4. Transition Arrangements
(i) Parallel Calculation
CA-5.2.45
Banks adopting the foundation IRB (advanced IRB for retail class) approach are required to calculate their capital requirement using these approaches, as well as the capital adequacy regulations issued by CBB dated July 2004 for the time period specified in section CA-A.4. The transition period for adoption of IRB will begin from the publication of this Module. Parallel calculation for banks adopting the foundation IRB approach to credit risk will start in the year beginning year-end 2007.
Apr 08(ii) Corporate, Sovereign, Bank, and Retail Exposures
CA-5.2.46
The transition period starts on the date of implementation of this Module and will last for 3 years from that date. During the transition period, the following minimum requirements can be relaxed:
(a) For corporate, sovereign, and bank exposures under the foundation approach, paragraph CA-5.8.74, the requirement that, regardless of the data source, banks must use at least five years of data to estimate the PD; and(b) For retail exposures, paragraph CA-5.8.77, the requirement that regardless of the data source banks must use at least five years of data to estimate loss characteristics (EAD, and either expected loss (EL) or PD and LGD).(c) For corporate, sovereign, bank, and retail exposures, paragraph CA-5.8.56, the requirement that a bank must demonstrate it has been using a rating system that was broadly in line with the minimum requirements articulated in this document for at least three years prior to qualification.(d) The applicable aforementioned transitional arrangements also apply to the PD/LGD approach to equity. There are no transitional arrangements for the market-based approach to equity.Apr 08CA-5.2.47
Under these transitional arrangements for IRB, banks must have a minimum of two years of data at the implementation of this Module. This requirement will increase by one year for each of three years of transition.
Apr 08CA-5.2.48
Owing to the potential for very long-run cycles in house prices which short-term data may not adequately capture, during this transition period, LGDs for retail exposures secured by residential properties cannot be set below 10% for any sub-segment of exposures to which the formula in paragraph CA-5.4.3 is applied.36 During the transition period the CBB will review the potential need for continuation of this floor.
36 The 10% LGD floor shall not apply, however, to sub-segments that are subject to/benefit from sovereign guarantees. Further, the existence of the floor does not imply any waiver of the requirements of LGD estimation as laid out in the minimum requirements starting with section CA-5.8.79.
Apr 08(iii) Equity Exposures
CA-5.2.49
For a maximum of ten years, CBB may, on a case by case basis, exempt from the IRB treatment particular equity investments held at the time of the publication of this Module. This exemption period will begin from the publication of this Module. The exempted position is measured as the number of shares as of that date and any additional arising directly as a result of owning those holdings, as long as they do not increase the proportional share of ownership in a portfolio company.
Apr 08CA-5.2.50
If an acquisition increases the proportional share of ownership in a specific holding (e.g. due to a change of ownership initiated by the investing company subsequent to the publication of this Module) the exceeding part of the holding is not subject to the exemption. Nor will the exemption apply to holdings that were originally subject to the exemption, but have been sold and then bought back.
Apr 08CA-5.2.51
Equity holdings covered by these transitional provisions will be subject to the capital requirements of the standardised approach.
Apr 08
