9. CBB's LGD and EAD estimates
CA-5.8.116
Banks under the foundation IRB approach, which do not meet the requirements for own-estimates of LGD and EAD, above, must meet the minimum requirements described in the standardised approach to receive recognition for eligible financial collateral (as set out in chapter CA-4). They must meet the following additional minimum requirements in order to receive recognition for additional collateral types.
Apr 08(i) Definition of Eligibility of CRE and RRE as Collateral
CA-5.8.117
Eligible CRE and RRE collateral for corporate, sovereign and bank exposures are defined as:
(a) Collateral where the risk of the borrower is not materially dependent upon the performance of the underlying property or project, but rather on the underlying capacity of the borrower to repay the debt from other sources. As such, repayment of the facility is not materially dependent on any cash flow generated by the underlying CRE/RRE serving as collateral;53 and(b) Additionally, the value of the collateral pledged must not be materially dependent on the performance of the borrower. This requirement is not intended to preclude situations where purely macro-economic factors affect both the value of the collateral and the performance of the borrower.
53 If the CBB ascertains that public housing policy is supportive of certain real estate sectors, considering them to be an important part of housing market in Bahrain, by means of guarantees or other credit support from government agencies, then mortgage on such multifamily residential real estate can be recognised as eligible collateral for corporate exposures.
Apr 08CA-5.8.118
In light of the generic description above and the definition of corporate exposures, income producing real estate that falls under the SL asset class is specifically excluded from recognition as collateral for corporate exposures.
Apr 08(ii) Operational Requirements for Eligible CRE/RRE
CA-5.8.119
Subject to meeting the definition above, CRE and RRE will be eligible for recognition as collateral for corporate claims only if all of the following operational requirements are met:
(a) Legal enforceability: any claim on a collateral taken must be legally enforceable in all relevant jurisdictions, and any claim on collateral must be properly filed on a timely basis. Collateral interests must reflect a perfected lien (i.e. all legal requirements for establishing the claim have been fulfilled). Furthermore, the collateral agreement and the legal process underpinning it must be such that they provide for the bank to realise the value of the collateral within a reasonable timeframe;(b) Objective market value of collateral: the collateral must be valued at or less than the current fair value under which the property could be sold under private contract between a willing seller and an arm's-length buyer on the date of valuation;(c) Frequent revaluation: the bank is expected to monitor the value of the collateral on a frequent basis and at a minimum once every year. More frequent monitoring is suggested where the market is subject to significant changes in conditions. Statistical methods of evaluation (e.g. reference to house price indices, sampling) may be used to update estimates or to identify collateral that may have declined in value and that may need re-appraisal. A qualified professional must evaluate the property when information indicates that the value of the collateral may have declined materially relative to general market prices or when a credit event, such as default, occurs; and(d) Junior liens: Junior liens may be taken into account where there is no doubt that the claim for collateral is legally enforceable and constitutes an efficient credit risk mitigant. When recognised, junior liens are to be treated using the C*/C** threshold, which is used for senior liens. In such cases, the C* and C** are calculated by taking into account the sum of the junior lien and all more senior liens.Amended: April 2011
Apr 08CA-5.8.120
Additional collateral management requirements are as follows:
(a) The types of CRE and RRE collateral accepted by the bank and lending policies (advance rates) when this type of collateral is taken must be clearly documented;(b) The bank must take steps to ensure that the property taken as collateral is adequately insured against damage or deterioration;(c) The bank must monitor on an ongoing basis the extent of any permissible prior claims (e.g. tax) on the property; and(d) The bank must appropriately monitor the risk of environmental liability arising in respect of the collateral, such as the presence of toxic material on a property.Amended: April 2011
Apr 08(iii) Requirements for Recognition of Financial Receivables
— Definition of Eligible Receivables
CA-5.8.121
Eligible financial receivables are claims with an original maturity of less than or equal to one year where repayment will occur through the commercial or financial flows related to the underlying assets of the borrower. This includes both self-liquidating debt arising from the sale of goods or services linked to a commercial transaction and general amounts owed by buyers, suppliers, renters, national and local governmental authorities, or other non-affiliated parties not related to the sale of goods or services linked to a commercial transaction. Eligible receivables do not include those associated with securitisations, sub- participations or credit derivatives.
Apr 08— Operational Requirements
CA-5.8.122
The legal mechanism by which collateral is given must be robust and ensure that the lender has clear rights over the proceeds from the collateral.
Apr 08CA-5.8.125
The collateral arrangements must be properly documented, with a clear and robust procedure for the timely collection of collateral proceeds. Banks' procedures should ensure that any legal conditions required for declaring the default of the customer and timely collection of collateral are observed. In the event of the obligor's financial distress or default, the bank must have legal authority to sell or assign the receivables to other parties without consent of the receivables' obligors.
Apr 08CA-5.8.124
All documentation used in collateralised transactions must be binding on all parties and legally enforceable in all relevant jurisdictions. Banks must have conducted sufficient legal review to verify this and have a well founded legal basis to reach this conclusion, and undertake such further review as necessary to ensure continuing enforceability.
Apr 08CA-5.8.123
Banks must take all steps necessary to fulfill local requirements in respect of the enforceability of security interest, e.g. by registering a security interest with a registrar. There should be a framework that allows the potential lender to have a perfected first priority claim over the collateral.
Apr 08
