CA-5.6 CA-5.6 Rules for Purchased Receivables
CA-5.6.1
This section presents the method of calculating the UL capital requirements for purchased receivables. For such assets, there are IRB capital charges for both default risk and dilution risk. The first sub-section discusses the calculation of risk-weighted assets for default risk. The calculation of risk-weighted assets for dilution risk is provided in the second sub-section. The method of calculating expected losses, and for determining the difference between that measure and provisions, is described in section CA-5.7.
Apr 081. Risk-weighted Assets for Default Risk
CA-5.6.2
For receivables belonging unambiguously to one asset class, the IRB risk weight for default risk is based on the risk-weight function applicable to that particular exposure type, as long as the bank meets the qualification standards for this particular risk-weight function. For example, if banks cannot comply with the standards for qualifying revolving retail exposures (defined in paragraph CA-5.2.21), they should use the risk-weight function for other retail exposures. For hybrid pools containing mixtures of exposure types, if the purchasing bank cannot separate the exposures by type, the risk-weight function producing the highest capital requirements for the exposure types in the receivable pool applies.
Apr 08(i) Purchased Retail Receivables
CA-5.6.3
For purchased retail receivables, a bank must meet the risk quantification standards for retail exposures but can utilise external and internal reference data to estimate the PDs and LGDs. The estimates for PD and LGD (or EL) must be calculated for the receivables on a stand-alone basis; that is, without regard to any assumption of recourse or guarantees from the seller or other parties.
Apr 08(ii) Purchased Corporate Receivables
CA-5.6.4
For purchased corporate receivables, the purchasing bank is required to apply the existing IRB risk quantification standards for the bottom-up approach.
Apr 082. Risk-weighted Assets for Dilution Risk
CA-5.6.5
Dilution refers to the possibility that the receivable amount is reduced through cash or non-cash credits to the receivable's obligor.48 For both corporate and retail receivables, unless the bank demonstrates to the CBB that the dilution risk for the purchasing bank is immaterial, the treatment of dilution risk must be the following: at the level of either the pool as a whole (top-down approach) or the individual receivables making up the pool (bottom-up approach), the purchasing bank will estimate the one-year EL for dilution risk, also expressed in percentage of the receivables amount. Banks can utilise external and internal data to estimate EL. As with the treatments of default risk, this estimate must be computed on a stand-alone basis; that is, under the assumption of no recourse or other support from the seller or third-party guarantors. For the purpose of calculating risk weights for dilution risk, the corporate risk-weight function must be used with the following settings: the PD must be set equal to the estimated EL, and the LGD must be set at 100%. An appropriate maturity treatment applies when determining the capital requirement for dilution risk.
48 Examples include offsets or allowances arising from returns of goods sold, disputes regarding product quality, possible debts of the borrower to a receivables obligor, and any payment or promotional discounts offered by the borrower (e.g. a credit for cash payments within 30 days).
Apr 08CA-5.6.6
This treatment will be applied regardless of whether the underlying receivables are corporate or retail exposures.
Apr 083. Treatment of Purchase Price Discounts for Receivables
CA-5.6.7
In many cases, the purchase price of receivables will reflect a discount (not to be confused with the discount concept defined in paragraphs CA-5.3.40 and CA-5.4.9) that provides first loss protection for default losses, dilution losses or both (see paragraph CA-6.4.73). To the extent a portion of such a purchase price discount will be refunded to the seller, this refundable amount may be treated as first loss protection under the IRB securitisation framework. Non- refundable purchase price discounts for receivables do not affect either the EL-provision calculation in section CA-5.7 or the calculation of risk-weighted assets.
Apr 08CA-5.6.8
When collateral or partial guarantees obtained on receivables provide first loss protection (collectively referred to as mitigants in this paragraph), and these mitigants cover default losses, dilution losses, or both, they may also be treated as first loss protection under the IRB securitisation framework (see paragraph CA-6.4.73). When the same mitigant covers both default and dilution risk, banks using the Supervisory Formula that are able to calculate an exposure-weighted LGD must do so as defined in paragraph CA-6.4.79.
Apr 084. Recognition of Credit Risk Mitigants
CA-5.6.9
Credit risk mitigants will be recognised generally using the same type of framework as set forth in paragraphs CA-5.3.33 to CA-5.3.37. In particular, a guarantee provided by the seller or a third party will be treated using the existing IRB rules for guarantees, regardless of whether the guarantee covers default risk, dilution risk, or both:
(a) If the guarantee covers both the pool's default risk and dilution risk, the bank will substitute the risk weight for an exposure to the guarantor in place of the pool's total risk weight for default and dilution risk;(b) If the guarantee covers only default risk or dilution risk, but not both, the bank will substitute the risk weight for an exposure to the guarantor in place of the pool's risk weight for the corresponding risk component (default or dilution). The capital requirement for the other component will then be added; and(c) If a guarantee covers only a portion of the default and/or dilution risk, the uncovered portion of the default and/or dilution risk will be treated as per the existing CRM rules for proportional or tranched coverage (i.e. the risk weights of the uncovered risk components will be added to the risk weights of the covered risk components).Amended: April 2011
Apr 08CA-5.6.10
If protection against dilution risk has been purchased, and the conditions of paragraphs CA-5.3.38 and CA-5.3.39 are met, the double default framework may be used for the calculation of the risk-weighted asset amount for dilution risk. In this case, paragraphs CA-5.3.12 to CA-5.3.16 apply with PDo being equal to the estimated EL, LGDg being equal to 100 percent, and effective maturity being set according to paragraph CA-5.6.6.
Apr 08
