a risk weight of 100 % to these exposures.
5.2. Calculating capital requirements for counterparty credit risk
667. A capital requirement for counterparty risk shall be calculated on any trade that is not yet due
for final settlement, or is overdue. A capital requirement for counterparty risk shall be calculated
114
for deferred payments, margin payments, fees, other counterparty risk in the trading book (e.g.,
where a loan is transferred to the trading book with a view to hedging a certain financial
instrument, the counterparty risk must be specified), free deliveries, which remain unsettled
maximum 5 business days after the due settlement date, OTC derivatives, credit derivatives,
repurchase and reverse repurchase agreements, securities and commodities lending and borrowing
transactions backed by securities or commodities included in the trading book, long-term
payments.
668. Exposure values and risk-weighted exposure amounts for such exposures shall be calculated
in accordance with the provisions of Chapter IV. When a bank applies IRB approach, value
adjustments made in consideration of the counterparty credit risk may be added to the amount of
value adjustments of transactions specified in Part 5, Section VI, Chapter V. In such case value
adjustments to the counterparty credit risk shall not be included in the bank capital. Where an
exposure included in the trading book is treated with due regard to the counterparty credit risk, a
bank, subject to the approval of the Bank of Lithuania, may treat the expected loss of the
counterparty risk exposure as equal to 0.
669. To obtain a figure for potential future credit exposure in the case of total return swap credit
derivatives and credit default swap credit derivatives, the nominal amount of the instrument shall
be multiplied by the following percentages:
669.1. where the reference obligation is one that if it gave rise to a direct exposure of the
institution it would be a qualifying item for the purposes of Part 2, Section VI, Chapter V − 5%;
669.2. where the reference obligation is one that if it gave rise to a direct exposure of the
institution it would not be a qualifying item for the purposes of Part 2, Section VI, Chapter V −
10%.
670. In the case of a credit default swap, an institution the exposure of which arising from the
swap represents a long position in the underlying shall be permitted to use a figure of 0% for
potential future credit exposure, unless the credit default swap is subject to closeout upon the
insolvency of the entity the exposure of which arising from the swap represents a short position in
the underlying, even though the underlying has not defaulted.
671. Where the credit derivative provides protection in relation to nth to default amongst a number
of underlying obligations, which of the percentage figures prescribed above is to be applied is
determined by the obligation with the nth lowest credit quality determined by whether it is one that
if incurred by the bank would be a qualifying item for the purposes of Part 2, Section VI, Chapter
IV.
672. For the purposes calculating risk-weighted exposure amounts banks shall not be permitted to
use the Financial Collateral Simple Method.
673. In the case of repurchase transactions and securities or commodities lending or borrowing
transactions booked in the trading book, all financial instruments and commodities that are eligible
to be included in the trading book may be recognised as eligible collateral.
674. For exposures due to OTC derivative instruments booked in the trading book, commodities
that are eligible to be included in the trading book may also be recognised as eligible collateral.
For the purposes of calculating volatility adjustments where such financial instruments or
commodities which are not eligible under Section III, Chapter IV, are lent, sold or provided, or
borrowed, purchased or received by way of collateral or otherwise under such a transaction, and
the bank is using the supervisory volatility adjustments approach, such instruments and
commodities shall be treated in the same way as non-main index equities listed on a recognised
exchange.
675. Where a bank uses the Own Estimates of Volatility adjustments approach which are not
eligible under volatility adjustments must be calculated for each individual item. Where a bank
uses the Internal Models Approach, it may also apply this approach in the trading book.
676. In relation to the recognition of master netting agreements covering repurchase transactions
and/or securities or commodities lending or borrowing transactions and/or other capital market-
115
driven transactions netting across positions in the trading book and the non-trading book will only
be recognised when the netted transactions fulfil the following conditions:
676.1. all transactions are marked to market daily;
676.2. in observance of Section III, Chapter IV, any items borrowed, purchased or received under
the transactions may be recognised as eligible financial collateral without the application of pars.
674-675.
677. Where a credit derivative included in the trading book forms part of an internal hedge and
the credit protection is recognised, there shall be deemed not to be counterparty risk arising
from the position in the credit derivative. Alternatively, a bank may consistently include for the
purposes of calculating capital requirements for counterparty credit risk all credit derivatives
included in the trading book forming part of internal hedges or purchased as protection against
a CCR exposure where the credit protection is recognised under these Regulations.
678. The capital requirement shall be 8% of the total risk-weighted exposure amounts.
5.3. Assessment of credit risk of financial derivatives, repurchase transactions, securities
lending or borrowing transactions, long settlement transactions and margin lending
transactions
5.3.1. Choice of the method
679. For the purpose of determining the exposure value a bank shall select the mark-to-market,
original exposure or internal model method (one of them). All methods listed in this paragraph
shall be consistently applied by the entire financial group of the bank, rather than by a bank alone.
680. On permission of the Bank of Lithuania, a bank may use the internal models’ method for the
purpose of determining the exposure value for the following transactions:
680.1. interest-rate contracts: single-currency interest rate swaps, basis-swaps, forward rate
agreements, interest-rate futures, interest-rate options purchased and other contracts of similar
nature;
680.2. foreign-exchange contracts and contracts concerning gold: cross-currency interest-rate
swaps, forward foreign-exchange contracts, currency futures, currency options purchased, other
contracts of a similar nature; and contracts concerning gold of a nature similar to those listed in
this item;
680.3. contracts of a nature similar to those in items 680.1 and 680,2;
680.4. repurchase transactions;
680.5. securities or commodities lending or borrowing transactions;
680.6. margin lending transactions;
680.7. long settlement transactions.
681. When a bank purchases credit derivative protection against a non-trading book exposure,
or against a CCR exposure, it may compute its capital requirement for the hedged asset in
accordance with pars. 401-405, or on permission of the Bank of Lithuania, according to pars.
401-403 and 439-444. In these cases, the exposure value for CCR for these credit derivatives
shall be set to zero. when a bank hedges a non-trading book credit risk exposure using a credit
derivative booked in its trading book (using an internal hedge), the non-trading book exposure
shall not be deemed to be hedged for the purposes of calculating capital requirements unless the
institution purchases from an eligible third party protection provider a credit derivative meeting
the requirements set out in paragraph 348 with regard to the non-trading book exposure. Where
such third party protection is purchased and recognised as a hedge of a non-trading book
exposure for the purposes of calculating capital requirements, neither the internal nor external
credit derivative hedge shall be included in the trading book for the purposes of calculating
capital requirements.
682. The exposure value for CCR from sold credit default swaps in the non-trading book, where
they are treated as credit protection provided by the bank and subject to a capital requirement for
credit risk for the full notional amount, shall be set to zero.
116
683. Under each of the mark-to-market, original exposure or internal model methods, the
exposure value for a given counterparty is equal to the sum of the exposure values calculated for
each netting set with that counterparty.
684. An exposure value of zero for CCR can be attributed to derivative contracts, or repurchase
transactions, securities or commodities lending or borrowing transactions, long settlement
transactions and margin lending transactions outstanding with a central counterparty and that have
not been rejected by the central counterparty. Furthermore, an exposure value of zero can be
attributed to credit risk exposures to central counterparties that result from the derivative contracts,
repurchase transactions, securities or commodities lending or borrowing transactions, long
settlement transactions and margin lending transactions or other exposures, that the bank has
outstanding with the central counterparty. The central counterparty CCR exposures with all
participants in its arrangements shall be fully collateralised on a daily basis.
685. Exposures arising from long settlement transactions can be determined using any of the markto-market, original exposure or internal model methods, regardless of the methods chosen for
treating OTC derivatives and repurchase transactions, securities or commodities lending or
borrowing transactions, and margin lending transactions. In calculating capital requirements for
long settlement transactions, a bank thats use the IRB approach for credit risk assessment, may
assign the risk weights used under the standardised approach.
686. For the mark-to-market and original exposure methods it shall be required to ensure that the
notional amount to be taken into account is an appropriate yardstick for the risk inherent in the
contract. Where, for instance, the contract provides for a multiplication of cash flows, the notional
amount must be adjusted in order to take into account the effects of the multiplication on the risk
structure of that contract.
5.3.2. Mark-to-market method
687. By attaching current market values to contracts (mark-to-market), the current replacement
cost of all contracts with positive values is obtained.
688. To obtain a figure for potential future credit exposure, except in the case of single-currency
floating/floating interest rate swaps in which only the current replacement cost will be calculated,
the notional principal amounts or underlying values are multiplied by the percentages in Table 29.
Table 29
Residual
maturity
Factor
applicable to
interest-rate
contracts, %
Factor
applicable to
contracts
concerning
equities, %
Factor
applicable to
contracts
concerning
precious metals
except gold, %
0
Factor
applicable to
contracts
concerning
foreignexchange
rates
and gold, %
1
6
7
Factor
applicable to
contracts
concerning
commodities
other than
precious
metals, %
10
1 year or
less
1- 5 years
5
years
and over
0,5
1,5
5
7,5
8
10
7
8
12
15
689. For contracts that are structured to settle outstanding exposure following specified payment
dates and where the terms are reset such that the market value of the contract is zero on these
specified dates, the residual maturity would be equal to the time until the next reset date. In the
case of interest-rate contracts that meet these criteria and have a remaining maturity of over one
year, the percentage shall be no lower than 0,5 %.
690. Contracts which do not fall within one of the five categories indicated in Table 29 above shall
be treated as contracts concerning commodities (other than precious metals).
691. For contracts with multiple exchanges of principal, the percentages have to be multiplied by
the number of remaining payments still to be made according to the contract.
117
692. The sum of current replacement cost and potential future credit exposure is the exposure
value.
5.3.3. Original exposure method
693. The notional principal amount of each instrument is multiplied by the percentages given in
Table 30.
Table 30
Original maturity
Factor applicable to
Factor applicable to
interest rate contracts,
contracts concerning
%
foreign exchange rates
and gold, %
1 year or less
1- 2 years
0,5
1
1
2
5
3
Additional allowance for each
additional year
694. In the case of interest-rate contracts, a bank may choose either original or residual maturity.
695. The original exposure thus obtained shall be the exposure value.
5.3.4. Standardised method
696. The Standardised Method (SM) can be used only for OTC derivatives and long settlement
transactions. The exposure value shall be calculated separately for each netting set. It shall be
determined net of collateral, as follows:

 * max  CMV  CMC; 


RPTij   RPClj * CCRMj 
l

j
i

Exposure value =
CMV – current market value of the portfolio of transactions within the netting set with a
counterparty gross of collateral;
where:
CMV   CMVi
i
CMVi – the current market value of transaction i;
CMC – the current market value of the collateral assigned to the netting set, where:
CMC   CMCl
l
CMC1 – the current market value of collateral l;
i – index designating transaction;
l – index designating collateral;
j – index designating hedging set category.
These hedging sets correspond to risk factors for which risk positions of opposite sign can
be offset to yield a net risk position on which the exposure measure is then based;
RPTij – risk position from transaction i with respect to hedging set j;
RPC1j – risk position from collateral l with respect to hedging set j;
CCRMj – CCR Multiplier set out in Table 32 with respect to hedging set j;
β = 1,4.
Collateral received from a counterparty has a positive sign and collateral posted to a
counterparty has a negative sign.
Collateral that is recognised for this method is confined to the collateral that is eligible
under par. 317 and pars. 673-674.
697. Whenan OTC derivative transaction with a linear risk profile stipulates the exchange of a
financial instrument for a payment, the payment part is referred to as the payment leg.
Transactions that stipulate the exchange of payment against payment consist of two payment legs.
The payment legs consist of the contractually agreed gross payments, including the notional
amountof the transaction. A bank may disregard the interest raterisk from payment legs witha
118
remaining maturity of less than one year for the purposes of the following calculations. A bank
may treat transactions that consist of two payment legs that are denominated in the same currency,
such as interest rate swaps, as a single aggregate transaction. The treatment for payment legs
applies to the aggregate transaction.
698. Transactions with a linear risk profile with equities (including equity indices), gold, other
precious metals or other commodities as the underlying financial instruments are mapped to a risk
position in the respective equity (or equity index)or commodity (including gold and other precious
metals) and an interest rate risk position for the payment leg. If the payment leg is denominated in
a foreign currency, it is additionally mapped to a risk position in the respective currency.
699. Transactions with a linear risk profile with a debt instrument as the underlying instrument are
mapped to an interest rate risk position for the debt instrument and another interest rate risk
position for the payment leg. Transactions with a linear risk profile that stipulate the exchange of
payment against payment, including foreign exchange forwards, are mapped to an interest rate risk
position for each of the payment legs. If the underlying debt instrument is denominated in a
foreign currency, the debt instrument is mapped to a risk position in this currency. If a payment leg
is denominated in foreign currency, the payment leg is again mapped to a risk position in this
currency. The exposure value assigned to a foreign exchange basis swap transaction is zero.
700. The size of a risk position from a transaction with linear risk profile is the effective notional
value (market price multiplied by quantity) of the underlying financial instruments (including
commodities) converted to the bank's domestic currency, except for debt instruments.
701. For debt instruments and for payment legs, the size of the risk position is the effective
notional value of the outstanding gross payments (including the notional amount) converted to the
bank's domestic currency, multiplied by the modified duration of the debt instrument, or payment
leg, respectively.
702. The size of a risk position from a credit default swap is the notional value of the reference
debt instrument multiplied by the remaining maturity of the credit default swap.
703. The size of a risk position from an OTC derivative with a non-linear risk profile, including
options and swaps, is equal to the delta equivalent effective notional value of the financial
instrument that underlies the transaction, except in the case of an underlying debt instrument.
704. The size of a risk position from an OTC derivative with a non-linear risk profile, including
options and swaps, of which the underlying is a debt instrument or a payment leg, is equal to the
delta equivalent effective notional value of the financial instrument or payment leg multiplied by
the modified duration of the debt instrument, or payment leg, respectively.
705. For the determination of risk positions, collateral received from a counterparty is to be
treated as a claim on the counterparty under a derivative contract (long position) that is due today,
while collateral posted is to be treated like an obligation to the counterparty (short position) that is
due today.
706. A bank may use the following formulae to determine the size and sign of a risk position:
706.1. for all instruments other than debt instruments:
706.1.1. effective notional value, or delta equivalent
p ref
V
 p
notional value =
pref – price of the underlying instrument, expressed in the reference currency;
V – value of the financial instrument (in the case of an option this is the option price and in
the case of a transaction with a linear risk profile this is the value of the underlying instrument
itself);
p – price of the underlying instrument, expressed in the same currency as V.
706.2. for debt instruments and the payment legs of all transactions:
706.2.1. effective notional value multiplied by the modified duration, or delta equivalent in
notional value multiplied by the modified duration
119
V
r
V – value of the financial instrument (in the case of an option this is the option price and in
the case of a transaction with a linear risk profile this is the value of the underlying instrument
itself or of the payment leg, respectively);
r – interest rate level.
703.3. If V is denominated in a currency other than the reference currency, the derivative must be
converted into the reference currency by multiplication with the relevant exchange rate.
707. The risk positions are to be grouped into hedging sets. For each hedging set, the absolute
value amount of the sum of the resulting risk positions is computed. This sum is termed the “net
risk position”and is represented by the following formula:

i
RPT ij   RPClj
l
RPTij and RPCij shall be calculated according to the formulae provided for in par. 696.
