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  • (ix) Minimum Requirements for Assessing Effect of Guarantees and Credit Derivatives

    • — Standards for Corporate, Sovereign, and Bank Exposures

      • CA-5.8.90

        The minimum requirements outlined in paragraphs CA-5.8.91 to CA-5.8.100 apply to banks using the foundation LGD estimates with the following exceptions:

        (a) The bank is not able to use an 'LGD-adjustment' option; and
        (b) The range of eligible guarantees and guarantors is limited to those outlined in paragraph CA-5.3.34.
        Apr 08

    • — Standards for Retail Exposures

      • a. Guarantees

        • CA-5.8.91

          Where guarantees exist, either in support of an individual obligation or a pool of exposures, a bank may reflect the risk-reducing effect either through its estimates of PD or LGD, provided this is done consistently. In adopting one or the other technique, a bank must adopt a consistent approach, both across types of guarantees and over time.

          Apr 08

        • CA-5.8.92

          In all cases, both the borrower and all recognised guarantors must be assigned a borrower rating at the outset and on an ongoing basis. A bank must follow all minimum requirements for assigning borrower ratings set out in this section, including the regular monitoring of the guarantor's condition and ability and willingness to honour its obligations. Consistent with the requirements in section CA-5.8.43, a bank must retain all relevant information on the assignment of an exposure to a pool, and the estimation of PD.

          Apr 08

        • CA-5.8.93

          In no case can the bank assign the guaranteed exposure an adjusted PD or LGD such that the adjusted risk weight would be lower than that of a comparable, direct exposure to the guarantor. Neither criteria nor rating processes are permitted to consider possible favourable effects of imperfect expected correlation between default events for the borrower and guarantor for purposes of regulatory minimum capital requirements. As such, the adjusted risk weight must not reflect the risk mitigation of "double default."

          Apr 08

        • CA-5.8.94

          There are no restrictions on the types of eligible guarantors. The bank must, however, have clearly specified criteria for the types of guarantors it will recognise for regulatory capital purposes.

          Apr 08

        • CA-5.8.95

          The guarantee must be evidenced in writing, non-cancellable on the part of the guarantor, in force until the debt is satisfied in full (to the extent of the amount and tenor of the guarantee) and legally enforceable against the guarantor in a jurisdiction where the guarantor has assets to attach and enforce a judgement. However, in contrast to the foundation approach to corporate, bank, and sovereign exposures, guarantees prescribing conditions under which the guarantor may not be obliged to perform (conditional guarantees) may be recognised under certain conditions. Specifically, the onus is on the bank to demonstrate that the assignment criteria adequately address any potential reduction in the risk mitigation effect.

          Apr 08

      • b. Eligible Guarantors and Guarantees

      • c. Adjustment Criteria

        • CA-5.8.96

          A bank must have clearly specified criteria for adjusting borrower grades or LGD estimates (or in the case of retail and eligible purchased receivables, the process of allocating exposures to pools) to reflect the impact of guarantees for regulatory capital purposes. These criteria must be as detailed as the criteria for assigning exposures to grades consistent with paragraphs CA-5.8.22 and CA-5.8.23, and must follow all minimum requirements for assigning borrower or facility ratings set out in this section.

          Apr 08

        • CA-5.8.97

          The criteria must be plausible and intuitive, and must address the guarantor's ability and willingness to perform under the guarantee. The criteria must also address the likely timing of any payments and the degree to which the guarantor's ability to perform under the guarantee is correlated with the borrower's ability to repay. The bank's criteria must also consider the extent to which residual risk to the borrower remains, for example a currency mismatch between the guarantee and the underlying exposure.

          Apr 08

        • CA-5.8.98

          In adjusting borrower grades or LGD estimates (or in the case of retail and eligible purchased receivables, the process of allocating exposures to pools), banks must take all relevant available information into account.

          Apr 08

      • d. Credit Derivatives

        • CA-5.8.99

          The minimum requirements for guarantees are relevant also for single-name credit derivatives. Additional considerations arise in respect of asset mismatches. The criteria used for assigning adjusted borrower grades or LGD estimates (or pools) for exposures hedged with credit derivatives must require that the asset on which the protection is based (the reference asset) cannot be different from the underlying asset, unless the conditions outlined in the foundation approach are met.

          Apr 08

        • CA-5.8.100

          In addition, the criteria must address the payout structure of the credit derivative and conservatively assess the impact this has on the level and timing of recoveries. The bank must also consider the extent to which other forms of residual risk remain.

          Apr 08