— Methodology for Recognition of Eligible Financial Collateral under the Foundation Approach
CA-5.3.21
The methodology for the recognition of eligible financial collateral closely follows that outlined in the comprehensive approach to collateral in the standardised approach in paragraphs CA-4.3.3 to CA-4.3.25. The simple approach to collateral presented in the standardised approach will not be available to banks applying the IRB approach.
Apr 08CA-5.3.22
Following the comprehensive approach, the effective loss given default (LGD*) applicable to a collateralised transaction can be expressed as follows, where:
(a) LGD is that of the senior unsecured exposure before recognition of collateral (45%);(b) E is the current value of the exposure (i.e. cash lent or securities lent or posted);(c) E* is the exposure value after risk mitigation as determined in paragraphs CA-4.3.3 to CA-4.3.6 of the standardised approach. This concept is only used to calculate LGD*. Banks must continue to calculate EAD without taking into account the presence of any collateral, unless otherwise specified.LGD* = LGD × (E* / E)
Apr 08CA-5.3.23
Banks that qualify for the foundation IRB approach may calculate E* using any of the ways specified under the comprehensive approach for collateralised transactions under the standardised approach.
Apr 08CA-5.3.24
Where repo-style transactions are subject to a master netting agreement, a bank may choose not to recognise the netting effects in calculating capital. Banks that want to recognise the effect of master netting agreements on such transactions for capital purposes must satisfy the criteria provided in paragraph CA-4.3.17 and CA-4.3.18 of the standardised approach. The bank must calculate E* in accordance with paragraphs CA-4.3.20 and 4.3.21 or CA-4.3.22 to 4.3.25 and equate this to EAD. The impact of collateral on these transactions may not be reflected through an adjustment to LGD.
Apr 08