708. For interest rate risk positions from money deposits received from the counterparty as
collateral, from payment legs and from underlying debt instruments, to which according to Table a
capital charge of 1,60% or less applies, there are six hedging sets for each currency, as set ou tin
Table 31 below. Hedging sets are defined by a combination of the criteria of maturity and
referenced interest rates.
Table 31
Government referenced
Non-government
interest rate
referenced interest rate
Maturity
<= 1 year
<= 1 year
Maturity
>1 – <= > 5 years
>1 – <= > 5 years
Maturity
> 5 years
> 5 years
709. For interest rate risk positions from underlying debt instruments or payment legs for which
the interest rate is linked to a reference interest rate that represents a general market interest level,
the remaining maturity is the length of the time interval up to the next re-adjustment of the interest
rate. In all other cases, it is the remaining life of the underlying debt instrument or in the case of a
payment leg, the remaining life of the transaction.
710. There is one hedging set for each issuer of a reference debt instrument that underlies a
credit default swap. “Nth to default” basket credit default swaps shall be treated as follows:
710.1. the size of a risk position in a reference debt instrument in a basket underlying an “nth to
default” credit default swap is the effective notional value of the reference debt instrument,
multiplied by the modified duration of the “nth to default” derivative with respect to change in
the credit spread of the reference debt instrument;
710.2. there is one hedging set for each reference debt instrument in a basket underlying a given
“nth to default” credit default swap; risk positions from different “nth to default” credit default
swaps shall not be included in the same hedging set;
710.3. the CCR multiplier applicable to each hedging set created for one of the reference debt
instruments of an “nth to default” derivative is 0,3 %for reference debt instruments that have a
credit assessment from a recognised ECAI equivalent to credit quality step 1 to 3 according to
Part I, Chapter IV, and 0,6 % for other debt instruments.
711. For interest rate risk positions from money deposits that are posted with a counterparty as
collateral when that counterparty does not have debt obligations of low specific risk outstanding
and from underlying debt instruments, to which according to Table 19 a capital charge of more
than 1,60% applies, the capital requirement is divided into 6 hedging sets for each issuer. When a
payment leg emulates such a debt instrument, there is also one hedging set for each issuer of the
reference debt instrument. Banks may assign risk positions that arise from debt instruments of a
120
certain issuer, or from reference debt instruments of the same issuer that are emulated by payment
legs, or that underlie a credit default swap, to the same hedging set.
712. Underlying financial instruments other than debt instruments shall be assigned to the same
respective hedging sets only if they are identical or similar instruments. In all other cases they shall
be assigned to separate hedging sets. The similarity of instruments is established as follows:
712.1. For equities, similar instruments are those of the same issuer. An equity index is treated as a
separate issuer.
712.2. For precious metals, similar instruments are those of the same metal. A precious metal
index is treated as a separate precious metal.
712.3. For electric power, similar instruments are those delivery rights and obligations that refer
to the same peak or off-peak load time interval within any 24-hour interval.
712.4. For commodities, similar instruments are those of the same commodity. A commodity
index is treated as a separate commodity.
713. The counterparty credit risk multipliers (CCRM) for the different hedging set categories are
set out in Table 32 below:
Table 32
Seq.
Hedging set categories
CCRM, %
No
1.
Interest rates
0,2
2.
Interest rates for risk positions from a reference debt
0,3
instrument that underlies a credit default swap and to
which a capital charge of 1.60 %, or less, applies
under Table 19.
3.
Interest rates for risk positions from a debt instrument
0,6
or reference debt instrument to which a capital charge
of more than 1.60 % applies under Table 19.
4.
Exchange rates
2,5
5.
Electric power
4,0
6.
Gold
5,0
7.
Equity
7,0
8.
Precious metals (except gold)
8,5
9.
Other commodities (excluding precious metals and
10,0
electricity power)
10.
Underlying instruments of OTC derivatives that are
10,0
not in any of the above categories
714. Underlying instruments of OTC derivatives, as referred to in point 10 of Table 32, shall be
assigned to separate individual hedging sets for each category of underlying instrument.
715. A bank that makes use of collateral to mitigate its CCR shall have internal procedures to
verify that, prior to recognising the effect of collateral in its calculations, the collateral meets the
legal certainty standards set out in these Regulations.
5.3.5. Internal model method
716. Subject to the approval of the Bank of Lithuania, a bank may use the Internal Model Method
(IMM) to the transactions in par. 680. To apply the IMM, a bank shall meet the following
requirements:
716.1. The implementation of the IMM may be carried out sequentially across different
transaction types, and during this period a bank may use the mark-to-market or standardise
methods.
716.2. For all OTC derivative transactions and for long settlement transactions for which a
bank has not received approval to use the IMM, thebank must use the mark-to-market or
standardise methods. Combined use of these two methods is permitted on a permanent
basis within a group.
121
716.3. A bank which have obtained permission to use the IMM shall not revert to the use
of the mark-to-market or standardise methods, except for demonstrated good cause and
subject to approval of the Bank of Lithuania.
716.4. If a bank ceases to comply with the requirements set out in items 716.1-716.3, it
shall either present to the Bank of Lithuania a plan for a timely return to compliance or
demonstrate that the effect of non-compliance is immaterial.
5.3.5.1. Exposure value
717. The exposure value shall be measured at the level of the netting set. The model shall specify
the forecasting distribution for changes in the market value of the netting set attributable to
changes in market variables, such as interest rates, foreign exchange rates. The model shall then
compute the exposure value for the netting set at each future date given the changes in the market
variables. For margined counterparties, the model may also capture future collateral movements.
718. A bank may include eligible financial collateral in its forecasting distributions for changes in
the market value of the netting set, if the quantitative, qualitative and data requirements for the
IMM are met for the collateral.
719. The exposure value shall be calculated as the product of α times effective expected possible
exposure (Effective EPE), as follows:
Exposure value = α × Effective EPE
α – 1,4; effective EPE shall be computed by estimating expected exposure (EEt) as the
average exposure at future date t, where the average is taken across possible future values
of relevant market risk factors. The model estimates EE at a series of future dates (t1, t2, t3
…).
720. Effective EE shall be computed recursively as:
Effective EEtk = max(Effective EEtk–1; EEtk),
the current date is denoted as t0, and effective EEt0 equals current exposure.
721. In this regard, Effective EPE is the average Effective EE during the first year of future
exposure. If all contracts in the netting set mature within less than one year, EPE is the average of
EE until all contracts in the netting set mature. Effective EPE is computed as a weighted average
of Effective EE:
min(1 year; maturity)
 Effective EEtk * ∆tk
Effective EPE =
k=1
The weights ∆tk = tk – tt-1 allow for the case when future exposure is calculated at dates
that are not equally spaced over time.
722. EE or peak exposure measures shall be calculated based on a distribution of exposures that
accounts for the possible non-normality of the distribution of exposures.
723. Banks may use a measure that is more conservative than α, multiplied by Effective EPE as
calculated according to the equation above for every counterparty.
724. Where appropriate, volatilities and correlations of market risk factors used in the joint
simulation of market and credit risk should be conditioned on the credit risk factor to reflect
potential increases in volatility or correlation in an economic downturn.
725. If the netting set is subject to a margin agreement, banks shall use one of the following EPE
measures:
725.1. Effective EPE without taking into account the margin agreement.
725.2. The threshold, if positive, under the margin agreement plus an add-on that reflects the
potential increase in exposure over the margin period of risk. The add-on is computed as the
expected increase in the netting set’s exposure beginning from a current exposure of zero over the
margin period of risk. A floor of five business days for netting sets consisting only of repo-style
transactions subject to daily remargining and daily mark-to-market, and ten business days for all
other netting sets is imposed on the margin period of risk used for this purpose.
5.3.5.2. Minimum requirements for EPE models
726. A bank’s EPE model shall meet the operational requirements set out in pars. 727-751.
5.3.5.2.1. Counterparty credit risk (CCR) control
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727. The bank shall have a control unit that is responsible for the design and implementation of its
CCR management system, including the initial and on-going validation of the model. This unit
shall control input data integrity and produce and analyse reports on the output of the bank’s risk
measurement model, including an evaluation of the relationship between measures of risk
exposure and credit and trading limits. This unit shall be independent from units responsible for
originating, renewing or trading exposures and free from undue influence; it shall be adequately
staffed; it shall reportdirectly to the senior management of the bank. The work of this unit shall be
closely integrated into the day-to-day credit risk management process of the bank. Its output shall,
accordingly, be an integral part of the process of planning, monitoring and controlling the bank’s
credit and overall risk profile.
728. A bank shall have CCR management policies, processes and systems that are conceptually
sound and implemented with integrity. A sound CCR management framework shall include the
identification, measurement, management, approval and internal reporting of CCR.
729. A bank’s risk management policies shall take account of market, liquidity, and legal and
operational risks that can be associated with CCR. The bank shall not undertake business with a
counterparty without assessing its creditworthiness and shall take due account of settlement and
pre.settlement credit risk. These risks shall be managed as comprehensively as practicable at the
counterparty level (aggregating CCR exposures with other credit exposures) and at the firm-wide
level.
730. The management of the bank shall be actively involved in the CCR control process and shall
regard this as an essential aspect of the business to which significant resources need to be devoted.
The bank’s management shall be aware of the limitations and assumptions of the model used and
the impact these can have on the reliability of the output. Additionally, the managers of the bank
shall consider the uncertainties of the market environment and operational issues and be aware of
how these are reflected in the model.
731. The daily reports prepared on exposures to CCR shall be reviewed by a level of management
with sufficient seniority and authority to enforce reductions of exposures held by the bank.
732. A bank’s CCR management system shall be used in conjunction with internal credit and
trading limits. Credit and trading limits shall be related to the bank’s risk measurement model in a
manner that is consistent over time and that is well understood by credit managers, traders and
senior management.
733. A bank’s measurement of CCR shall include measuring daily and intra-day usage of credit
lines. The bank shall measure current exposure gross and net of collateral. At portfolio and
counterparty level, the bank shall calculate and monitor peak exposure or PFE at the confidence
interval chosen by the bank. The bank shall take account of large or concentrated positions,
including by groups of related counterparties, by industry, by market, etc.
734. A bank shall have a routine and rigorous program of stress testing in place as a supplement to
the CCR analysis based on the day-to-day output of the bank’s risk measurement model. The
results of this stress testing shall be reviewed periodically by the bank managers and shall be
reflected in the CCR policies and limits set by them. Where stress tests reveal particular
vulnerability to a given set of circumstances, prompt steps shall be taken to manage those risks
appropriately.
735. A bank shall have a routine in place for ensuring compliance witha documented set of internal
policies, controls and procedures concerning the operation of the CCR management system. The
bank’s CCR management system shall be well documented and shall provide an explanation of the
empirical techniques used to measure CCR.
736. A bank shall conduct an independent review of its CCR management system regularly
through its own internal auditing process. This review shall shall specifically address:
736.1. the adequacy of the documentation of the CCR management system and process;
736.2. the organisation of the CCR control unit;
736.3. the integration of CCR measures into daily risk management;
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736.4. the approval process for risk pricing models and valuation systems used by front and backoffice personnel;
736.5. the validation of any significant change in the CCR measurement process;
736.6. the scope of CCR captured by the risk measurement model;
736.7. the integrity of the management information system;
736.8. the accuracy and completeness of CCR data;
736.9. the verification of the consistency, timeliness and reliability of data sources used to run
models, including the independence of such data sources;
736.10. the accuracy and appropriateness of volatility and correlation assumptions;
736.11. the accuracy of valuation and risk transformation calculations;
736.12. the verification of the model’s accuracy through frequent back-testing.
5.3.5.2.2. Use test
737. The distribution of exposures generated by the model used to calculate effective EPE shall be
closely integrated into the day-to-day CCR management process of the bank. The model’s output
shall accordingly play an essential role in the credit approval, CCR management, internal capital
allocation and corporate governance of the bank.
738. A bank shall have a track record in the use of models that generate a distribution of exposures
to CCR and shall demonstrate that it has been using a model to calculate the distributions of
exposures upon which the EPE calculation is based that meets, broadly, the minimum
requirements set out in these Regulations for at least one year prior to approval by the Bank of
Lithuania.
739. The model used to generate a distribution of exposures to CCR shall be part of a CCR
management framework that includes the identification, measurement, management, approval and
internal reporting of CCR. This framework shall include the measurement of usage of credit lines
(aggregating CCR exposures with other credit exposures) and internal capital allocation. In
addition to EPE, a bank shall measure and manage current exposures. Where appropriate, the bank
shall measure current exposure gross and net of collateral. The use test is satisfied if a bank uses
other CCR measures, such as peak exposure or (PFE), based on the distribution of exposures
generated by the same model to compute EPE.
740. A bank shall have the systems capability to estimate EE daily if necessary, unless it
demonstrates to the Bank of Lithuania that its exposures to CCR warrant less frequent calculation.
The bank shall compute EE along a time profile of forecasting horizons that adequately reflects the
time structureof future cashflows and maturity of the contracts and in a manner that is consistent
with the materiality and composition of the exposures.
741. Exposure shall be measured, monitored and controlled over the life of all contracts in the
netting set (not just to the one year horizon). The bank shall have procedures in place to identify
and control the risks for counterparties where the exposure rises beyond the one-year horizon. The
forecast increase in exposure shall be an input into the bank’s internal capital model.
5.3.5.2.3. Stress testing
742. A bank shall have in place sound stress testing processes for use in the assessment of capital
adequacy for CCR. These stress measures shall be compared with the measure of EPE and
considered by the bank as part of its capital adequacy calculation process. Stress testing shall also
involve identifying possible events or future changes in economic conditions that could have
unfavourable effects on a bank’s credit exposures and an assessment of the bank’s ability to
withstand such changes.
743. The bank shall stress test its CCR exposures, including jointly stressing market and credit risk
factors. Stress tests of CCR shall consider concentration risk (to a single counterparty or groups of
counterparties), correlation risk across market and credit risk, and the risk that liquidating the
counterparty’s positions could move the market. Stress tests shall also consider the impact on the
bank’s own positions of such market moves and integrate that impact in its assessment of CCR.
5.3.5.2.4. Wrong-way risk
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744. A bank shall give due consideration to exposures that give rise to a significant degree of
General Wrong-Way Risk.
745. A bank shall have procedures in place to identify, monitor and control cases of Specific
Wrong-Way Risk, beginning at the inception of a transaction and continuing through the life of the
transaction.
5.3.5.2.5. Integrity of the modelling process
746. The model shall reflect transaction terms and specifications in a timely, complete, and
conservative fashion. Such terms shall include at least contract notional amounts, maturity,
reference assets, margining arrangements, netting arrangements. The terms and specifications shall
be maintained in a database that is subject to formal and periodic audit.
747. The model shall employ current market data to compute current exposures. When using
historical data to estimate volatility and correlations, at least three years of historical data shall be
used and shall be updated quarterly or more frequently if market conditions warrant. The data shall
cover a full range of economic conditions, such as a full business cycle. A unit independent from
the business unit shall validate the price supplied by the business unit.The data shall be acquired
independently of the lines of business, fed into the model in a timely and complete fashion, and
maintainedina database subjecttoformal and periodic audit. A bank shall also have a welldeveloped data integrity process to clean the data of erroneous and/or anomalous observations. To
the extent that the model relies on proxy market data, including, for new products, where three
years of historical data may not be available, internal policies shall identify suitable proxies and
the bank shall demonstrate empirically that the proxy provides a conservative representation of the
underlying risk under adverse market conditions. If the model includes the effect of collateral on
changes in the market value of the netting set, the bank shall have adequate historical data to
model the volatility of the collateral.
