CA-5.7 CA-5.7 Treatment of Expected Losses and Recognition of Provisions
CA-5.7.1
This section discusses the method by which the difference between provisions (specific provisions and collective impairment provisions) and expected losses may be included in or must be deducted from regulatory capital, as outlined in paragraph CA-2.1.5 (e). However any excess provision representing impairment loss will not be allowed to be included in regulatory capital.
Apr 081. Calculation of Expected Losses
CA-5.7.2
A bank must sum the EL amount (defined as EL multiplied by EAD) associated with its exposures (excluding the EL amount associated with equity exposures under the PD/LGD approach and securitisation exposures) to obtain a total EL amount. While the EL amount associated with equity exposures subject to the PD/LGD approach is excluded from the total EL amount, paragraphs CA-5.7.3 and CA-5.7.13 apply to such exposures. The treatment of EL for securitisation exposures is described in paragraph CA-6.4.4.
Apr 08(i) Expected Loss for Exposures other than SL Subject to the Supervisory Slotting Criteria
CA-5.7.3
Banks must calculate an EL as PD x LGD for corporate, sovereign, bank, and retail exposures both not in default and not treated as hedged exposures under the double default treatment. For corporate, sovereign, bank, and retail exposures that are in default, banks must use their best estimate of expected loss as defined in paragraph CA-5.8.82 and banks on the foundation approach must use the CBB's LGD. For SL exposures subject to the supervisory slotting criteria EL is calculated as described in paragraphs CA-5.7.4 and CA-5.7.5. For equity exposures subject to the PD/LGD approach, the EL is calculated as PD x LGD unless paragraphs CA-5.5.13 to CA-5.5.16 apply. Securitisation exposures do not contribute to the EL amount, as set out in paragraph CA-6.4.4. For all other exposures, including hedged exposures under the double default treatment, the EL is zero.
Apr 08(ii) Expected Loss for SL Exposures Subject to the Supervisory Slotting Criteria
CA-5.7.4
For SL exposures subject to the supervisory slotting criteria, the EL amount is determined by multiplying 8% by the risk-weighted assets produced from the appropriate risk weights, as specified below, multiplied by EAD.
Apr 08Supervisory Categories and EL Risk Weights for other SL Exposures
CA-5.7.5
The risk weights for SL, other than HVCRE, are as follows:
Strong Good Satisfactory Weak Default 5% 10% 35% 100% 625% Apr 08Supervisory Categories and EL Risk Weights for HVCRE
CA-5.7.6
The risk weights for HVCRE are as follows:
Strong Good Satisfactory Weak Default 5% 5% 35% 100% 625% Apr 082. Calculation of Provisions
(i) Exposures subject to IRB Approach
CA-5.7.7
Total eligible provisions are defined as the sum of all provisions (specific provisions and collective impairment provisions) that are attributed to exposures treated under the IRB approach. In addition, total eligible provisions may include any discounts on defaulted assets. Specific provisions set aside against equity and securitisation exposures must not be included in total eligible provisions.
Apr 08(ii) Portion of Exposures Subject to the Standardised Approach to Credit Risk
CA-5.7.8
Banks using the standardised approach for a portion of their credit risk exposures, either on a transitional basis (as defined in paragraphs CA-5.2.44 and CA-5.2.45), or on a permanent basis if the exposures subject to the standardised approach are immaterial (paragraph CA-5.2.46), must determine the portion of collective impairment provisions attributed to the standardised or IRB treatment of provisions (see section CA-2.1 (d) according to the methods outlined in paragraphs CA-5.7.9 and CA-5.7.10.)
Apr 08CA-5.7.9
Banks should generally attribute total provisions on a pro rata basis according to the proportion of credit risk-weighted assets subject to the standardised and IRB approaches. However, when one approach to determining credit risk-weighted assets (i.e. standardised or IRB approach) is used exclusively within an entity, provisions booked within the entity may be attributed to that approach.
Apr 08CA-5.7.10
Subject to CBB's discretion, banks using both the standardised and IRB approaches may rely on their internal methods for allocating provisions for recognition in capital under either the standardised or IRB approach, subject to the following conditions. Where the internal allocation method is made available, the CBB will establish the standards surrounding their use. Banks will need to obtain prior approval from CBB to use an internal allocation method for this purpose.
Apr 083. Treatment of EL and Provisions
CA-5.7.11
As specified in paragraph CA-2.1.5 (e), banks using the IRB approach must compare the total amount of total eligible provisions (as defined in paragraph CA-5.7.7) with the total EL amount as calculated within the IRB approach (as defined in paragraph CA-5.7.2).
Apr 08CA-5.7.12
Where the calculated EL amount is lower than the provisions of the bank, CBB will consider whether the EL fully reflects the conditions in the market in which it operates before allowing the difference to be included in Tier 2 capital. If specific provisions exceed the EL amount on defaulted assets this assessment also needs to be made before using the difference to offset the EL amount on non-defaulted assets.
Apr 08CA-5.7.13
The EL amount for equity exposures under the PD/LGD approach is deducted 50% from Tier 1 and 50% from Tier 2. Provisions or write-offs for equity exposures under the PD/LGD approach will not be used in the EL-provision calculation. The treatment of EL and provisions related to securitisation exposures is outlined in paragraph CA-6.4.4.
Apr 08
