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Title[ Part 4: The Third Pillar — Market Discipline

Section[ 2. Credit risk

825. General disclosures of credit risk provide market participants with a range of information about overall credit exposure and need not necessarily be based on information prepared for regulatory purposes. Disclosures on the capital assessment techniques give information on the specific nature of the exposures, the means of capital assessment and data to assess the reliability of the information disclosed.

Table 4 ¹³⁸

Credit risk: general disclosures for all banks

Qualitative Disclosures

(a) The general qualitative disclosure requirement (paragraph 824) with respect to credit risk, including:

w Definitions of past due and impaired (for accounting purposes);

w Description of approaches followed for specific and general allowances and statistical methods;

w Discussion of the bank’s credit risk management policy; and

w For banks that have partly, but not fully adopted either the foundation IRB or the advanced IRB approach, a description of the nature of exposures within each portfolio that are subject to the 1) standardised, 2) foundation IRB, and

3) advanced IRB approaches and of management’s plans and timing for migrating exposures to full implementation of the applicable approach.

Quantitative Disclosures

(b) Total gross credit risk exposures, ¹³⁹ plus average gross exposure ¹⁴⁰ over the period ¹⁴¹ broken down by major types of credit exposure. ¹⁴²

(d) Industry or counterparty type distribution of exposures, broken down by major types of credit exposure.

(e) Residual contractual maturity breakdown of the whole portfolio, ¹⁴⁴ broken down by major types of credit exposure.

(f) By major industry or counterparty type:

w Amount of impaired loans and if available, past due loans, provided separately; ¹⁴⁵

w Specific and general allowances; and

w Charges for specific allowances and charge-offs during the period.

(g) Amount of impaired loans and, if available, past due loans provided separately broken down by significant geographic areas including, if practical, the amounts of specific and general allowances related to each geographical area. ¹⁴⁶

(h) Reconciliation of changes in the allowances for loan impairment. ¹⁴⁷

(i) For each portfolio, the amount of exposures (for IRB banks, drawn plus EAD on undrawn) subject to the 1) standardised, 2) foundation IRB, and 3) advanced IRB approaches.

138 Table 4 does not include equities.

139 That is, after accounting offsets in accordance with the applicable accounting regime and without taking into account the effects of credit risk mitigation techniques, e.g. collateral and netting.

140 Where the period end position is representative of the risk positions of the bank during the period, average gross exposures need not be disclosed.

141 Where average amounts are disclosed in accordance with an accounting standard or other requirement which specifies the calculation method to be used, that method should be followed. Otherwise, the average exposures should be calculated using the most frequent interval that an entity’s systems generate for management, regulatory or other reasons, provided that the resulting averages are representative of the bank’s operations. The basis used for calculating averages need be stated only if not on a daily average basis.

142 This breakdown could be that applied under accounting rules, and might, for instance, be (a) loans, commitments and other non-derivative off balance sheet exposures, (b) debt securities, and (c) OTC derivatives.

143 Geographical areas may comprise individual countries, groups of countries or regions within countries. Banks might choose to define the geographical areas based on the way the bank’s portfolio is geographically managed. The criteria used to allocate the loans to geographical areas should be specified.

144 This may already be covered by accounting standards, in which case banks may wish to use the same maturity groupings used in accounting.

145 Banks are encouraged also to provide an analysis of the ageing of past-due loans.

146 The portion of general allowance that is not allocated to a geographical area should be disclosed separately.

147 The reconciliation shows separately specific and general allowances; the information comprises: a description of the type of allowance; the opening balance of the allowance; charge-offs taken against the allowance during the period; amounts set aside (or reversed) for estimated probable loan losses during the period, any other adjustments (e.g. exchange rate differences, business combinations, acquisitions and disposals of subsidiaries), including transfers between allowances; and the closing of the allowance. Charge-offs and recoveries that have been recorded directly to the income statement should be disclosed separately.