748. The model shall be subject to a validation process. The process shall be clearly articulated in
the bank’s policies and procedures. The validation process shall specify the kind of testing needed
to ensure model integrity and identify conditions under which assumptions are violated and
mayresult in an understatement of EPE. The validation process shall include a review of the
comprehensiveness of the model.
749. A bank shall monitor the appropriate risks and have processes in place to adjust its estimation
of EPE when those risks become significant. This includes the following:
749.1. the bank shall identify and manage its exposures to specific wrong-way risk;
749.2. for exposures with a rising risk profile after one year, the bank shall compare on a
regular basis the estimate of EPE over one year with EPE over the life of the exposure;
749.3. for exposures with a residual maturity below one year, the bank shall compare ona
regular basis the replacement cost (current exposure) and the realised exposure profile,
and/or store data that would allow such a comparison.
750. bank shall have internal procedures to verify that, prior to including a transaction in a netting
set, the transactionis covered by a legally enforceable netting contract that meets the requirements
of these Regulations.
751. A bank that makes use of collateral to mitigate its CCR shall have internal procedures to
verify that, prior to recognising the effect of collateral in its calculations, the collateral meets the
legal certainty standards.
5.3.5.3. Validation requirements for EPE models
752. A bank’s EPE model shall meet the following validation requirements:
752.1. the qualitative validation requirements set out in pars. 652-654 hereof;
752.2. interest rates, foreign exchange rates, equity prices, commodities, and other market risk
factors shall be forecast over long time horizons for measuring CCR exposure. The performance of
the forecasting model for market risk factors shall be validated over a long time horizon;
752.3. the pricing models used to calculate CCR exposure for a given scenario of future shocks to
market risk factors shall be tested as part of the model validation process. Pricing models for
options shall account for the nonlinearity of option value with respect to market risk factors;
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752.4. the EPE model shall capture transaction-specific information in order to aggregate
exposures at the level of the netting set. A bank shall verify that transactions are assigned to the
appropriate netting set within the model;
752.5. the EPE model shall also include transaction-specific information to capture the effects of
margining. It shall take into account both the current amount of margin and margin that would be
passed between counterparties in the future. Such a model shall account for the nature of margin
agreements (unilateral or bilateral). Such a model shall either model the mark-to-market change in
the value of collateral posted or apply the rules set out in Section III, Chapter IV;
752.6. anko f
, historical back-testing on representative counterparty portfolios shall be part
of the model validation process. At regular intervals, a bank shall conduct such back-testing on a
number of representative counterparty portfolios (actual or hypothetical). These representative
portfolios shall be chosen based on their sensitivity to the material risk factors and correlations to
which the bank is exposed;
752.7. if large number of discrepancies from actual results shows that the anko f not
sufficiently accurate, the anko f Lithuania shall revoke the model approval or impose appropriate
measures to ensure that the anko f improved promptly. The anko f Lithuania may also
require additional capital to be held by a bank.
5.3.6. Contractual netting (contracts for novation and other netting agreements)
5.3.6.1. Types of netting that competent authorities may recognise
753. For the purpose of this paragraph, “counterparty” means any entity (including natural
persons) that has the power to conclude a contractual netting agreement and “contractual cross
product netting agreement” means a written bilateral agreement between a bank and a counterparty
which creates a single legal obligation covering all included bilateral master agreements and
transactions belonging to different product categories. Contractual cross product netting
agreements do not cover netting other than on a bilateral basis.
754. For the purposes of cross product netting, the following are considered different product
categories:
754.1. repurchase transactions, reverse repurchase transactions, securities and commodities
lending and borrowing transactions;
754.2. margin lending transactions;
754.3. the contracts listed in pars. 680.1-680.3.
755. The competent authorities may recognise as risk-reducing the following types of contractual
netting:
755.1. bilateral contracts for novation between a bank and its counterparty under which mutual
claims and obligations are automatically amalgamated in such a way that this novation fixes one
single net amount each time novation applies and thus creates a legally binding, single new
contract extinguishing former contracts;
755.2. other bilateral agreements between a bank and its counterparty;
755.3. contractual cross product netting agreements for banks that have received approval by the
Bank of Lithuania to use the internal model approach. Netting across transactions entered by
members of a group is not recognised for the purposes of calculating capital requirements.
5.3.6.2. Conditions for recognition
756. Contractual netting may be recognised as risk-reducing only under the following conditions:
756.1. A bank must have a contractual netting agreement with its counterparty which creates a
single legal obligation, covering all included transactions, such that, in the event of a
counterparty’s failure to perform owing to default, bankruptcy, liquidation or any other similar
circumstance, the bank would have a claim to receive or an obligation to pay only the net sum of
the positive and negative mark-to-market values of included individual transactions.
756.2. a bank must have made available to the Bank of Lithuania written and reasoned legal
opinions to the effect that, in the event of a legal challenge, the relevant courts and administrative
authorities would, in the cases described under (i), find that the bank’s claims and obligations
would be limited to the net sum, as described in item 756.1 under:
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756.2.1. the law of the jurisdiction in which the counterparty is incorporated and, if a foreign
branch of an undertaking is involved, also under the law of the jurisdiction in which the branch is
located;
756.2.2. laws governing the individual transactions included;
756.2.3. laws governing any contract or agreement necessary to effect the contractual netting.
756.3. A bank must have procedures in place to ensure that the legal validity of its contractual
netting is kept under review in the light of possible changes in the relevant laws.
756.4. A bank maintains all required documentation in its files.
756.5. The effects of netting shall be factored into the bank’s measurement of each counterparty’s
aggregate credit risk exposure and the bank manages its CCR on such a basis.
756.6. Credit risk to each counterparty is aggregated to arrive at a single legal exposure across
transactions. This aggregation shall be factored into credit limit purposes and internal capital
purposes.
757. No contract containing a provision which permits a non-defaulting counterparty to make
limited payments only, or no payments at all, to the estate of the defaulter, even if the defaulter is a
net creditor maybe recognised as risk-reducing.
758. In addition, for contractual cross-product netting agreements the following criteria shall be
met:
758.1. the net sum referred to in item 756.1 shall be the net sum of the positive and negative close
out values of any included individual bilateral master agreement and of the positive and negative
mark-to-market value of the individual transactions (the “Cross-Product Net Amount”);
758.2. The written and reasoned legal opinions shall address the validity and enforceability of the
entire contractual cross-product netting agreement under its terms and the impact of the netting
arrangement on the material provisions of any included individual bilateral master agreement. The
same requirements shall apply to a memorandum of law that addresses all relevant issues in a
reasoned manner.
758.3. The bank shall have procedures in place to verify that any transaction which is to be
included in a netting set is covered by a legal opinion.
758.4. Taking into account the contractual cross product netting agreement, the bank shall
continue to comply with the requirements for the recognition of bilateral netting and the
requirements of Section III, Chapter IV.
5.3.6.3. Effects of recognition
759. Netting for the purposes of the standardised or internal model approach shall be recognised as
set out therein.
5.3.6.4. Contracts for novation
760. The single net amounts fixed by contracts for novation, rather than the gross amounts
involved, may be weighted.
761. Thus, in the application of the mark-to-market approach:
761.1. Step A – the current replacement cost.
761.2. Step B – the notional principal amounts or underlying values maybe obtained taking
account of the contract for novation.
762. in the application of the original exposure method:
762.1. in Step A the notional principal amount may be calculated taking account of the
contract for novation.
762.2. The percentages of Table 30 must apply.
5.3.6.5. Other netting agreements
763. In the application of the mark-to-market approach:
763.1. in Step A the current replacement cost for the contracts included in a netting agreement
maybe obtained by taking account of the actual hypothetical net replacement cost which results
from the agreement; in the case where netting leads to a net obligation for the bank calculating the
net replacement cost, the current replacement cost is calculated as 0
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763.2. in Step B the figure for potential future credit exposure for all contracts included in a
netting agreement may be reduced according to the following formula: PCEred = 0,4 × PCEgross+
0,6× NGR × PCEgross
PCEred – the reduced figure for potential future credit exposure for all contracts with a
given counterparty included in a legally valid bilateral netting agreement.
PCEgross – the sum of the figures for potential future credit exposure for all contracts with a
given counterparty which are included in a legally valid bilateral netting agreement and are
calculated by multiplying their notional principal amounts by the percentages set out in Table 29.
NGR – “net-to-gross ratio”, i.e.:
Separate calculation: the quotient of the net replacement cost for all contracts included in a
legally valid bilateral netting agreement with a given counterparty (numerator) and the gross
replacement cost for all contracts included in a legally valid bilateral netting agreement with that
counterparty (denominator).
Aggregate calculation: the quotient of the sum of the net replacement cost calculated on a
bilateral basis for all counterparties taking into account the contracts included in legally valid
netting agreements (numerator) and the gross replacement cost for all contracts included in legally
valid netting agreements (denominator).
A bank shall choose one of the methods and use it consistently.
764. For the calculation of the potential future credit exposure according to the above formula
perfectly matching contracts included in the netting agreement maybe taken into account as a
single contract with a notional principal equivalent to the net receipts. Perfectly matching contracts
are forward foreign-exchange contracts or similar contracts in which a notional principal is
equivalent to cash flows if the cash flows fall due on the same value date and fully or partly in the
same currency.
765. For the purpose of applying the original exposure method, perfectly matching contracts
included in the netting agreement maybe taken into account as a single contract with a notional
principal equivalent to the net receipts, the notional principal amounts are multiplied by the
percentages given in Table 30; for all other contracts included in a netting agreement, the
percentages applicable may be reduced as indicated in Table 33.
Table 33
Maturity
Interest-rate
Foreign-exchange
contracts, %
contracts,%
1 year or less
0.35
1.50
1-2 years
0.75
3.75
Additional allowance for
0.75
2.25
each additional year
6. Option risk
6.1. Calculation of capital requirement for option risk
766. For the purpose of calculating the capital requirement of option risk each option shall be
converted into a notional position in the underlying financial instrument using the delta equivalent
method.
Delta equivalent method
767. Delta equivalent method measures the percentage change in an option premium for a given
change in the price of the underlying financial instrument.
Delta ratio shall be calculated according to the following formulas:
,
N( ) – the value obtained under the normal curve for D1 from statistical tables or using
MS Excel function NORMSDIST ( );
(D1) – the argument of the above value;
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ln( ) – the natural logarithm;
P – price of the underlying financial instrument;
S – strike price of the option;
r – risk free rate of annual interest of the current year expressed as a relative value;
v – measure of the price fluctuation of the underlying financial instrument usually
expressed as a standard error;
t – time to maturity in years.
Where options are exchange traded, the delta ratio may be fixed by the exchange itself.
768. The notional position in each financial instrument shall be equal to the product of delta and
market price of the underlying financial instrument.
769. Each notional position shall be subsequently used in the methods of calculation of capital
requirement of foreign exchange rate, interest rate, equity position, counterparty and commodity
risk, in the manner similar to that of any other notional position.
770. The calculated notional position in foreign currency shall be included in the relevant foreign
exchange rate risk capital requirement calculation as defined in Part 1, Section VI, Chapter V.
771. The calculated notional position related to debt instruments shall be included in calculations
of both general and specific interest rate position risk capital requirement, as defined in Part 2.1,
Section VI, Chapter V.
772. The calculated notional position related to equities, shall be included in calculations of both
general and specific equity position risk capital requirement, as defined in Part 2.2, Section VI,
Chapter V.
773. Where the underlying financial instrument is an equity index, the notional position shall be
included in the capital requirement calculation as defined in pars. 619-622.
774. The notional position is related to commodity products shall be included in the calculation of
commodity risk capital requirement pursuant to Part 3, Section VI, Chapter V.
CHAPTER VI
LARGE EXPOSURES
775. The risk of large exposures in the banking book shall be assessed in observance of the
provisions of Section VII.
776. The risk of large exposures in the trading book shall be assessed in observance of the
provisions of Section VIII.
7761. A separate report for the assessment of risks of large exposures in the banking and
trading book shall be submitted according to the procedure set forth in Part VIII1.
7762. For the purpose of this Chapter the term “obligor” shall mean the client of the group
of connected clients. The identification of the group of connected clients is described in Annex 14.
7763. Exposures to schemes with underlying assets shall be assessed separately. For the
purpose of this Chapter the term “exposures to schemes with underlying assets” – exposures to
collective investment undertakings, securitisation exposures and other exposures as defined in Part
2, Section I, Chapter IV, when property held by individuals by right of common partial ownership
the management of which has been transferred to a management company is accumulated and
having divided the risk collectively invested into assets constituting the underlying assets of the
scheme.
The bank applying the provisions of Section VII shall assess whether the scheme into
which the bank invests is related with other clients of the bank (including other schemes). For that
purpose bank shall, considering the economic substance of each such transaction and the risk
inherent in the structure of the transaction, evaluate the scheme, its underlying exposures, or both,
the scheme and the underlying exposures. When the scheme is a collective investment undertaking
the bank shall assess either the collective investment undertaking (scheme), or asset into which the
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collective investment undertaking has invested (exposure to the underlying assets of the scheme),
or both.
For the purpose of calculating exposure value the bank shall always to the extent possible
assess potential relationships of persons to whom exposures to underlying assets of the scheme are
attributed with other clients of the bank.
To the extent related to the assessment of exposures to schemes with underlying assets
provisions of Annex 14 shall apply to transactions concluded from 31 December 2010.
Requirements of this Annex to the transactions concluded earlier shall apply from 31 December
2015.
SECTION VII
LARGE EXPOSURES OF THE BANKING BOOK
1. General provisions
777. Balance-sheet items shall not be subject to the application of risk weights specified in
Part 2, Section I, Chapter IV, and off-balance sheet claims shall be excluded from the scope of
application of CF indicated in Part 3, Section I, Chapter IV. The value of exposures arising from
derivatives covered by Annex 7 shall be calculated in observance of provisions of Chapter V. The
value of balance sheet and off-balance sheet exposures shall be equal to their net value.
2. Calculation of large exposure value
778. Large exposure value shall be calculated before taking into account the credit risk
mitigation. Maximum exposure amount to one borrower shall be calculated in consideration of
impact of credit risk mitigation measures according to the requirements of paragraphs 781–787.
779. The following exposures shall be exempt from calculation of exposure value:
779.1. exposures arising from currency spot transactions in the ordinary course of
settlement during the two working days following payment, the settlement term is not extended
and newly concluded transactions are not used for refinancing of the previous transactions ;
779.2. exposures incurred in the case of transactions for the purchase or sale of securities,
exposures incurred in the ordinary course of settlement during five working days following
payment or delivery of the securities, whichever the earlier;
779.3. short-term exposures of institutions lasting no longer than until the end of the next
business day, which the bank cannot foresee in advance and is therefore unable to control,
including balances of interbank accounts arising from delayed receipts in funding when payments
by clients are late and made at the end or after the business day; other exposures in the case of the
provision of money transmission (including the execution of payment services, clearing and
settlement in any currency and correspondent banking) or financial instruments clearing,
settlement and custody services to clients;
779.4. short-term exposures in the case of the provision of money transmission (including
the execution of payment services, clearing and settlement in any currency and correspondent
banking), intra-day exposures to institutions providing those services;
779.5. exposures the value of which is used to reduce bank capital in observance of
provisions of paragraphs 9–10 hereof.
