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  • CA-4.1 CA-4.1 Overarching Issues

    • Introduction

      • CA-4.1.1

        Banks use a number of techniques to mitigate the credit risks to which they are exposed. For example, exposures may be collateralised by first priority claims, in whole or in part with cash or securities, a loan exposure may be guaranteed by a third party, or a bank may buy a credit derivative to offset various forms of credit risk. Additionally banks may agree to net loans owed to them against deposits from the same counterparty. Off-balance sheet items will first be converted into on-balance sheet equivalents prior to the CRM being applied.

        Apr 08

    • General remarks

      • CA-4.1.2

        The framework set out in this sub-section of "General remarks" is applicable to all banking book exposures. Certain additional types of collateral are also eligible under the IRB approach (see paragraph CA-5.3.20 and others).

        Apr 08

      • CA-4.1.3

        The comprehensive approach for the treatment of collateral (see paragraphs CA-4.2.12 to CA-4.2.20 and CA-4.3.1 to CA-4.3.32) will also be applied to calculate the counterparty risk charges for OTC derivatives and repo-style transactions booked in the trading book.

        Apr 08

      • CA-4.1.4

        No transaction in which CRM techniques are used should receive a higher capital requirement than an otherwise identical transaction where such techniques are not used.

        Apr 08

      • CA-4.1.5

        The effects of CRM will not be double counted. Therefore, no additional recognition of CRM for regulatory capital purposes will be applicable on claims for which an issue-specific rating is used that already reflects that CRM. As stated in paragraph CA-3.4.8 of the section on the standardised approach, principal-only ratings will also not be allowed within the framework of CRM.

        Apr 08

      • CA-4.1.6

        While the use of CRM techniques reduces or transfers credit risk, it simultaneously may increase other risks (residual risks). Residual risks include legal, operational, liquidity and market risks. Therefore, it is imperative that banks employ robust procedures and processes to control these risks, including strategy; consideration of the underlying credit; valuation; policies and procedures; systems; control of roll-off risks; and management of concentration risk arising from the bank's use of CRM techniques and its interaction with the bank's overall credit risk profile. Where these risks are not adequately controlled, the CBB may impose additional capital charges or take supervisory actions.

        Apr 08

      • CA-4.1.7

        Market Discipline requirements must also be observed for banks to obtain capital relief in respect of any CRM techniques.

        Apr 08

    • Legal Certainty

      • CA-4.1.8

        In order for banks to obtain capital relief for any use of CRM techniques, the following minimum standards for legal documentation must be met.

        Apr 08

      • CA-4.1.9

        All documentation used in collateralised transactions and for documenting on- balance sheet netting, guarantees and credit derivatives must be binding on all parties and legally enforceable in all relevant jurisdictions. Banks must have conducted sufficient legal review to verify this and have a well founded legal basis to reach this conclusion, and undertake such further review as necessary to ensure continuing enforceability.

        Apr 08