Table 5

Credit risk: disclosures for portfolios subject to the

standardised approach and supervisory risk weights in the IRB approaches ¹⁴⁸

Qualitative Disclosures

(a) For portfolios under the standardised approach:

w Names of ECAIs and ECAs used, plus reasons for any changes;*

w Types of exposure for which each agency is used;

w A description of the process used to transfer public issue ratings onto comparable assets in the banking book; and

w The alignment of the alphanumerical scale of each agency used with risk buckets. ¹⁴⁹

Quantitative Disclosures

(b) w For exposure amounts after risk mitigation subject to the standardised approach, amount of a bank’s outstandings (rated and unrated) in each risk bucket as well as those that are deducted; and

w For exposures subject to the supervisory risk weights in IRB (HVCRE, any SL products subject to supervisory slotting criteria and equities under the simple risk weight method) the aggregate amount of a bank’s outstandings in each risk bucket.

Credit risk: disclosures for portfolios subject to IRB approaches

826. An important part of this Framework is the introduction of an IRB approach for the assessment of regulatory capital for credit risk. To varying degrees, banks will have discretion to use internal inputs in their regulatory capital calculations. In this sub-section, the IRB approach is used as the basis for a set of disclosures intended to provide market participants with information about asset quality. In addition, these disclosures are important to allow market participants to assess the resulting capital in light of the exposures. There are two categories of quantitative disclosures: those focussing on an analysis of risk exposure and assessment (i.e. the inputs) and those focussing on the actual outcomes (as the basis for providing an indication of the likely reliability of the disclosed information). These are supplemented by a qualitative disclosure regime which provides background information on the assumptions underlying the IRB framework, the use of the IRB system as part of a risk management framework and the means for validating the results of the IRB system. The disclosure regime is intended to enable market participants to assess the credit risk exposure of IRB banks and the overall application and suitability of the IRB framework, without revealing proprietary information or duplicating the role of the supervisor in validating the detail of the IRB framework in place.

148 A de minimis exception would apply where ratings are used for less than 1% of the total loan portfolio.

149 This information need not be disclosed if the bank complies with a standard mapping which is published by the relevant supervisor.

Table 6

Credit risk: disclosures for portfolios subject to IRB approaches

Qualitative disclosures*

(a) Supervisor’s acceptance of approach/ supervisory approved transition

(b) Explanation and review of the:

w Structure of internal rating systems and relation between internal and external ratings;

w use of internal estimates other than for IRB capital purposes;

w process for managing and recognising credit risk mitigation; and

w Control mechanisms for the rating system including discussion of independence, accountability, and rating systems review.

w Corporate (including SMEs, specialised lending and purchased corporate receivables), sovereign and bank;

w Equities; ¹⁵⁰

w Residential mortgages;

w Qualifying revolving retail; ¹⁵¹ and

w Other retail.

The description should include, for each portfolio:

w The types of exposure included in the portfolio;

w The definitions, methods and data for estimation and validation of PD, and

(for portfolios subject to the IRB advanced approach) LGD and/or EAD, including assumptions employed in the derivation of these variables; ¹⁵² and

w Description of deviations as permitted under paragraph 456 and footnote 89 from the reference definition of default where determined to be material, including the broad segments of the portfolio(s) affected by such deviations. ¹⁵³

150 Equities need only be disclosed here as a separate portfolio where the bank uses the PD/LGD approach for equities held in the banking book.

151 In both the qualitative disclosures and quantitative disclosures that follow, banks should distinguish between the qualifying revolving retail exposures and other retail exposures unless these portfolios are insignificant in size (relative to overall credit exposures) and the risk profile of each portfolio is sufficiently similar such that separate disclosure would not help users’ understanding of the risk profile of the banks’ retail business.

152 This disclosure does not require a detailed description of the model in full — it should provide the reader with a broad overview of the model approach, describing definitions of the variables, and methods for estimating and validating those variables set out in the quantitative risk disclosures below. This should be done for each of the five portfolios. Banks should draw out any significant differences in approach to estimating these variables within each portfolio.

153 This is to provide the reader with context for the quantitative disclosures that follow. Banks need only describe main areas where there has been material divergence from the reference definition of default such that it would affect the readers’ ability to compare and understand the disclosure of exposures by PD grade.

Quantitative disclosures: risk assessment*

(d) For each portfolio (as defined above) except retail, present the following information across a sufficient number of PD grades (including default) to allow for a meaningful differentiation of credit risk: ¹⁵⁴

w Total exposures (for corporate, sovereign and bank, outstanding loans and

EAD on undrawn commitments; ¹⁵⁵ for equities, outstanding amount);

w For banks on the IRB advanced approach, exposure-weighted average LGD

(percentage); and

w Exposure-weighted average risk-weight.