780. Calculation of exposure value shall exclude exposures indicated in subparagraphs
779.3 to 779.4 which satisfy the criteria drafted in observance of the Implementation guidelines on
Article 106(2)(c) and (d) of Directive 2006/48/EC (recast).
780.1. Calculation of exposure value shall exclude exposures indicated in subparagraph
779.3 when the following criteria are met:
780.1.1. exposures which stem from the following operations: money transmission,
including the execution of payment services, clearing and settlement in any currency and
correspondent banking and handling of financial instruments of clients. When the bank provides to
clients custody services of financial instruments, exposures that stem from these services shall
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include exposures arising from payment of interest or dividends, redemption of principal amounts
and other payments arising from life-cycle events related to such financial instruments.
Exposures incurred performing operations specified in this paragraph shall be excluded when they
stem from unexpected incoming flows or exposures which are the result of expected in- or
outflows which have not materialised where the credit institution, as a consequence of technical or
external limitations (e.g. time of the day, market practice) is not in a position to reduce these
exposures with reasonable efforts before the end of the business day; from cash collateral given or
received in the context of operations of handling financial instruments of clients, or other financial
markets transactions for clients;
780.1.2. exposures that stem from or are otherwise related with client activity, i.e. activity
on the initiative of the client but also “indirect” client activity in the form of payments or
withdrawals by agents or contracting partners of the client, including the crediting and debiting of
payments, fees and interest, and the provision or withdrawal of cash collateral. Exposures arising
from proprietary trading activities are not covered by this exemption;
780.1.3. exposures that are reduced below the LE limit within the following business day
are covered by the exemption, i.e. the reporting institution shall reduce the exposure below the LE
limit before the end of the following business day. Otherwise, the exposure is no longer exempted
from the LE regime and a breach of the limit shall be reported to the Bank of Lithuania. However,
although the maximum time span for such an exempted exposure lasts until the end of the next
business day; such exposure shall be reduced below the LE limit without delay, i.e. as soon as
possible within the next business day.
780.2. Calculation of exposure value shall exclude exposures indicated in subparagraph
779.4 when the following criteria are met:
780.2.1. exposures which stem from the following operations: money transmission,
including the execution of payment services, clearing and settlement in any currency and
correspondent banking services. These exposures shall be excluded notwithstanding their origin
(i.e. they may stem from movement of funds on accounts when carrying operations with financial
instruments, from payments for purchases, etc.) or payment method (e.g., transmission of funds,
direct debit, etc.);
780.2.2. exposures of the institution which has the right to provide monetary transmission
services and belongs to the jurisdiction of the EU Member State. Such institution shall not
necessarily be a payment institution, but must always be subject to supervision of the EU Member
State;
780.2.3. exposures that are reduced below the LE limit within the following business day
are covered by the exemption, i.e. the reporting institution shall reduce the exposure below the LE
limit before the end of the following business day. Otherwise, the exposure is no longer exempted
from the LE regime and a breach of the limit shall be reported to the Bank of Lithuania. However,
although the maximum time span for such an exempted exposure lasts until the end of the next
business day; such exposure shall be reduced below the LE limit without delay, i.e. as soon as
possible within the next business day.
780.3. The bank shall have in place adequate procedures and controls guaranteeing the
adherence to the criteria required by subparagraphs 780.1–780.2.
781. The requirement of maximum exposure to one borrower shall not apply to:
781.1. exposures to central governments and central banks as well as to international
organisations or multilateral development banks, which uncollateralized would be assigned a 0 %
risk weight according to the standardised method;
781.2. international organisations or multilateral development banks, where
uncollateralized claims on the entity providing the guarantee would be assigned a 0 % risk weight;
where an exposure is only partially collateralised by guarantee, the uncollateralized portion of the
exposure amount shall be included in the calculation of the exposure value;
781.3. exposures collateralised by debt securities issued by central governments or central
banks, international organisations, multilateral development banks, which securities constitute
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claims on their issuer which would be assigned a 0% risk weighting; where an exposure is only
partially collateralised by debt securities, the uncollateralized portion of the exposure amount shall
be included in the calculation of the exposure value;
781.4. exposures collateralised by deposits placed with the lending bank or lending bank’s
parent bank or a controlled financial undertakings of the lending bank according to credit related
note issued by the bank for received cash and balance-sheet netting transactions;
781.5. exposures collateralised by certificates of deposit issued by the lending bank,
lending bank’s parent bank or controlled financial undertakings of the lending bank and lodged
with either of them;
781.6. exposures of the parent bank which is a parent credit institution in a Member State
or EU parent credit institution, including the share of parent bank’s capital controlled by the bank;
781.7. exposures to institutions, provided that those exposures do not constitute such
institutions’ own funds, do not last longer than the following business day and are not
denominated in a major trading currency;
781.8. exposures constituting claims on central banks in the form of required minimum
reserves held at those central banks which are denominated in their national currencies;
781.9. exposures in the form of covered bonds that meet the requirements of subparagraph
51.12;
781.10. 50% of the value of the off-balance-sheet documentary credits and credit facilities
assigned a 20% CF by virtue of Part 3, Section I, Chapter IV;
781.11. exposures arising from crediting liabilities assigned a 0% CF by virtue of Part 3,
Section I, Chapter IV, if the arrangement concluded with the debtor provides that these liabilities
may be used only if such use does not result in exceeding the maximum exposure to one borrower;
7811. The bank may reduce exposure value up to 50% of the residential property market
value, if one of the following is met:
7811.1. portion of exposures collateralised by residential property mortgaged only to the
lending bank and owned by the borrower, where exposure value does not exceed the market value
of such real estate and where it is demonstrated to the satisfaction of the bank that no disputes with
regard to land title will arise from such property.
7811.2. exposure is related with leasing transaction whereby the title to the residential
property is retained by the lessor until the lessee exercises the right to redeem the property.
The residential property shall be recognised as eligible collateral under paragraph 7811
when it satisfied the requirements of paragraph 337.
782. Funded and unfunded credit protection collaterals under paragraphs 781 and 783-785
shall satisfy the recognition and other minimum requirements referred to in Section III, Chapter
IV. For the purposes of this section the term “guarantee” shall cover credit derivatives recognised
in observance of provisions of Section III, excluding credit related notes.
783. A bank which applies the Financial Collateral Comprehensive method or a method
specified in paragraph 785 may use a “fully adjusted exposure value” taking into account the
following requirements:
783.1. a bank shall conduct periodic stress tests of their credit-risk concentrations,
including in relation to the realisable value of any collateral taken. These periodic stress tests shall
address risks arising from potential changes in market conditions that could adversely impact the
bank’s adequacy of own funds and risks arising from the realisation of collateral in stressed
situations. The stress tests carried out shall be adequate and appropriate for the assessment of such
risks. A bank shall include the following in their strategies to address concentration risk:
783.1.1. policies and procedures to address risks arising from maturity mismatches
between exposures and any credit protection on those exposures;
783.1.2. policies and procedures in the event that as tress test indicates a lower realisable
value of collateral than taken into account while making use of the Financial Collateral
Comprehensive Method or the method described in paragraph 785;
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783.1.3. policies and procedures in the event that a stress test indicates a lower realisable
value of collateral than taken into account for the purpose of calculation of large exposure. In such
case the value of collateral should be respectively reduced.
783.2. In the event that such a stress test performed according to the provisions of
subparagraph 783.1 indicates a lower realisable value of collateral taken than would be permitted
to be taken into account while making use of the Financial Collateral Comprehensive Method or
the method described in paragraph 785 as appropriate, the value of collateral permitted to be
recognised in calculating the value of exposures shall be reduced accordingly.
784. A bank permitted to use own estimates of LGDs and conversion factors for an
exposure class under Section II, Chapter IV may use the Financial Collateral Comprehensive
Method or the approach set out in subparagraph 785.2 for calculating the value of exposures.
785. Where an exposure to a client is secured by a guarantee or by collateral issued by a
third party, a bank may:
785.1. treat the portion of the exposure which is guaranteed as having been incurred to the
guarantor rather than to the borrower provided that the unsecured exposure to the guarantor would
be assigned an equal or lower risk weight than a risk weight of the unsecured exposure to the
borrower under Section I, Chapter IV;
785.2. treat the portion of the exposure collateralised by the market value of recognised
collateral as having been incurred to the third party rather than to the borrower, if the exposure is
secured by collateral and provided that the collateralised portion of the exposure would be
assigned an equal or lower risk weight than a risk weight of the unsecured exposure to the
borrower under Section I, Chapter IV.
786. The approach referred to in subparagraph 785.2 shall not be used by a bank where
there is a mismatch between the maturity of the exposure and the maturity of the protection. For
the purpose of this Section, a credit institution may use both the Financial Collateral
Comprehensive Method and the treatment provided for in subparagraph 785.2 only where it is
permitted to use both the Financial Collateral Comprehensive Method and the Financial Collateral
Simple Method.
787. Where a bank applies provisions of subparagraph 785.1:
787.1. when a guarantee is denominated in the currency, other than the exposure currency,
the exposure amount considered as covered shall be calculated in observance of currency
mismatch treatment provisions indicated in Section III, Chapter IV in case of unfunded credit
protection;
787.2. exposure and collateral maturity mismatch shall be treated in observance of the
maturity mismatch treatment provisions defined in Section III, Chapter IV;
787.3. partial coverage may be recognised in the manner set forth under Section III,
Chapter IV.
3. Amounts of limits
788. The value of maximum exposure to one obligor may not exceed 25% of the bank’s
own funds.
789. The value of maximum exposure granted by a bank to its parent bank, controlled
undertakings or other undertakings of parent bank may not exceed 75% of the bank’s own funds, if
the Bank of Lithuania carries out consolidated supervision of the financial group; if such
supervision is not carried out, maximum exposure to one obligor may not exceed the limits
indicated in paragraph 788.
7891. A bank must ensure that the limits set forth in paragraphs 788–789 are fulfilled every
day. When exposure to one obligor exceeds one of these limits, the bank must forthwith notify the
bank of Lithuania about the exposure value and furnish the report according to the requirements of
Section VIII1.
7892. A bank may not incur large exposures which in total exceed 800% of its own funds.
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SECTION VIII
LARGE EXPOSURES OF THE TRADING BOOK
1. General provisions
790. Exposures to individual clients arising in the trading book shall be calculated by
summing up:
790.1. the difference (where positive) between all marked-to-market long and short
positions in all financial instruments issued by one bank client;
790.2. exposures arising from transactions with one client mentioned in the Chapter
“Settlement and counterparty credit risk” and calculated using methods described in this Chapter
without applying the counterparty risk weights;
790.3. net exposure if the bank organises underwriting of debt or equity financial
instruments. Net exposure shall be calculated deducting those underwritten exposures
which were subscribed by third parties or the purchase of which was confirmed by official
agreements by third parties and adjusted according to the weights indicated in Annex No
8 to these Regulations. In consideration of the type of assumed risks the bank must
create systems to facilitate the monitoring and control of its exposures related with
securities underwriting guarantee.
791. trading book exposure of the group of connected clients shall be calculated summing
up the exposures of each client of the group as specified in paragraph 790.
792. The total exposure value of one client shall be calculated by summing up the amounts
of exposures of the trading and banking books. Maximum amount of the value of maximum total
exposure incurred to one client may not exceed the requirements set forth in paragraphs 788–789
and 7892.
2. Calculating capital requirements for large exposure risks of the trading book
793. Requirements specified in pars. 788–789 and 7892 may be exceeded, where:
793.1. the exposure to the obligor in the banking book does not exceed the requirements set
forth in pars. 788–789 and 7892, i.e. the excess arises only from the trading book exposures;
793.2. a bank holds the additional capital for the excess of requirements set forth in
paragraphs 788–789.
794. The capital requirements for large exposure risks of each client as specified in the
trading book shall be calculated as follows:
794.1. an exposure from the banking book shall be identified and compared with
percentage values referred to in paragraphs 788–789 calculating from the bank capital.
794.2. short and long equity exposures shall be matched (comparing short and long
exposures which attract the highest specific-risk requirements). Specific risk weights means
respective weights applied to calculate the capital requirement for risks identified in the trading
book (other than foreign exchange risks) and specified in these Regulations.
794.3. The remaining net long equity exposures shall be classified according to the specific
risk weights.
794.4. Firstly, exposures attracting the lowest specific risk weights shall be taken. The
obligor’s net long equity exposures of all types shall be added to the exposure of the banking book
until it becomes equal to the percentage values referred to in paragraphs 788-789 calculating from
the bank capital.
794.5. The capital requirement for the risks of the remaining net long equity exposures
shall be calculated as follows:
794.5.1. Where the excess has not persisted for more than 10 days, the specific risk weights
for exposures exceeding the limits specified in pars. 788-789 shall be multiplied by 200%.
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794.5.2. Where the excess has persisted for more than 10 days, the specific risk weights for
exposures exceeding the limits specified in pars. 788-789 shall be multiplied by factors referred to
in Table 34 below.
Table 34
Excess on exposures exceeding the limits
Factor applicable to specific risk weight,
set forth in pars. 788-789
%
Up to 40% of own funds
200
From 40 to 60% of own funds
300
From 60 to 80% of own funds
400
From 80 to 100% of own funds
500
From 100 to 250% of own funds
600
Over 250% of own funds
900
795. Where 10 or less days have elapsed from the occurrence of excess, the trading book
exposure related with one obligor may not exceed 500% of the bank’s own funds.
796. The sum of excesses persisting for more than 10 days may not exceed 600% of the
bank‘s own funds.
SECTION VIII1
REPORTING ON LARGE EXPOSURES FOR RISK ASSESSMENT PURPOSES
7961. This Section has been drafted in observance of recommendations set forth in CEBS
Guidelines on reporting requirements for the revised large exposures regime issued on 11
December 2009.
7962. A bank must have in place sound framework of administrative and accounting
procedures and adequate system of internal control to be able to identify and monitor all large
exposures, their subsequent developments and furnish the Credit Institutions Supervision
Department of the Bank of Lithuania with a monthly Report on Maximum Exposure Amount to a
Single Borrower and Large Exposures (Form 7001, Table A). The Report shall include the
information about all large exposures granted to a single borrower calculated according to Part 2,
Section VII, including those exposures that are not subject to the requirement of maximum
exposure amount to a single borrower under paragraph 781, and information on large exposures
calculated according to Section VIII.
7963. When the borrower is a group of connected clients, the Report on Maximum
Exposure Amount to a Single Borrower and Large Exposures shall include the data about the total
amount of the exposure granted to a single borrower obtained summing up the exposure amounts
of all clients of the group (i.e. one line item of data shall be filled out for one group of connected
clients). The Report shall be accompanied by additional information on all clients belonging to the
group of connected clients (Form 7001, Table B).
7964. A bank applying the IRB approach for determining the capital requirement for credit
risk under Section II, Chapter IV that does not have any large exposures or has less than 20 large
exposures included in the Report on Maximum Exposure Amount to a Single Borrower and Large
Exposures under paragraph 7962 shall provide information on its 20 largest exposures on a
consolidated basis, except for those specified in paragraph 781. For example, a bank with no large
exposures has to report its 20 largest exposures; a bank with 5 large exposures must report its 15
next largest exposures; bank with 5 large exposures of which 2 are specified in paragraph 781,
must not only report these 5 large exposures, but should complete its reporting by including its 17
next largest (non-exempted) exposures.
