3. Adoption of the IRB Approach Across Asset Classes
CA-5.2.38
Once a bank adopts an IRB approach for part of its holdings, it is expected to extend it across the entire banking group. The CBB recognises however, that, for many banks, it may not be practicable for various reasons to implement the IRB approach across all material asset classes and business units at the same time. Furthermore, once on IRB, data limitations may mean that banks can meet the standards for the use of own estimates of LGD and EAD for some but not all of their business units at the same time. CBB will expect banks to define their business units in line with asset classes given in this chapter, however banks can apply to CBB for exemption from this rule.
Apr 08CA-5.2.39
As such, CBB allows banks to adopt a phased rollout of the IRB approach across the banking group. The phased rollout includes (i) adoption of IRB across asset classes within the same business unit (or in the case of retail exposures across individual sub-classes); and (ii) adoption of IRB across business units in the same banking group. However, when a bank adopts an IRB approach for an asset class within a particular business unit (or in the case of retail exposures for an individual sub-class), it must apply the IRB approach to all exposures within that asset class (or sub-class) in that unit.
Apr 08CA-5.2.40
A bank must produce an implementation plan, specifying to what extent and when it intends to roll out IRB approaches across significant asset classes (or sub-classes in the case of retail) and business units over time. The plan should be exacting, yet realistic, and must be agreed with the CBB. It should be driven by the practicality and feasibility of moving to the more advanced approaches, and not motivated by a desire to adopt an approach that minimises its capital charge. During the roll-out period, CBB will ensure that no capital relief is granted for intra-group transactions which are designed to reduce a banking group's aggregate capital charge by transferring credit risk among entities on the standardised approach, foundation and advanced IRB approaches. This includes, but is not limited to, asset sales or cross guarantees.
Apr 08CA-5.2.41
Some exposures in non-significant business units as well as asset classes (or sub-classes in the case of retail) that are immaterial in terms of size and perceived risk profile may be exempt from the requirements in the previous two paragraphs, subject to CBB's approval. Capital requirements for such operations will be determined according to the standardised approach, with the CBB determining whether a bank should hold more capital for such positions.
Apr 08CA-5.2.42
Notwithstanding the above, once a bank has adopted the IRB approach for all or part of any of the corporate, bank, sovereign, or retail asset classes, it will be required to adopt the IRB approach for its equity exposures at the same time, subject to materiality. Further, once a bank has adopted the general IRB approach for corporate exposures, it will be required to adopt the IRB approach for the SL sub-classes within the corporate exposure class.
Apr 08CA-5.2.43
Banks adopting an IRB approach are expected to continue to employ an IRB approach. A voluntary return to the standardised approach is permitted only in extraordinary circumstances, such as divestiture of a large fraction of the bank's credit- related business, and approval must be obtained from the CBB.
Apr 08CA-5.2.44
Given the data limitations associated with SL exposures, a bank may remain on the supervisory slotting criteria approach for one or more of the PF, OF, CF, IPRE or HVCRE sub-classes, and move to the foundation approach for other sub-classes within the corporate asset class.
Apr 08