For banks on the IRB advanced approach, amount of undrawn commitments and exposure-weighted average EAD for each portfolio; ¹⁵⁶

For each retail portfolio (as defined above), either: ¹⁵⁷

w Disclosures as outlined above on a pool basis (i.e. same as for non-retail portfolios); or

w Analysis of exposures on a pool basis (outstanding loans and EAD on commitments) against a sufficient number of EL grades to allow for a meaningful differentiation of credit risk.

Quantitative disclosures: historical results*

(e) Actual losses (e.g. charge-offs and specific provisions) in the preceding period for each portfolio (as defined above) and how this differs from past experience. A discussion of the factors that impacted on the loss experience in the preceding period — for example, has the bank experienced higher than average default rates, or higher than average LGDs and EADs.

(f) Banks’ estimates against actual outcomes over a longer period. ¹⁵⁸ At a minimum, this should include information on estimates of losses against actual losses in each portfolio (as defined above) over a period sufficient to allow for a meaningful assessment of the performance of the internal rating processes for each portfolio. ¹⁵⁹ Where appropriate, banks should further decompose this to provide analysis of PD and, for banks on the advanced IRB approach, LGD and EAD outcomes against estimates provided in the quantitative risk assessment disclosures above. ¹⁶⁰

154 The PD, LGD and EAD disclosures below should reflect the effects of collateral, netting and guarantees/credit derivatives, where recognised under Part 2. Disclosure of each PD grade should include the exposure weighted-average PD for each grade. Where banks are aggregating PD grades for the purposes of disclosure, this should be a representative breakdown of the distribution of PD grades used in the IRB approach.

155 Outstanding loans and EAD on undrawn commitments can be presented on a combined basis for these disclosures.

156 Banks need only provide one estimate of EAD for each portfolio. However, where banks believe it is helpful, in order to give a more meaningful assessment of risk, they may also disclose EAD estimates across a number of EAD categories, against the undrawn exposures to which these relate.

157 Banks would normally be expected to follow the disclosures provided for the non-retail portfolios. However, banks may choose to adopt EL grades as the basis of disclosure where they believe this can provide the reader with a meaningful differentiation of credit risk. Where banks are aggregating internal grades (either PD/LGD or EL) for the purposes of disclosure, this should be a representative breakdown of the distribution of those grades used in the IRB approach.

158 These disclosures are a way of further informing the reader about the reliability of the information provided in the “quantitative disclosures: risk assessment” over the long run. The disclosures are requirements from year- end 2009; In the meantime, early adoption would be encouraged. The phased implementation is to allow banks sufficient time to build up a longer run of data that will make these disclosures meaningful.

159 The Committee will not be prescriptive about the period used for this assessment. Upon implementation, it might be expected that banks would provide these disclosures for as long run of data as possible — for example, if banks have 10 years of data, they might choose to disclose the average default rates for each PD grade over that 10-year period. Annual amounts need not be disclosed.

160 Banks should provide this further decomposition where it will allow users greater insight into the reliability of the estimates provided in the ‘quantitative disclosures: risk assessment’. In particular, banks should provide this information where there are material differences between the PD, LGD or EAD estimates given by banks compared to actual outcomes over the long run. Banks should also provide explanations for such differences.

Table 7

Credit risk mitigation: disclosures for standardised and IRB approaches ^161,162

Qualitative Disclosures*

(a) The general qualitative disclosure requirement (paragraph 824) with respect to credit risk mitigation including:

w policies and processes for, and an indication of the extent to which the bank makes use of, on- and off-balance sheet netting;

w policies and processes for collateral valuation and management;

w a description of the main types of collateral taken by the bank;

w the main types of guarantor/credit derivative counterparty and their creditworthiness; and

w information about (market or credit) risk concentrations within the mitigation taken.