797. The capital requirement for operational risk shall be calculated using one of the
selected methods – the Basic Indicator Approach, the Standardized Approach and the Advanced
Operational Risks Measurement Approach. If a bank opting for the Basic Indicator Approach or
the Standardized Approach is operating for less than three years and does not have sufficient
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historic data necessary for the calculation of the capital requirement for operational risk, the
expected estimates of income shall be used and replaced by real historic data as soon as this is
practicable.
798. Without prejudice to par. 0, banks that use the approach set out in Section X, shall not
revert to the use of the approach set out in Section IX, except for demonstrated good cause and
subject to approval by the Bank of Lithuania.
799. Without prejudice to par. 0, banks that use the approach set out in Section XI, shall
not revert to the use of the approach set out in Sections IX or X, except for demonstrated good
cause and subject to approval by the Bank of Lithuania.
800. The Bank of Lithuania may allow the bank Lietuvos bankas to use a combination of
approaches in accordance with Section XII.
PART IX
BASIC INDICATOR APPROACH
801. Under the Basic Indicator Approach, the capital requirement for operational risk (KOpR) is
equal to 15% of the relevant indicator (BI), which is calculated in the manner set forth under
pars0–0:
KOpR = BI x 15 %
802. The indicator is the average over three years of the sum of net interest income (NII) and net
non-interest income (NNII). The three-year average is calculated on the basis of the last three
twelve-monthly observations at the end of the financial year. When audited figures are not
available, business estimates maybe used.
For example, the capital requirement for operational risk using the Basic Indicator Approach
as of 1 July 2007 shall be calculated on the basis of the last three twelve-monthly observations at
the end of the financial year:
Table 35
Financial year
2006
2005
2004
Observation date
01 01 2007
01 01 2006
01 01 2005
803. If for any given observation, the sum of net interest income and net non-interest income is
negative or equal to zero, this figure shall not be taken into account in the calculation of the threeyear average. The relevant indicator shall be calculated as the sum of positive figures divided by
the number of positive figures (n):
n
BI =[ (NIIi + NNIIi)] /n
i=1
n – number of positive figures (n < 3).
E.g., where calculating the capital requirement as of 1 July 2007, based on data of annual reports
for 2004, it is determined that the sum of the bank’s NII and NNII was negative, and the amounts
earned in 2005 and 2006 were respectively LTL 5 and 7 million, BI shall be calculated as follows:
1) number of positive figures n = 3–1=2
2) BI = (5+7)/2 = LTL 6 million
804. Calculation of net interest income (NII) and net non-interest income (NNII). Net interest
income (NII) and net non-interest income (NNII) shall comprise the following items of the profit
(loss) statement1:
Table 36
1
Where the structure of income and expenses of banks keeping their accounting records according to the International
Financial Reporting Standards differs from that indicated in Table 36, data used for the purpose of calculation of the
indicator shall be the most representative of the categories defines in pars. 0–0.
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1. Interest receivable and similar income
2. Interest payable and similar charges
3. Income from shares and other variable/fixed-yield securities
4. Commissions/fees receivable
5.Commissions/fees payable
6. Net profit or net loss on financial operations
7. Other operating income
The indicator shall be expressed as the sum of the elements listed in Table 36. Each
element shall be included in the sum with its positive or negative sign. These elements may need
to be adjusted to reflect the qualifications in pars. 0 and0.
805. The indicator shall be calculated including the specified elements of the profit (loss)
statement before the deduction of any provisions and operating expenses. Operating expenses shall
include fees paid for outsourcing services rendered by third parties which are not a parent
undertaking or controlled undertaking of the bank or a controlled undertaking of bank’s parent
undertaking.
806. The following elements of the profit (loss) statement shall not be used in the calculation of
the relevant indicator:
806.1. realised profits/losses from the sale of non-trading book items,
806.2. income from extraordinary or irregular items,
806.3. income derived from insurance.
PART X
STANDARDISED APPROACH
1. Calculation of capital requirement for operational risk
807. Under the Standardised Approach, the capital requirement for operational risk is the
average over three years of the risk-weighted relevant indicators calculated each year across the
business lines referred to in Table 37. In each year, a negative capital requirement in one
business line, (resulting from negative total revenues) may cover positive capital requirement of
other business lines without limitations. However, where the aggregate capital charge across all
business lines within a given year is negative, then the input to the average for that year shall be
zero.
808. The capital requirement per business line shall be calculated multiplying the indicator of that
business line by a risk weight assigned to it which is specified in Table 37 (risk-weighted
indicator).
809. The indicator of each business line is the sum of net interest income (NII) and net non-interest
income (NNII) calculated in the manner established in par. 804.
810. The three-year average is calculated on the basis of the last three twelve-monthly
observations at the end of the financial year. When audited figures are not available, business
estimates may be used.
Table 37
No
Business line
List of activities
Risk weight
1.
Corporate finance
Underwriting of financial instruments
18%
and/or placing of financial instruments on
a firm commitment basis
Services related to underwriting
Investment advice
Advice to undertakings on capital
structure, industrial strategy and related
matters and advice and services relating to
the mergers and the purchase of
137
2.
3.
4.
5.
6.
undertakings
Investment research and financial analysis
and
other
forms
of
general
recommendation relating to transactions
in financial instruments
Trading and sales
Dealing on own account
Money broking
Reception and transmission of orders in
relation to one or more financial
instruments
Execution of orders on behalf of clients
Placing of financial instruments without a
firm commitment basis
Operation
of
Multilateral
Trading
Facilities
Retail brokerage
Reception and transmission of orders in
(Activities with a relation to one or more financial
individual
physical instruments
persons or with small
and medium sized Execution of orders on behalf of clients
entities meeting the
criteria set out in par. Placing of financial instruments without a
51.8 for the retail firm commitment basis
exposure class)
Commercial banking
Acceptance of deposits and other
repayable funds
Lending
Financial leasing
Guarantees and commitments
Retail banking
Acceptance of deposits and other
(Activities meeting the repayable funds
criteria set out in par. Lending
51.8 for the retail Financial leasing
exposure
Guarantees and commitments
class)
Payment and
Money transmission services,
settlements
Issuing and administering means of
payment (e.g., credit cards, traveller’s
cheques and bank cheques)
7.
Intermediation
(agency) services
8.
Asset management
Safekeeping and administration of
financial instruments for the account of
clients, including custodianship and related
services such as cash/collateral
management
18%
12%
15%
12%
18%
15%
Portfolio management
12%
Other forms of asset management
2. Principles for business line mapping
811. A bank must develop and document specific policies and criteria for mapping the relevant
indicator for current business lines and activities into the standardised framework. The criteria
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must be reviewed and adjusted as appropriate for new or changing business activities and risks.
The principles for business line mapping shall be as follows:
811.1. all activities must be mapped into the business lines in a mutually exclusive and jointly
exhaustive manner;
811.2. any activity which cannot be readily mapped into the business line framework, but which
represents an ancillary function to an activity included in the framework, must be allocated to the
business line it supports. If more than one business line is supported through the ancillary activity,
an objective-mapping criterion must be used;
811.3. if an activity cannot be mapped into a particular business line then the business line yielding
the highest percentage must be used. The same business line equally applies to any associated
ancillary activity;
811.4. banks may use internal pricing methods to allocate the relevant indicator between business
lines. Costs generated in one business line which are imputable to a different business line may be
reallocated to the business line to which they pertain, for instance by using a treatment based on
internal transfer costs between the two business lines;
811.5. the mapping of activities into business lines for the calculation of operational risk capital
requirements shall be consistent with the categories used for the calculation of capital
requirements for covering credit and market risks;
811.6. the bank board shall be responsible for the mapping policy under the control of the
governing bodies of the bank;
811.7. the mapping process to business lines must be subject to independent review.
3. Qualifying criteria
812. Banks intending to apply the Standardised Approach for calculating the capital requirements
for operational risk, must meet the qualifying criteria listed below, in addition to the general risk
management standards set out in pars. 813-815:
812.1. A bank shall have a well-documented assessment and management system for operational
risk with clear responsibilities assigned for this system. They shall identify their exposures to
operational risk and track relevant operational risk data, including material loss data. This system
shall be subject to regular independent review.
812.2. The operational risk assessment system must be closely integrated into the risk management
processes of the bank. Its output must be an integral part of the process of monitoring and
controlling the bank’s operational risk profile.
812.3. A bank shall implement a system of management reporting that provides operational risk
reports to relevant functions within the bank. A bank shall have procedures for taking appropriate
action according to the information within the management reports.
4. General standards for management of operational risks
813. The bank managers shall approve and regularly revise the strategies and policies for
assuming, managing, monitoring and mitigating the operational risks which the bank assumes or is
likely to face.
814. The bank must implement the policy and processes aimed at assessing and managing the
operational risks, including infrequent occurrences with significant effects. Without prejudice to
the definition of the operational risk in item 4.14, the bank must clearly identify the operational
risks within the framework of such policy and procedures.
815. The bank shall have in place the emergency and business continuity plans with a view to
ensuring ongoing operations of the bank and limiting losses in case of material failures in
operations.
PART XI
ADVANCED MEASUREMENT APPROACH
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816. A bank may apply the Advanced Measurement Approach (AMA) for the calculation of the
capital requirement for operational risk only on permission of the Bank of Lithuania.
Permission to use AMA shall be granted in the manner established by the Bank of Lithuania. If
EU parent credit institution and its controlled financial undertakings together apply AMA, they
shall be allowed that AMA at the group level conforms to the eligibility criteria specified in
Section XI, Chapter VII.
1. Qualification criteria
817. A bank intending to use AMA, must perform the internal assessment of its operational risk
management system and satisfy the bank of Lithuania that it meets the general risk management
criteria set forth in pars. 813-815 as well as the below-specified qualitative and quantitative
standards. The Bank of Lithuania shall assess the bank’s operational risk management system in
the manner established by the Bank of Lithuania.
1.1. Qualitative Standards
818. The bank’s internal operational risk measurement system shall be closely integrated into its
day-to-day risk management processes.
819. The bank must have an independent risk management function for operational risk.
820. There must be regular reporting of operational risk exposures and loss experience. The bank
shall have procedures for taking appropriate corrective action.
821. The bank’s risk management system must be well documented. The bank shall have routines
in place for ensuring compliance and policies for the treatment of non-compliance.
822. The operational risk management processes and measurement systems shall be subject to
regular reviews performed by internal and/or external auditors.
1.2. Quantitative Standards
1.2.1 Processes
823. The bank shall calculate their capital requirement as comprising both expected loss and
unexpected loss, unless they can demonstrate that expected loss is adequately captured in their
internal business practices. The operational risk measure must capture potentially severe tail
events, achieving a soundness standard comparable to a 99.9% confidence interval over a one year
period.
824. The operational risk measurement system of a bank must have certain key elements to meet
the soundness standard set out in point 823. These elements must include the use of internal data,
external data, scenario analysis and factors reflecting the business environment and internal control
systems as set out in points 828-839. A bank needs to have a well documented approach for
weighting the use of these four elements in its overall operational risk measurement system.
825. The risk measurement system shall capture the major drivers of risk affecting the shape of the
tail of the loss estimates.
826. Correlations in operational risk losses across individual operational risk estimates may be
recognised only if a bank can demonstrate to the satisfaction of the Bank of Lithuania that its
systems for measuring correlations are sound, implemented with integrity, and take into account
the uncertainty surrounding any such correlation estimates, particularly in periods of stress. The
bank must validate its correlation assumptions using appropriate quantitative and qualitative
techniques.
827. The risk measurement system shall be internally consistent and shall avoid the multiple
counting of qualitative assessments or risk mitigation techniques recognised in other areas of the
capital adequacy framework.
1.2.2. Internal data
828. Internally generated operational risk measures shall be based on a minimum historical
observation period of five years. When a bank first moves to an Advanced Measurement
Approach, a three-year historical observation period is acceptable.
829. A bank must be able to map their historical internal loss data into the business lines
defined in Table 37 and into the event types defined in Table 38, and to provide these data to the
Bank of Lithuania upon request. Loss events influencing the whole bank in exceptional
140
circumstances may be attributed to the additional business line “corporate items”. There must
be documented, objective criteria for allocating losses to the specified business lines and event
types. The operational risk losses that are related to credit risk and have historically been
included in the internal credit risk databases must be recorded in the operational risk databases
and be separately identified. Such losses will not be subject to the operational risk charge, as
long as they continue to be treated as credit risk for the purposes of calculating minimum
capital requirements. Operational risk losses that are related to market risks shall be included in
the scope of the capital requirement for operational risk.
830. The bank’s internal loss data must be comprehensive in that it captures all material activities
and exposures from all appropriate sub-systems and geographic locations. A bank must be able to
justify that any excluded activities or exposures, both individually and in combination, would not
have a material impact on the overall risk estimates. Appropriate minimum loss thresholds for
internal loss data collection must be defined.
831. Aside from information on gross loss amounts, a bank shall collect information about the date
of the event, any recoveries of gross loss amounts, as well as some descriptive information about
the drivers or causes of the loss event.
832. There shall be specific criteria for assigning loss data arising from an event in a centralised
function or an activity that spans more than one business line, as well as from related events over
time.
833. A bank must have documented procedures for assessing the on-going relevance of historical
loss data, including those situations in which judgement overrides, scaling, or other adjustments
maybe used, to what extent they maybe used and who is authorised to make such decisions.
1.2.3. External data
834. The bank’s operational risk measurement system shall use relevant external data, especially
when there is reason to believe that the bank is exposed to infrequent, yet potentially severe,
losses. A bank must have a systematic process for determining the situations for which external
data must be used and the methodologies used to incorporate the data in its measurement system.
The conditions and practices for external data use must be regularly reviewed, documented and
subject to periodic independent review.
1.2.4. Scenario analysis
835. The bank shall use scenario analysis of expert opinion in conjunction with external data to
evaluate its exposure to high severity events. Over time, such assessments need to be validated and
reassessed through comparison to actual loss experience to ensure their reasonableness.
1.2.5. Business environment and internal control factors
836. The bank’s firm-wide risk assessment methodology must capture key business environment
and internal control factors that can change its operational risk profile.
837. The choice of each factor needs to be justified as a meaningful driver of risk, based on
experience and involving the expert judgment of the affected business areas.
838. The sensitivity of risk estimates to changes in the factors and the relative weighting of the
various factors need to be well reasoned. In addition to capturing changes in risk due to
improvements in risk controls, the framework must also capture potential increases in risk due to
greater complexity of activities or increased business volume.
839. The bank must ensure that this framework is documented and subject to independent review.
Over time, the process and the outcomes need to be validated and re-assessed through comparison
to actual internal loss experience and relevant external data.
Table 38
Loss event type classification
Event type
Definition
1. Internal fraud
Losses due to acts of a type intended to defraud,
misappropriate property or circumvent laws,
regulatory requirements or bank policies
2. External fraud
Losses due to acts by a third party of a type intended
to defraud, misappropriate property or circumvent
141
laws
3. Employment practices and Losses arising from acts inconsistent with
workplace safety
employment, health or safety laws or agreements,
from payment of personal injury claims, or from
discrimination events
4. Clients, products and Losses arising from an unintentional or negligent
business practices
failure to meet a professional obligation to specific
clients or from the nature of a product
5. Damage to physical assets
Losses arising from loss or damage to physical
assets from natural disaster or other events
6. Business disruption and Losses arising from disruption of business or system
system failures
failures
7. Execution, delivery and Losses from failed transaction processing or process
process management
management,
from
relations
with
trade
counterparties and vendors
2. Assessing the impact of insurance and other risk transfer mechanisms
840. Provisions of this Part have been drafted in observance of recommendations provided
for in CEBS Guidelines on operational risk mitigation techniques issued on 22 December 2009.
