CA-A.4.1

For banks applying the IRB approach for credit risk, there will be a capital floor following implementation of this Module. Banks must calculate the difference between: (i) the floor as defined in Paragraph CA-A.4.2 and (ii) the amount as calculated according to Paragraph CA-A.4.3. If the floor amount is larger, banks are required to add 12.5 times the difference to the risk-weighted assets.

CA-A.4.2

The capital floor is based on previous capital adequacy Rules issued by CBB dated July 2004. It is derived by applying an adjustment factor to the following amount: (i) 8% of the risk-weighted assets, (ii) plus Tier 1 and Tier 2 deductions. The adjustment factor for banks applying the foundation IRB approach for the year 2008 is 95%. The adjustment factor for the year 2009 is 90%, and for the year 2010 is 80%. The following table illustrates the application of the adjustment factors. Additional transitional arrangements including parallel calculation are set out in Paragraphs CA-5.2.45 to CA-5.2.51.

CA-A.4.3

In the years in which the floor applies, banks must also calculate (i) 8% of total risk-weighted assets as calculated under this Module, (ii) less the difference between total provisions and expected loss amount as described in Section CA-5.7, and (iii) plus other Tier 1 and Tier 2 deductions.

CA-A.4.4

These prudential floors are also applicable to banks that that do not complete the transition to IRB approach in the years specified in Paragraph CA-2.4.2 to provide time to ensure that individual bank implementations of the IRB approach are sound. However, CBB may develop appropriate bank-by-bank floors periodically.

CA-A.4.5

Banks which start to use internal models for market risk for one or more risk categories should, over a reasonable period of time, extend the models to all of their operations, subject to the exceptions mentioned in Paragraph CA-A.4.6 below, and move towards a comprehensive model (i.e., one which captures all market risk categories).

CA-A.4.6

On a transitional basis, banks will be allowed to use a combination of the standardised approach and the internal models approach to measure their market risks provided they should cover a complete risk category (e.g., interest rate risk or foreign exchange risk), i.e., a combination of the two methods will not be allowed within the same risk category¹. However, banks presently implementing or further improving their internal models will be allowed some flexibility (including within risk categories) in including all their operations on a worldwide basis. This flexibility shall be subject to the specific prior written approval of the CBB, and such approval will be given on a case-by-case basis and reviewed by the CBB from time to time.

¹ This does not, however, apply to pre-processing techniques which are used to simplify the calculation and whose results become subject to the standardised methodology.

CA-A.4.7

The CBB will closely monitor banks to ensure that there will be no "cherry-picking" between the standardised approach and the models approach for market risk within a risk category. Banks which adopt a model will not be permitted, save in exceptional circumstances, to revert to the standardised approach.

CA-A.4.8

The CBB recognises that even a bank which uses a comprehensive model for market risk may still incur risks in positions which are not captured by their internal models², for example, in remote locations, in minor currencies or in negligible business areas³. Any such risks that are not included in a model should be separately measured and reported using the standardised approach described in Chapters CA-9 to CA-13.

² Banks may also incur interest rate and equity risks outside of their trading activities. However, there are no explicit capital charges for the price risk in such positions.

³ For example, if a bank is hardly at all engaged in commodities it will not necessarily be expected to model its commodities risk.

CA-A.4.9

Transitioning banks are required to move towards a comprehensive internal model approach for market risk.

CA-A.4.10

The CBB will closely monitor the risk management practices of banks moving towards the models approach for market risk, to ensure that they are in a position to meet all standards once they apply a full-fledged model for any risk category.