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  • CA-3 CA-3 Credit risk

    • CA-3.1 CA-3.1 Introduction

      • CA-3.1.1

        This Chapter describes the standardised approach for the measurement of the credit risk exposure in the bank's banking book.

        October 07

      • CA-3.1.2

        As illustrated in Sections CA-3.2, CA-3.3 and CA-3.4, banks are required to apply a simple risk-weighted approach through which claims of different categories of counterparties are assigned risk weights according to broad categories of relative risk.

        October 07

    • CA-3.2 CA-3.2 Risk weighting – On-balance-sheet asset Category

      • CA-3.2.1

        Risk weights by Category of on-balance-sheet asset are illustrated in the table below:

        Risk weights Category of on-balance-sheet assets/claims
        0%
        (a) Cash and balances with Central Banks
        (b) Holdings of Gold bullion and other commodities
        (c) Claims on & guaranteed by:
        (i) The Government of Bahrain & Bahrain public sector entities
        (ii) Government-owned GCC companies incorporated in Bahrain
        (d) Claims on & guaranteed by or collateralised by cash or securities issued by central governments and central banks of Group A countries; and
        (e) Claims on the central governments and central banks of Group B countries, where denominated in national currency and funded in that currency.
           
        20%
        (a) Claims on and guaranteed by or collateralised by securities issued by multilateral development banks
        (b) Claims on and guaranteed by banks and securities firms incorporated in Group A countries
        (c) Claims on and guaranteed by banks incorporated in Group B countries with a residual maturity of 1 year or less
        (d) Claims on and guaranteed by public sector entities in Group A countries
        (e) Claims on and guaranteed by government-owned GCC companies incorporated outside Bahrain; and
        (f) Cash items in process of collection
           
        50% Claims secured by mortgage on residential property
        100%
        (a) Claims on related parties
        (b) Holdings of other (non-subsidiary) banks' and securities firms' capital instruments
        (c) Claims on and guaranteed by banks incorporated in Group B countries with a residual maturity over one year
        (d) Claims on central governments and central banks of Group B countries (not included above)
        (e) Claims on and guaranteed by public sector entities of Group B countries
        (f) Claims on and guaranteed by government-owned companies in non-GCC countries
        (g) Claims on and guaranteed by private sector persons and entities in and outside Bahrain
        (h) Premises and equipment, real estate investments and assets not reported elsewhere
        October 07

    • CA-3.3 CA-3.3 Risk weighting – Off-balance-sheet items

      • CA-3.3.1

        The framework takes account of the credit risk on off-balance-sheet exposures by applying credit conversion factors to the different types of off-balance-sheet instruments or transactions (with the exception of derivatives).

        October 07

      • CA-3.3.2

        The conversion factors are derived from the estimated size and likely occurrence of the credit exposure, as well as the relative degree of credit risk as identified in the Basel Committee's paper on 'The management of banks' off-balance-sheet exposures: a supervisory perspective' (see www.bis.org/publ/bcbsc134.pdf) issued in March 1986.

        October 07

      • CA-3.3.3

        The credit conversion factors applicable to the off-balance-sheet items are set out in the table below:

        Credit Conversion factors Off-balance-sheet items
        100% Direct credit substitutes, including general guarantees of indebtedness and acceptances
        50% Transaction-related contingent items (e.g. performance bonds, bid bonds, warranties and standby letters of credit related to particular transactions)
        20% Short-term self-liquidating trade-related contingencies (such as documentary credits collateralised by the underlying shipments)
        100% Sale and repurchase agreements and asset sales with recourse, where the credit risk remains with the bank
        100% Forward asset purchases, forward forward deposits and the unpaid part of partly-paid shares and securities, which represent commitments with certain draw-down
        50% Underwriting commitments under note issuance and revolving underwriting facilities (minus own holdings of notes underwritten)
        50% Other commitments (e.g. formal standby facilities and credit lines) with an original maturity of 1 year and over
        0% Similar commitments with an original maturity of up to 1 year, or which can be unconditionally cancelled at any time
        October 07

      • CA-3.3.4

        The applicable credit conversion factors should be multiplied by the weights applicable to the Category of the counterparty as set out below:

        Risk weights Counterparty
        0% Type (a)
         
        •   The Government of Bahrain.
        •   Bahrain public sector entities.
        •   Government-owned (non-banking) GCC companies incorporated in Bahrain.
        •   Central government and central banks of Group A countries.
        20% Type (b)
         