841. A bank willing to recognise the impact of insurance and other risk transfer
mechanisms for the purpose of reducing the capital requirement for operational risk shall be able
to demonstrate to the satisfaction of the Bank of Lithuania that a noticeable risk mitigating effect is
achieved.
The insurance mechanisms used by a bank must meet the requirements of paragraphs 842–
844. Risk transfer mechanisms, other than insurance used by a bank (e.g., funded credit protection,
guarantees, derivatives) shall be recognised as eligible for reducing the capital requirement for
operational risk, if they are used only for risk management purposes and satisfies to the maximum
possible extent the requirements of paragraphs 842–844 and Parts 1 and 2, Section III, Chapter IV
with regard to the recognition of other credit risk security instruments, and furthermore, the bank
has previous experience of their use and has accumulated internal and external data about the
expected coverage level and observance of payment terms according to the agreements for such
instruments.
The outsourcing activities or other risk transfer mechanisms held or used for trading shall
not be considered as mitigating risk for the purposes of this Section.
842. The provider shall be authorised to provide insurance or re-insurance and the provider
has a minimum claims paying ability rating by an eligible ECAI to be associated with CQS 3 or
above under Section I, Chapter IV.
843. The insurance company’s and the bank’s insurance framework used for risk mitigation
shall meet the following conditions:
843.1. the insurance policy must have an initial term (i.e. the period from the present
moment of assessment of the insurance policy risk mitigation effect and actual end of validity of
such policy) of no less than one year. For policies with a residual term of less than one year, the
bank must make appropriate haircuts reflecting the declining residual term of the policy, up to a
full 100% haircut for policies with a residual term of 90 days or less, except in cases when a bank
has acquired a new insurance policy replacing the previous one and providing equivalent insurance
coverage under the same conditions.
843.2. the insurance policy shall have a minimum notice period for cancellation of the
contract of 90 days.
843.3. the insurance policy shall have no exclusions or limitations triggered by the actions
of the Bank of Lithuania, or, in the case of a failed bank, that preclude the bankn receiver or
liquidator, from recovering for damages suffered or expenses incurred by the bank, except in
respect of events occurring after the initiation of receivership or liquidation proceedings in respect
of the bank.
142
843.4. the risk mitigation calculations must reflect the insurance coverage in a manner that
is transparent in its relationship to, and consistent with, the actual likelihood and impact of loss
used in the overall determination of operational risk capital. The mapping of insurance contracts to
operational risk losses (or operational risk sub-categories) should be performed at a sufficiently
granular level to demonstrate the relationship between the actual and potential likelihood and
magnitude of operational risk losses and the level of insurance coverage. All the information
sources available to the institution, including (internal and external) loss data and scenario
estimates, should be used for this aim;
843.5. the insurance is provided by a third party entity, i.e. an independent entity outside
the group of the institution seeking insurance protection. In the case of insurance through the entity
controlled by the bank group, the exposure has to be laid off to an independent third party entity,
e.g., re-insurance entity that meets the eligibility criteria.
843.6. the framework for recognising insurance is well reasoned and documented.
844. The methodology for recognising insurance shall capture the following elements
through discounts or haircuts in the amount of insurance recognition:
844.1. the residual term of an insurance policy, where less than one year, as noted above.
844.2. a policy’s cancellation terms, where less than one year; and.
844.3. the uncertainty of payment, i.e. the risk that the payments due to different reasons
will not be made in timely fashion (such as, for example, differences in the interpretation of
contractual language, delays in payment arising from the claims protocol or the evaluation and
settlement processes) as expected by the bank, coverage mismatch occurs when the coverage of
the insurance contract does not match the operational risk profile of the bank, such that the cover
does not provide the desired mitigating effect and some events are not covered.
Adjustment of insurance as risk mitigation measure for the risk of default of the
counterparty, i.e. insurance provider shall be carried out having regard to the credit rating of the
insurance provider which is responsible for the discharge of obligations specified in the insurance
policy, even if the parent of the insurance provider has been assigned a higher rating or risk is
transferred to a third party. For the insurance provider assigned a lower long-term credit rating
shall be subject to greater adjustments than the insurance provider with higher long-term credit
rating.
8441. The capital alleviation arising from the recognition of insurance shall not exceed 20%
of the capital requirement for operational risk before the recognition of risk-mitigation techniques.
PART XII
COMBINED USE OF DIFFERENT OPERATIONAL RISK MEASUREMENT
APPROACHES
1. Use of the Advanced Operational Risk Measurement Approach in combination with
other approaches
845. A bank may use an Advanced Measurement Approach in combination with either the
Basic Indicator Approach or the Standardised Approach on permission of the Bank of Lithuania
and subject to the following conditions:
845.1. all operational risks of the bank shall be captured and the methodology used shall
cover different activities, geographical locations, legal structures or other relevant divisions
determined on an internal basis;
845.2. the bank shall guarantee that the qualifying criteria set out in Parts X and XI are
fulfilled for the parts of activities covered by the Standardised Approach and Advanced
Measurement Approaches respectively.
846. On a case-by case basis, the Bank of Lithuania may impose the following additional
conditions:
846.1. on the date of implementation of an Advanced Measurement Approach, a significant
part of the bank's operational risks are captured by the Advanced Measurement Approach;
143
846.2. the bank takes a commitment to roll out the Advanced Measurement Approach
across a material part of its operations within a time schedule agreed with the Bank of Lithuania.
2. Combined use of the Basic Indicator Approach and of the Standardised Approach
847. A bank may use a combination of the Basic Indicator Approach and the Standardised
Approach only in exceptional circumstances such as the recent acquisition of new business which
may require a transition period for the roll out of the Standardised Approach.
848. The combined use of the Basic Indicator Approach and the Standardised Approach
shall be conditional upon a commitment by the bank to roll out the Standardised Approach within
a time schedule agreed with the Bank of Lithuania.
CHAPTER VIII
FINAL PROVISIONS
849. On a quarterly basis banks shall furnish the Credit Institutions Supervision
Department with the Capital Adequacy Report.
850. [Repealed by Resolution No 03-127 of the Board of the Bank of Lithuania of 21 October 2010 with
effect from 31 December 2010].
144
Annex 1 to
General Regulations for the
Calculation of Capital Adequacy
TABLE OF LONG- AND SHORT-TERM CREDIT RATINGS ASSIGNED BY
RECOGNISED ECAIS OF THE BANK OF LITHUANIA
CQS
Standard & Poor’s
Moody’s Investors Service
Fitch Ratings
Long-term
ratings
From AAA to
AA-
Short-term
ratings
A-1+, A-1
Long-term
ratings
From Aaa to
Aa3
Short-term
ratings
P-1
Long-term
ratings
From AAA to
AA-
Short-term
ratings
F1+, F1
2
From A+ to A-
A-2
From A1 to A3
P-2
From A+ to A-
F2
3
From BBB+ to
BBBFrom BB+ to
BB-
A-3
From Baa1 to
Baa3
From Ba1 to
Ba3
P-3
From BBB+ to
BBBFrom BB+ to
BB-
F3
1
4
B-1, B-2,
B-3, C
NP
5
From B+ to B-
From B1 to B3
From B+ to B-
6
Lower than B-
Lower than B3
Lower than B-
Lower than F3
145
Annex 2 to
General Regulations for the
Calculation of Capital Adequacy
(as amended by Resolution No 03-127
of the Board of the Bank of Lithuania of
21 October 2010)
CALCULATION OF RISK-WEIGHTED EXPOSURE AMOUNTS USING IRB
APPROACH
CIUs exposures meet the criteria of par. 93; a
bank has information about all underlying
exposures or parts thereof of a CIUs
Application of
methods of Part II,
Chapter IV for review
of underlying
exposures
CIUs exposures do not meet the criteria of
par. 93 or a bank does not have
information about all underlying exposures
or parts of a CIUs
Simple risk weights
method for review of
underlying exposures
Alternative method: a
bank may use its own
estimates or rely on
third party
To underlying
exposures in
equities
To other
underlying
exposures
Simple risk
weights method
Standardised
credit risk
assessment
approach based
on par. 139
146
Annex 3 to
General Regulations for the
Calculation of Capital Adequacy
VOLATILITY ADJUSTMENTS FOR EQUITIES LISTED IN ITEMS 316.2-316-4
CQS
2
1
2, 3
4
Residual
maturity
, years
<= 1
>1 <= 5
>5
<= 1
>1 <= 5
>5
<= 1
>1 <= 5
>5
Equities listed in item 316.2
Liquidation
period of 20
days, %
0,707
2,828
5,657
1,414
4,243
8,485
21,213
21,213
21,213
Liquidation
period of 10
days, %
0,5
2
4
1
1
6
15
15
15
Equities listed in items 316.3 and 316.4
Liquidation
Liquidation
Liquidation
Liquidation
period of 5
period of 20
period of 10
period of 5
days, %
days, %
days, %
days, %
0,354
1,414
1
0,707
1,414
5,657
4
2,828
2,828
11,314
8
5,657
0,707
2,828
2
1,414
2,121
8,485
6
4,243
4,243
16,971
12
8,8485
10,607
Non recognised
10,607
10,607
VOLATILITY ADJUSTMENTS FOR EQUITIES ASSIGNED SHORT-TERM RATINGS
LISTED IN ITEMS 316.2-316-4
CQS3
Equities listed in item 316.2
Liquidation
Liquidation
Liquidation
period of 20
period of 10
period of 5
days, %
days, %
days, %
0,707
0,5
0,354
1,414
1
0,707
1
2-3
2
3
Equities listed in items 316.3 and 316.4
Liquidation
Liquidation
Liquidation
period of 20
period of 10
period of 5
days, %
days, %
days, %
1,414
1
0,707
2,828
2
1,414
See Annex 1.
See Annex 1.
147
Annex 4 to
General
Regulations
for
Calculation of Capital Adequacy
the
VOLATILITY ADJUSTMENTS FOR RECOGNISED COLLATERAL , OTHER THAN
THOSE SPECIFIED IN ANNEX 3
Collateral
Main-index shares and
convertible securities
Other equities and
convertible shares listed on
recognised stock-exchanges
Currency
Gold
Liquidation period of 20
days, %
21,213
Liquidation period of 10
days, %
15
Liquidation period of 5
days, %
10,607
35,355
25
17,678
0
21,213
0
15
0
10,607
VOLATILITY ADJUSTMENTS FOR CURRENCY MISMATCH
Liquidation period of 20 days, %
11,314
Liquidation period of 10 days, %
8
Liquidation period of 5 days, %
5,657
148
Annex 5 to
General
Regulations
for
Calculation of Capital Adequacy
the
FINANCIAL COLLATERAL SIMPLE METHOD
Exposure
Amount of financial collateral
Uncollateralised
portion of exposure
Obligor’s risk weight
Collateralised portion of exposure
Risk weigh of financial collateral, guarantor
149
Annex 6 to
General
Regulations
for
Calculation of Capital Adequacy
the
FINANCIAL COLLATERAL COMPREHENSIVE METHOD
Exposure (adjusted)
Financial collateral amount
(adjusted)
Uncollateralised portion of exposure
Obligor’s risk weight
Collateralised portion of exposure
No capital requirements
GUARANTEES’ ASSESSMENT SCHEME
Exposure
Guarantee or credit derivative amount (adjusted)
Uncollateralised portion of exposureCollateralised portion of exposure
Obligor’s risk weight
Guarantor’s or credit derivative seller’s risk weight
150
151
Annex 7 to
General
Regulations
for
Calculation of Capital Adequacy
the
TYPES OF DERIVATIVES
1.
Interest-rate contracts:
1.1. single-currency interest rate swaps;
1.2. basis-swaps;
1.3. forward rate agreements;
1.4. interest-rate futures;
1.5. interest-rate options purchased;
1.6. other contracts of similar nature.
2.
Foreign-exchange contracts and contracts concerning gold:
1.1. single-currency interest rate swaps;
1.2. forward foreign-exchange swaps;
1.3. currency futures;
1.4. currency options purchased;
1.5. other contracts of similar nature;
1.6. contracts concerning gold of a nature similar to contracts specified in points 2.1-2.5.
3.
Contracts of a nature similar to contracts specified in points 1.1-1.5 and 2.1-2.4 of this
Annex concerning other reference items or indices. These include all instruments specified in
pars. 9 and 10 of Section C of Annex I to Directive of the European Parliament and of the
Council 2004/39/EC on markets in financial instruments as amending Council Directives
85/611/EEC, 93/6/EEC and Directive 2000/12/EC of the European Parliament and of the
Council and repealing Council Directive 93/22/EEC (OJ 2004, SE, Chapter 6, Vol. 7, p. 263),
not otherwise included in points 1 and 2.
152
Annex 8 to
General
Regulations
for
Calculation of Capital Adequacy
the
MEASUREMENT OF UNDERWRITING OF FINANCIAL INSTRUMENTS
CALCULATING CAPITAL REQUIREMENTS FOR POSITION RISK
A bank organising the underwriting of debt or equity financial instruments shall calculate
capital requirements for position risk as follows:
1. For the purpose of calculating net positions a bank shall deduct exposures in offered
financial instruments which are subscribed by third parties or the purchase of which is guaranteed
by official arrangements by third parties.
2. Net positions shall be reduced by factors indicated in Table 1 of this Annex.
Table 1
Maturity
0 business day
1 business day
2–3 business days
4 business days
5 business days
after 5 business days
Factor, %
100
90
75
50
25
0
Zero (0) business day is a business day on which a bank unconditionally undertakes to
accept agreed amount of securities for the agreed price.
3. Capital requirements for position risks shall be calculated for reduced underwriting
exposures.
153
Annex 9 to
General
Regulations
for
Calculation of Capital Adequacy
the
MEASUREMENT OF CIU TRADING BOOK POSITIONS CALCULATING CAPITAL
REQUIREMENTS FOR MARKET RISK
1. Capital requirements for CIUs positions which meet conditions established for trading
book positions indicated in Section V, Chapter V of the General Regulations for the Calculation of
Capital Adequacy shall be calculated in the following manner:
1.1. CIUs positions shall be subject to 32% position risks (specific and general) capital
charge. When position in gold is distinguished as a separate position, capital charge applicable to
CIUs positions shall not exceed 40% position risks (specific and general) and foreign exchange
rate risk capital charge.
1.2. Calculating open currency positions, a bank shall take into account actual foreign
currency positions of CIUs. When data announced is accurate, a bank may rely upon data on
foreign currency positions of CIUs published by third parties. A bank which does not have data on
foreign currency positions of CIUs, when calculating capital requirements shall take into
consideration the highest implicit risk which it can face with regard to CIUs investments in foreign
currency. To this end foreign currency position of CIU shall be proportionately increased to the
maximum position permitted by investment power with regard to underlying investment units.
Notional foreign currency position of CIU shall be measured as a separate currency in observance
of procedure applicable to investments in gold having regard to the fact that if investment trend is
known, long open position may be summed up with long open currency position, and short open
position – with short open currency position. Netting of such positions shall not apply before
calculation.
1.3. Capital requirements for market risk of CIUs positions corresponding to the general
criteria established in par. 2 of this Annex shall be calculated using methods provided for in pars.
3-7.
1.4. The bank may not perform the netting of underlying CIUs investments and other short
positions which this bank has .
GENERAL CRITERIA
2. General criteria in observance of which the right to CIUs positions issued by companies
subject to supervision of the EU or operating in the EU shall be as follows:
2.1. The following information must be provided in a prospectus or equivalent document of
CIU:
2.1.1. categories of assets to which CIU has the right to invest;
2.1.2. relative restrictions and their calculation methods, if CIU investments are subject to
restrictions;
2.1.3. maximum debt level, if CIU has the right to borrow funds;
2.1.4. instruments limiting counterparty’s credit risk arising from OTC financial derivatives
or repurchase transactions, if CIUs has the right to carry out such transactions.
2.2. CIU shall provide semi-annual and annual financial accounts on the basis of which its
assets and liabilities as well as income and operations of the reporting period can be assessed.
2.3. On investment unit holder’s request, CIU has the right to convert to cash investment
units (or shares) every day.
2.4. CIU investments shall be separated from assets of CIU manager.
2.5. CIU risk must be properly assessed by the investing bank.
SPECIFIC METHODS
3. A bank, which has all necessary information about the underlying CIUs positions, may
use such positions for the calculation of capital requirements for position risk (general and
specific). CIUs positions shall be measured as positions of underlying investments of CIUs. A
bank may perform the netting of CIUs underlying investment positions and other positions which
this bank has only if the bank has enough investment units for the redemption or formation of
underlying investments.
4. A bank may calculate capital requirements for covering the position risk (general and
specific) of notional positions corresponding to those positions which are necessary to restore
external index of equity or debt securities or fixed basket, if the following conditions are met:
4.1. CIU aims at restoring composition and operation of external index of equity or debt
securities or fixed basket.
4.2. Minimum factor of correlation between daily change in CIUs prices and index of
equity or debt securities or basket, which can be clearly determined for a minimum period of six
months, shall be 0.9. In this context correlation shall be understood as a correlation factor between
daily return of CIU and index of equity or debt securities or basket.
5. A bank, which does not have daily information about the underlying positions of CIU,
may calculate capital requirements for covering the position risk (general and specific) according
to the methods established in this Annex, if the following conditions are met:
5.1. maximum and primary investments of CIU, to the extent permitted by powers granted
to it, shall be made into those asset categories, which are subject to the largest capital charge for
position risk (general and specific), and subsequent investments shall be made in diminishing
order until maximum total investment limit is reached;
5.2. a bank shall calculate capital requirements for position risk in consideration of the
maximum indirect position which it can accept trough CIU proportionately increasing its CIU
position to the maximum position permitted by granted powers.
6. If capital requirements for covering the position risk (general and specific) calculated
according to par. 5 exceed capital requirements determined under par. 1, capital requirements
calculated under par. 1 shall apply.
7. Calculating capital requirements for CIUs trading book positions a bank may rely upon
calculations of a third party, if the latter appropriately guarantees the accuracy of provided
estimation and report.
2
Annex 10 to
General Regulations for the
Calculation of Capital Adequacy
CALCULATION OF CAPITAL REQUIREMENTS FOR COMMODITIES RISK
APPLYING SIMPLE AND EXTENDED MATURITY LADDER APPROACHES
1. SIMPLE APPROACH
1. 1. Capital requirements for each commodity shall be calculated by summing up:
1.1.1. 15% of net long or short position multiplied by the price of spot commodity
transaction;
1.1.2. 3% of general long or short position multiplied by the price of spot commodity
transaction.
1.2. Total capital requirements for commodities risk shall be calculated as a sum of
capital requirements of individual commodities.
2. EXTENDED MATURITY LADDER APPROACH
Table 1
Rate, %
Precious
metals (excl.
gold)
Base metals
Spread of purchasing and selling prices
Transportation prices
1
0.3
1.2
0.5
Agricultural
products
(not
processed)
1.5
0.6
Forward prices
8
10
12
Other,
including
energy
products
1.5
0.6
15
3. A bank may apply minimum rates of the spread of purchasing and selling prices,
transportation prices and forward prices indicated in Table 1 of this Annex instead of requirements
established under pars. 641–647 and Table 25 of these Regulations, if in the opinion of the
Bank of Lithuania:
3.1. the trading portfolio of commodities of a bank is material;
3.2. the trading portfolio of commodities of a bank comprises diversified
commodities;
3.3. the bank cannot yet apply internal models for the purpose of calculating capital
requirements for commodities risk.
4
Annex 11 to
General Regulations for the
Calculation of Capital Adequacy
(as amended by Resolution No 03127 of the Board of the Bank of
Lithuania of 21 October 2010)
RISK WEIGHTS ASSIGNED TO THE PORTION OF THE EXPOSURE
COLLATERALISED BY THE CURRENT SURRENDER VALUE OF THE LIFE
INSURANCE POLICY
For the purposes of standardized approach, the portion of exposure collateralised by
the current surrender value of the insurance policy, subject to the risk weight assigned to the
senior unsecured exposure to the company providing the life insurance, shall be assigned the
risk weights specified in the Table:
Risk weight assigned to
the secured portion of the
exposure,
%
20
35
70
150
Risk weight assigned to the senior unsecured
exposure to the company providing the life
insurance,
%
20
50
100
150
4
5
Annex 12 to
General Regulations for the
Calculation of Capital Adequacy
(as amended by Resolution No 03127 of the Board of the Bank of
Lithuania of 21 October 2010)
REQUIREMENTS FOR RECOGNISING THE TRANSFER OF SIGNIFICANT
CREDIT RISK CONCLUDING SECURITISATION TRANSACTIONS
1. Unless the Bank of Lithuania decides in a specific instance that the possible
reduction in risk weighted exposure amounts which the originator bank would achieve by this
securitisation is not justified by a commensurate transfer of credit risk to third parties,
significant credit risk shall be considered to have been transferred in the following cases:
1.1. The risk-weighted exposure amounts of the mezzanine securitisation positions
held by the originator credit institution in this securitisation do not exceed 50 % of the risk
weighted exposure amounts of all mezzanine securitisation positions existing in this
securitisation.
1.2. Where there are no mezzanine securitisation positions in a given securitisation
and the originator can demonstrate that the exposure value of the securitisation positions that
would be subject to deduction from own funds or a 1 250 % risk weight exceeds a reasoned
estimate of the expected loss on the securitised exposures by a substantial margin, the
originator credit institution does not hold more than 20 % of the exposure values of the
securitisation positions that would be subject to deduction from own funds or a 1 250 % risk
weight.
2. For the purposes of point 1a, mezzanine securitisation positions mean securitisation
positions to which a risk weight lower than 1 250 % applies and that are more junior than the
most senior position in this securitisation and more junior than any securitisation position in
this securitisation to which:
2.1. in the case of a securitisation position subject to standardized approach a credit
quality step 1 is assigned, or
2.2. in the case of a securitisation position subject to IRB approach a credit quality
step 1 or 2 is assigned under Part 3 of this Section.
3. As an alternative to points 1 and 2 hereof, significant credit risk may be considered
to have been transferred if the Bank of Lithuania is satisfied that a bank has policies and
methodologies in place, ensuring that the possible reduction of capital requirements which
the originator achieves by the securitisation is justified by a commensurate transfer of credit
risk to third parties. The Bank of Lithuania shall only be satisfied if the originator bank can
demonstrate that such transfer of credit risk to third parties is also recognised for purposes of
the bank’s internal risk management and its internal capital allocation.
5
6
Annex 13 to
General Regulations for the
Calculation of Capital Adequacy
(as amended by Resolution No
03-30 of the Board of the Bank
of Lithuania of 15 March 2011)
EXPOSURES TO TRANSFERRED CREDIT RISK
I. GENERAL PROVISIONS
1. The document has been drafted in observance of CEBS Guidelines to Article 122a
of the Capital Requirements Directive issued on 31 December 2010.
2. Provisions set forth in this Annex shall apply to the securitisation exposures of the
trading book and non-trading book of the bank which arise from transactions defined in
paragraph 4.58 of the General Regulations for the Calculation of Capital Adequacy when
credit risk of securitisation is transferred to investors.
3. Banks participating in securitisation as investors shall be subject to the provisions
of Part II of this Annex and banks participating as originators, sponsors or original lenders –
provisions of Part III of this Annex. A bank which for the purposes of a securitisation
transaction acts as both, an investor exposed to credit risk and as originator, sponsor or
original lender performing the securitisation of underlying exposures, having regard to the
undertaken role, shall be respectively subject to the provisions of Part II or Part III of this
Annex.
II. REQUIREMENTS FOR BANKS ACTING AS INVESTORS IN
SECURITISATION TRANSACTIONS
4. A bank, acting as an investor for the purposes of a securitisation transaction, must
use due diligence before the transaction covering credit analysis, risk management and other
similar activities as specified in items 11–15. A bank may enter into outsourcing transactions
with other entities for separate due diligence operations (for example, collection of
information necessary for the assessment of a securitisation transaction), however performing
the overall process control and assuming responsibility for the fulfilment of requirements of
this Annex. A bank should refrain from investing into a securitisation transaction, if it
establishes that a bank acting as an originator, sponsor or original lender has failed to provide
possibilities for easy access, i.e. without any access limits and additional costs, to all
information required for the due diligence according to the requirements of this Annex.
5. A bank, other than when acting as an originator, a sponsor or original lender, shall
be exposed to the credit risk of a securitisation exposure in its trading book or non-trading
book only if the originator, sponsor or original lender has explicitly disclosed to the bank that
it will retain, on an ongoing basis, a material net economic interest which, in any event, shall
not be less than 5 %.
This requirement shall not apply to those transactions when credit risk of underlying
securitises exposures is not transferred to investors, but is further retained by the originator
bank being a final debtor of the investor, even when the transaction meets the definition in
paragraph 4.58 of the General Regulations for the Calculation of Capital Adequacy, for
6
7
example, when the underlying securitised exposure comprises backed bonds issued by credit
institutions. However, when obligations of the originator bank are created with a view to
transferring credit risk of third persons, such as credit related notes, for the purposes of
securitisation the minimum retention requirement shall apply.
Where the originator or original lender of securitisation positions is represented by
several entities, this requirement shall apply to each of them proportionately to their
involvement in the securitisation transaction.
6. Retention of net economic interest shall mean:
6.1. retention of no less than 5 % of the nominal value of each of the tranches sold or
transferred to the investors (“vertical slice“ retention);
6.2. in the case of securitisations of revolving exposures, retention of the originator’s
interest of no less than 5 % of the nominal value of the securitised exposures (“originator
interest“ retention). The use of this option is applicable not only to securitisations of
revolving exposures (e.g., the revolving securitisation of credit card loans), but also to
revolving securitisations of non-revolving exposures (e.g., the revolving securitisation of
mortgage loans);
6.3. retention of randomly selected exposures, equivalent to no less than 5 % of the
nominal amount of the securitised exposures, where such exposures would otherwise have
been securitised in the securitisation, provided that the number of potentially securitised
exposures is no less than 100 at origination (“on-balance sheet” retention). The requirement
that the number of potentially securitised exposures is no less than 100 at origination means
that the pool of potentially securitised exposures from which the 5% of randomly selected
exposures is drawn contains no less than 100 exposures, not that the randomly selected
retained exposures themselves consist of no less than 100 exposures. The “on-balance sheet”
retention option can be used in respect of synthetic securitisations as well as traditional
securitisations. When considering the process for randomly selecting exposures, a bank
should consider both quantitative and qualitative factors when defining the pool of potentially
securitised exposures from which the exposures retained and the exposures securitised are
drawn, and consequently only truly “random” differences should exist or evolve between the
retained and securitised exposures. Such factors may include weighted averages, debt service
coverage ratio, type of security, etc. Banks that are originators, sponsors or original lenders
should clearly disclose such risk factors to investors for due diligence purposes;
6.4. retention of the first loss tranche and, if necessary, other tranches having the same
or a more severe risk profile than those transferred or sold to investors and not maturing any
earlier than those transferred or sold to investors, so that the retention equals in total no less
than 5 % of the nominal value of the securitised exposures (“first loss” retention).
For the purpose of points 6.1–6.4 the “nominal value” of the securitised exposures
refers to the gross exposure value, i.e. gross of impairments and value adjustments, not net of
these.
There shall be no multiple applications of the net economic interest retention
requirements for any given securitisation set forth in points 6.1–6.4.
7. Net economic interest is measured at the origination and shall be maintained on an
ongoing basis. “At origination” means that the net retention is measured when the exposures
were first securitised, and not when the exposures were first created (for example, not when
the underlying loans were first extended). “Ongoing basis” means that retained positions,
interest or exposures are not hedged or sold.
The net economic interest shall not be subject to any credit risk mitigation or any
short positions or any other hedge. For instance, when the net economic interest is retained
using the method referred to in points 6.1, 6.2 or 6.4, the bank originator, sponsor or original
lender may not use credit default swaps for its hedging purposes, and when the method
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specified in point 6.3 is used – said banks may not use hedging instruments retained for the
credit risk mitigation of randomly selected exposures. This restriction shall apply only to the
credit risk hedging instruments and does not prevent from applying other risk hedges (e.g.,
interest rates).
The net economic interest shall be determined by the notional value for off-balance
sheet items. All securitisation transactions may not be subject to the retention requirements
for several times, i.e. the retention requirement for a securitisation transaction is met when it
is satisfied by any one of the counterparties in a securitisation transaction – the bank
originator, sponsor or original lender, rather than each of them.
8. Where an EU parent bank or an EU financial holding company, or one of its
subsidiaries, as an originator or a sponsor, securitises exposures from several banks,
investment firms or other financial institutions which are included in the scope of supervision
on a consolidated basis, the requirement referred to in paragraph 2 may be satisfied on the
basis of the consolidated situation of the related EU parent bank or EU financial holding
company. This paragraph shall apply only where banks, investment firms or financial
institutions which created the securitised exposures have committed themselves to adhere to
the requirements set out in paragraph 14 and deliver, in a timely manner, to the originator or
sponsor and to the EU parent bank or an EU financial holding company the information
needed to satisfy the information disclosure requirements set forth in legal acts of the Bank of
Lithuania.
Provisions of this paragraph shall apply only when all counterparties in a
securitisation transaction are subject to the consolidated supervision of the EU. If a bank
retaining the net interest in a securitisation transaction for the benefit of other consolidated
group members leaves the group, the net interest retained by such bank shall be taken over by
one or more members of the group.
9. Provisions of 5 shall not apply where the securitised exposures are claims or
contingent claims on or fully, unconditionally and irrevocably guaranteed by:
9.1. central governments or central banks;
9.2. regional governments, local authorities and public sector entities of Member
States;
9.3. institutions to which a 50 % risk weight or less is assigned under Section I,
Chapter IV; or
9.4. multilateral development banks.
10. Provisions of 5 shall not apply:
10.1. transactions based on a clear, transparent and accessible index, where the
underlying reference entities are identical to those that make up an index of entities that is
widely traded, or are other tradable securities other than securitisation positions, i.e.
correlation trading portfolios;
10.2. syndicated loans, purchased receivables or credit default swaps where these
instruments are not used to package and/or hedge a securitisation that is covered by
paragraph 5. Application of provisions of this paragraph to credit default swaps depends upon
buying protection versus selling protection. Pursuant to paragraph 457 of the General
Regulations for the Calculation of Capital Adequacy where a credit protection for a
securitisation position is provided by a non-originator bank, the latter shall calculate the
capital requirements for the protected portion of position as the investor in such transaction,
and consequently the transaction shall be subject to the provisions of paragraph 5. Provisions
of 5 shall not apply when a bank is buying a protection on the securitisation exposure.