        •   Banks incorporated in Bahrain or Group A countries and securities firms.
        •   Banks incorporated in Group B countries (if the commitment has a residual life of 1 year or less).
        •   Public sector entities in Group A countries.
        •   Government-owned (non-banking) GCC companies incorporated outside Bahrain.
        100% Type (c)
         
        •   Banks incorporated in Group B countries (if the commitment has a residual life of more than 1 year).
        •   Central governments, central banks and public sector entities in Group B countries.
        •   Government-owned companies incorporated in non-GCC countries.
        •   Private sector persons and entities in Bahrain and abroad.
        October 07

    • CA-3.4 CA-3.4 Treatment of derivatives contracts in the banking book

      • CA-3.4.1

        The treatment of forwards, swaps, purchased options and similar derivative contracts needs special attention because banks are not exposed to credit risk for the full face value of their contracts, but only to the potential cost of replacing the cash flow (on contracts showing positive value) if the counterparty defaults. The credit equivalent amounts (as referred to under Paragraph CA-3.4.13) will depend inter alia on the maturity of the contract and on the volatility of the rates and prices underlying that type of instrument.

        October 07

      • CA-3.4.2

        Instruments traded on exchanges may be excluded where they are subject to daily receipt and payment of cash variation margins.

        October 07

      • CA-3.4.3

        Options purchased over-the-counter are included with the same conversion factors as other instruments.

        October 07

      • Interest rate contracts

        • CA-3.4.4

          Interest rate contracts are defined to include single-currency interest rate swaps, basis swaps, forward rate agreements, interest rate futures, interest rate options purchased and similar instruments.

          October 07

      • Exchange rate contracts

        • CA-3.4.5

          Exchange rate contracts include cross-currency interest rate swaps, forward foreign exchange contracts, currency futures, currency options purchased and similar instruments.

          October 07

        • CA-3.4.6

          Exchange rate contracts with an original maturity of 14 calendar days or less may be excluded.

          October 07

      • Equity contracts

        • CA-3.4.7

          Equity contracts include forwards, swaps, purchased options and similar derivative contracts based on individual equities or on equity indices.

          October 07

      • Gold contracts

        • CA-3.4.8

          Gold contracts are treated the same as foreign exchange contracts for the purpose of calculating credit risk except that contracts with original maturity of 14 calendar days or less are included.

          October 07

        • CA-3.4.9

          Precious metals other than gold receive a separate treatment (see Section BR-4.1) and include forwards, swaps, purchased options and similar derivative contracts that are based on precious metals (e.g. silver, platinum, and palladium).

          October 07

      • Other commodities

        • CA-3.4.10

          Other commodities are also treated separately (see Section BR-4.1) and include forwards, swaps, purchased options and similar derivative contracts based on energy contracts, agricultural contracts, base metals (e.g. aluminium, copper, and zinc), and any other non-precious metal commodity contracts.

          October 07

      • General guidance on treatment of derivatives contracts

        • CA-3.4.11

          The following points should be noted for the treatment of certain derivatives contracts:

          (a) For contracts with multiple exchange of principal, the add-on factors are to be multiplied by the number of remaining payments in the contracts.
          (i) 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 set equal to the time until the next reset date.
          (ii) Forwards, swaps, purchased options and similar derivative contracts not covered in any of the above mentioned categories should be treated as 'other commodities'.
          (iii) No potential future credit exposure (as referred to under Paragraph CA-3.4.12) would be calculated for single currency floating/floating interest rate swaps.
          October 07

      • Calculation of weighted derivative exposures

        • CA-3.4.12

          Banks should calculate their weighted exposure under the above mentioned contracts according to the Current Exposure Method, which involves calculating the current replacement cost by marking contracts to market, thus capturing the current exposure without any need for estimation, and then adding a factor (the 'add-on') to reflect the potential future exposure over the remaining life of the contract.

          The 'add-on' factor table:

            Residual maturity of contracts
          1 year or less Over 1 year to 5 years Over 5 years
          Interest rate related contracts 0.000 0.005 0.015
          Foreign exchange & gold contracts 0.010 0.050 0.075
          Equity contracts 0.060 0.080 0.100
          Precious metals (except gold) 0.070 0.070 0.070
          Other commodities 0.120 0.120 0.150
          October 07

        • CA-3.4.13

          In order to reflect counterparty risk, the total credit equivalent amount, which results from the calculation in Paragraph CA-3.4.12 has to be broken down again according to type of counterparty, using the same classification into types (a), (b) and (c) given in Section CA-3.3. Finally, the exposure to each type of counterparty has to be weighted as 0%, 20% or 50% respectively, and the total weighted exposure calculated.

          October 07