11. Before investing, and as appropriate thereafter (if the bank originator, sponsor or
original lender becomes insolvent, or after change of the bank’s trading or non-trading book
policies or procedures, investors’ risk profile, etc.) banks shall be able to demonstrate to the
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Bank of Lithuania for each of their individual securitisation positions, that they have a
comprehensive and thorough understanding of and have implemented formal policies and
procedures appropriate to their trading book and non-trading book and commensurate with
the risk profile of their investments in securitised positions for analysing and recording:
11.1. information disclosed under paragraph 5, by originators or sponsors to specify
the net economic interest that they maintain, on an ongoing basis, in the securitisation;
11.2. the risk characteristics of the individual securitisation position;
11.3. the risk characteristics of the exposures underlying the securitisation position;
11.4. the reputation and loss experience in earlier securitisations of the originators or
sponsors in the relevant exposure classes underlying the securitisation position;
11.5. the statements and disclosures made by the originators or sponsors, or their
agents or advisors, about their due diligence on the securitised exposures and, where
applicable, on the quality of the collateral supporting the securitised exposures;
11.6. where applicable, the methodologies and concepts on which the valuation of
collateral supporting the securitised exposures is based;
11.7. the policies adopted by the originator or sponsor to ensure the independence of
the valuer;
11.8. all the structural features of the securitisation that can materially impact the
performance of the credit institution’s securitisation position.
12. A bank shall regularly perform their own stress tests appropriate to their
securitisation positions as part of the general stress testing of the bank performed in
observance of requirements of the General Regulations for Stress Testing approved by
Resolution No 133 of the Board of the Bank of Lithuania of 11 October 2007 (Valstybės
žinios (Official Gazette) No 109–4486, 2007; No 156–7965, 2010). To this end, a bank may
rely on financial models developed by an ECAI provided that credit institutions can
demonstrate, when requested, that they took due care prior to investing to validate the
relevant assumptions in and structuring of the models and to understand methodology,
assumptions and results.
13. Banks, other than when acting as originators or sponsors or original lenders, shall
establish formal procedures appropriate to their trading book and non-trading book and
commensurate with the risk profile of their investments in securitised positions to monitor on
an ongoing basis (at least annually) and in a timely manner (upon significant change of the
underlying exposures or occurrence of material events that might seriously affect the
securitisation positions) performance information on the exposures underlying their
securitisation positions. Information monitored on an ongoing basis and in a timely manner
shall include:
13.1. the exposure type, the percentage of loans more than 30, 60 and 90 days past
due,
13.2. default rates, prepayment rates,
13.3. loans in foreclosure, collateral type and occupancy,
13.4. frequency distribution of credit scores or other measures of credit worthiness
across underlying exposures,
13.5. industry and geographical diversification,
13.6. frequency distribution of loan to value ratios with bandwidths that facilitate
adequate sensitivity analysis.
14. Where the underlying exposures are themselves securitisation positions, a bank
shall have the information set out in this subparagraph not only on the underlying
securitisation tranches, such as the issuer name and credit quality, but also on the
characteristics and performance of the pools underlying those securitisation tranches.
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15. A bank shall have a thorough understanding of all structural features of a
securitisation transaction that would materially impact the performance of their exposures to
the transaction such as the contractual waterfall and waterfall related triggers, credit
enhancements, liquidity enhancements, market value triggers, and deal-specific definition of
default.
16. Where the requirements in paragraphs 11 to 15 or information disclosure
requirements established by legal acts of the Bank of Lithuania are not met in any material
respect by reason of the negligence or omission of the bank, the latter shall be subject to a
proportionate additional risk weight of 250–1.250% (capped at 1.250%). A bank shall also
have in mind that for the purpose of observing the requirements of paragraphs 11–15 hereof
it must meet the requirements established by paragraphs 5–7. Additional risk weight shall
apply commensurate with the respective securitisation exposure weights imposed by virtue of
Section IV. The risk weight shall progressively increase the risk weight with each subsequent
infringement of the due diligence provisions. The duration of “each subsequent infringement”
shall be expressed in years with the input as an integer (not a fraction), i.e. expressed in terms
of discrete 12-month periods of infringement, rounded down (not up) to the nearest 12month period (e.g., “0” for an infringement of less than 12 months). The competent
authorities shall take into account the exemptions for certain securitisations provided in
paragraph 9 by reducing the risk weight.
III. REQUIREMENTS FOR BANKS ACTING AS ORIGINATORS OR SPONSORS
IN SECURITISATION TRANSACTIONS
17. A sponsor and originator banks shall apply the same sound and well-defined
criteria for credit-granting as they apply to exposures to be held on their book. To this end the
same processes for approving and, where relevant, amending, renewing and re-financing
credits shall be applied by the originator and sponsor credit institutions. A bank shall also
apply the same standards of analysis to participations or underwritings in securitisation issues
purchased from third parties whether such participations or underwritings are to be held on
their trading or non-trading book.
18. Where the requirements referred to in paragraph 17 are not met, the bank shall not
be allowed to apply provisions of paragraph 5, which means that a bank shall have to
calculate its capital requirement for securitisation exposures.
19. A sponsor and originator bank shall disclose properly document to investors and
disclose to the public (e.g., in the prospectus of the issue of securities according to the
securitisation programme) the level of their commitment under provisions of paragraph 5 to
maintain a net economic interest in the securitisation and selected retention method according
to requirements of paragraph 6.
A sponsor and originator bank shall ensure that prospective investors have readily
available access to all materially relevant data on the credit quality and performance of the
individual underlying exposures, cash flows and collateral supporting a securitisation
exposure as well as such information that is necessary to conduct comprehensive and well
informed stress tests on the cash flows and collateral values supporting the underlying
exposures. For that purpose, materially relevant data shall be determined as at the date of the
securitisation and where appropriate due to the nature o the securitisation thereafter.
A sponsor and originator bank shall disclose the information about the ongoing
retention of the net interest of securitisation on the transaction date and shall update it on a
regular basis, at least once a year throughout the duration of the transaction.
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20. When requirements of paragraph 19 are not met in some material respect through
the fault of a sponsor and originator bank, the net interest retained by the bank shall be
subject to additional weights in the manner established in paragraph 16 hereof.
IV. FINAL PROVISIONS
21. Until 31 December 2014 provisions of this Annex shall apply to securitisations
issued after 1 January 2011. From 31 December 2014 provisions of this Annex shall apply to
existing securitisations concluded before 1 January 2011, where new underlying exposures
are added or substituted after 31 December 2014.
22. The Bank of Lithuania may decide to suspend temporarily the requirements
referred to in paragraphs 5 and 8 during periods of general market liquidity stress.
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Annex 14 to
General Regulations for the
Calculation of Capital Adequacy
(as amended by Resolution No 03127 of the Board of the Bank of
Lithuania of 21 October 2010)
IDENTIFICATION OF THE GROUP OF CONNECTED CLIENTS FOR
LIMITING THE RISK OF LARGE EXPOSURES
I. GENERAL PROVISIONS
1. The present Annex explains the term of the “group of connected clients” defined in
subparagraph 4.19 of the Regulations for the Calculation of Capital Adequacy for the purpose
of limiting the risk of large exposures.
2. The Annex has been drafted in observance of recommendations provided in CEBS
Guidelines on the implementation of the revised large exposures regime issued on 11
December 2009.
3. Part II of the Annex defines the requirements on the basis of which a bank shall
determine whether two or more persons should be considered as the group of connected
clients through interconnection of control, economic interconnection, or common main
source of funding and should be treated as a single borrower for large exposure calculation
purposes.
4. Part III of the Annex defines specific methods used by a bank to determine whether
two or more persons of whom at least one is assigned the exposure to scheme with
underlying assets, should be treated as the group of clients interconnected with other clients
of the bank.
II. REQUIREMENTS FOR IDENTIFYING THE GROUP OF CONNECTED
CLIENTS
5. Two or more persons shall be considered as the group of connected clients and treated as a
single borrower for the purpose of limiting the risk of large exposures, if one of the following
is met:
5.1. the interconnection arises from direct or indirect control of another person, i.e. persons
are connected by relationships of a parent and controlled company, including the cases of
joint control (i.e. when a company is controlled by two or more contractual parties) on the
basis of concluded agreements or existing provisions of founding documents;
5.2. the interconnection arises from direct economic dependency of persons (for instance,
direct economic dependencies such as supply chain links or dependence on large customers),
or from the main common source of funding in the form of credit support, potential funding
or direct, indirect or reciprocal financial assistance.
6. For the purpose of determining whether the control interconnection exists between two or
more persons, the bank shall observe the definitions provided for in the Law of the Republic
of Lithuania on Financial Institutions and the following additional criteria:
6.1. control may also exist when the client owns less than half of the voting power of an
entity or does not hold any participating interest in the entity at all, but there are indicators
showing that the client is able to exercise decisive influence on material decisions made by
the entity with regard to:
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6.1.1. changing the activities of the entity so as to obtain benefits from that;
6.1.2. transfer of profit or loss;
6.1.3. appointment or removal of the majority of directors, the supervisory board, the
members of the board of directors or equivalent governing body ;
6.1.4. casting the majority of votes of the entity’s participants;
6.1.5. coordination of management of an undertaking with that of other undertakings in
pursuit of a common objective, for instance, in the case where the same natural persons are
involved in the management or board of two or more undertakings.
6.2. There will be some situations where there could be a requirement to include an entity in
more than one group of connected clients, for example, in the case of an entity in which two
persons/companies hold 50:50 participations if they exercise equal control on the entity. The
same applies to a case where a client has entered into a “shareholders’ agreement” with other
shareholders so as to obtain the majority of the voting power of an entity and this implies that
all of the shareholders involved have control over the entity.
6.3. The entire exposure to a connected client must be included in the calculation of the
exposure to a group of connected clients; it is not limited to, nor proportional to, the formal
percentage of ownership.
7. Two or more persons shall be considered as the group of connected clients because of
control interconnection, unless it is shown otherwise. . Two or more persons shall be treated
as individual clients if:
7.1. the bank is able to demonstrate that what seems to be a formal control relationship truly
is not, for instance, when shares held are without voting rights and there are no other
indications of control;
7.2. the portion of the undertaking’s authorised capital and (or) voting rights enabling to
control the undertaking’s activities is directly controlled by the regional or local authorities
treated as a central government the exposures to which receive a 0 % risk weight under
Section I, Chapter IV. However, where such undertaking controls other undertakings, they
shall be treated as a single borrower.
8. For the purpose of determining whether two or more persons should be regarded as the
group of connected clients because of economic interconnection, a bank should assess
whether they are related so closely that if one of them faces serious financial difficulties (for
example, becomes insolvent), the other would not be able to find a replacement for his
business partner or customer client, or to compensate for such loss threatening his own
business continuity by other means, for example, through reduction of costs, concentration on
other sectors, etc. The interconnection arising from geographic or sectoral concentration risk
of the clients’ business, for example, concentration of business in a certain geographical area
or participation in manufacturing of the same products, which affects all entities active in the
sector or region in the same manner shall not be considered as the indicator of economic
dependence for the purpose of limiting large exposure risk. The following persons shall be
treated as interconnected by possible economic dependence (but not limited to): the debtor
and a guarantor (collateral provider), provided that the collateral or guarantee is so substantial
for the issuer to the extent that the guarantor’s (collateral provider’s) ability to service the
liabilities will threaten his solvency; the owner of a residential/commercial property and the
tenant who pays the majority of the rent; a producer and vendor that this producer is
depending on and which it would take time to replace; undertakings that have an identical
customer base, consisting of a very small number of customers and where the potential for
finding new customers is limited; if the bank becomes aware that clients have been
considered as interconnected by another bank; in retail banking – the borrower and his (her)
spouse or other co-borrower if by contractual arrangements or marriage laws both are liable
and the loan is significant for both.
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9. For the purpose of determining whether two or more persons should be regarded as the
group of connected clients because of their dependence upon the same main source of
funding, a bank shall assess, whether such clients would encounter serious problems or
higher costs to find an alternative source of funding, for example, in cases of use of one
funding entity, similar structures of asset exposures, etc. This provision shall not apply when
security market instruments are used for funding (for example, several clients offer debt
securities in the same market) or when several small and medium-sized enterprises use
services of the same commercial bank, because it operates in the same geographic area as the
enterprises.
III. TREATMENT OF SCHEMES WITH UNDERLYING ASSETS FOR THE
PURPOSE OF IDENTIFYING THE GROUP OF CONNECTED CLIENTS
10. A bank shall apply the following approach or combination of approaches for the
treatment of exposures to schemes with underlying assets for the purpose of determining the
interconnections of the underlying assets in the scheme with other clients:
10.1. full look-through of the scheme with underlying assets whereby The bank identifies
and monitor over time all exposures in a scheme and assign them to the corresponding
client(s) or group(s) of connected clients. This is a most risk-sensitive approach applicable to
schemes the maximum exposure of the underlying assets accounts for 5% or more of the total
assets of the scheme. Sufficiently granular schemes with exposure of underlying assets
smaller than 5% (or 1.25% of bank’s own funds) may be exempted from application of this
method). In such case the exposure shall be treated as exposure to one borrower;
10.2. partial look-through approach whereby a bank may look-through to the x known
exposures in a scheme and assign them to the corresponding client(s) or group(s) of
connected clients. The remaining exposures shall be treated as unknown exposures in
accordance with subparagraph 10.3 below. This approach shall apply when the full lookthrough of the scheme is impracticable;
10.3. unknown exposure assessment whereby All unknown exposures (including schemes
where the institution does not look-through by any of the methods described above and which
are not sufficiently granular) are to be regarded as a single risk and shall, therefore, be
considered as one unknown client. A scheme may be considered as sufficiently granular if its
largest exposure is smaller than 5% of the total scheme. All unknown exposures shall be
treated as one scheme, i.e. exposure of a single borrower;
10.4. Structure-based approach which a bank may apply if it can ensure (e.g. by means of a
CIU’s mandate) that the underlying assets of the scheme are not connected with any other
direct or indirect exposure in the bank’s portfolio (including other schemes) that is higher
than 2% of the bank’s own funds, it may treat these schemes as separate unconnected clients.
In that case the scheme exposure may be treated as the exposure to a single borrower, i.e. the
bank must assess possible interconnection of exposure of the scheme with underlying assets
only with those exposures to bank clients which are larger than 2% of the bank’s own funds,.
11. A bank shall consider the risk arising from the scheme itself separately16, in addition to
the risk stemming from the underlying assets. Therefore, investments in a single scheme
(including the group of unknown exposures) shall be regarded as the exposure to a single
borrower subject to the requirement of maximum exposure to a single borrower.
12. When applying the approaches referred to in paragraph 10 it is necessary to assess the
fulfilment of the scheme granulation criterion (if the largest exposure of underlying assets of
the scheme is smaller than 5% of the total scheme) in the funds of funds, exposures of the
underlying assets of the fund of funds may be assessed.
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13. For the purpose of calculating large exposures the scheme exposure shall be included
commensurately to the involvement of the bank in the scheme.
IV. FINAL PROVISIONS
14. Procedures of identification and monitoring of connected clients implemented by a bank
shall be integrated in the credit risk management system in observance of Regulations for the
Organisation of Internal Control and Risk Assessment (Management) approved by
Resolution No 149 of the Board of the Bank of Lithuania of 25 September 2008 (Valstybės
žinios (Official Gazette) No 127-4888, 2008).
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