Quantitative Disclosures*

(b) For each separately disclosed credit risk portfolio under the standardised and/or foundation IRB approach, the total exposure (after, where applicable, on- or off- balance sheet netting) that is covered by:

w eligible financial collateral; and

w other eligible IRB collateral;

after the application of haircuts. ¹⁶³

(c) For each separately disclosed portfolio under the standardised and/or IRB approach, the total exposure (after, where applicable, on- or off-balance sheet netting) that is covered by guarantees/credit derivatives.

161 At a minimum, banks must give the disclosures below in relation to credit risk mitigation that has been recognised for the purposes of reducing capital requirements under this Framework. Where relevant, banks are encouraged to give further information about mitigants that have not been recognised for that purpose.

162 Credit derivatives that are treated, for the purposes of this Framework, as part of synthetic securitisation structures should be excluded from the credit risk mitigation disclosures and included within those relating to securitisation.

163 If the comprehensive approach is applied, where applicable, the total exposure covered by collateral after haircuts should be reduced further to remove any positive adjustments that were applied to the exposure, as permitted under Part 2.

Table 8

General disclosure for exposures related to counterparty credit risk

Qualitative Disclosures

(a) The general qualitative disclosure requirement (paragraphs 824 and 825) with respect to derivatives and CCR, including:

w Discussion of methodology used to assign economic capital and credit limits for counterparty credit exposures;

w Discussion of policies for securing collateral and establishing credit reserves;

w Discussion of policies with respect to wrong-way risk exposures;

w Discussion of the impact of the amount of collateral the bank would have to have to provide given a credit rating downgrade.

Quantitative Disclosures

(b) Gross positive fair value of contracts, netting benefits, netted current credit exposure, collateral held (including type, e.g. cash, government securities, etc.), and net derivatives credit exposure.164 Also report measures for exposure at default, or exposure amount, under the IMM, SM or CEM, whichever is applicable. The notional value of credit derivative hedges, and the distribution of current credit exposure by types of credit exposure. ¹⁶⁵

(c) Credit derivative transactions that create exposures to CCR (notional value), segregated between use for the institution’s own credit portfolio, as well as in its intermediation activities, including the distribution of the credit derivatives products used ¹⁶⁶, broken down further by protection bought and sold within each product group.

(d) The estimate of alpha if the bank has received supervisory approval to estimate alpha.

164 Net credit exposure is the credit exposure on derivatives transactions after considering both the benefits from legally enforceable netting agreements and collateral arrangements. The notional amount of credit derivative hedges alerts market participants to an additional source of credit risk mitigation.

165 This might be interest rate contracts, FX contracts, equity contracts, credit derivatives, and commodity/other contracts.

166 This might be Credit Default Swaps, Total Return Swaps, Credit options, and other.

Table 9

Securitisation: disclosure for standardised and IRB approaches ¹⁶²

Qualitative disclosures*

(a) The general qualitative disclosure requirement (paragraph 824) with respect to securitisation (including synthetics), including a discussion of:

w the bank’s objectives in relation to securitisation activity, including the extent to which these activities transfer credit risk of the underlying securitised exposures away from the bank to other entities;

w the roles played by the bank in the securitisation process ¹⁶⁷ and an indication of the extent of the bank’s involvement in each of them; and

the regulatory capital approaches (e.g. RBA, IAA and SFA) that the bank follows for its securitisation activities.

(b) Summary of the bank’s accounting policies for securitisation activities, including:

w whether the transactions are treated as sales or financings;

w recognition of gain on sale;

w key assumptions for valuing retained interests, including any significant changes since the last reporting period and the impact of such changes; and

w treatment of synthetic securitisations if this is not covered by other accounting policies (e.g. on derivatives).

Quantitative disclosures*

(d) The total outstanding exposures securitised by the bank and subject to the securitisation framework (broken down into traditional/synthetic), by exposure type. ^168,169,170

(e) For exposures securitised by the bank and subject to the securitisation framework: ¹⁷⁰

w amount of impaired/past due assets securitised; and

w losses recognised by the bank during the current period ¹⁷¹

broken down by exposure type.

(f) Aggregate amount of securitisation exposures retained or purchased ¹⁷² broken down by exposure type.168

(g) Aggregate amount of securitisation exposures retained or purchased ¹⁷² and the associated IRB capital charges for these exposures broken down into a meaningful number of risk weight bands. Exposures that have been deducted entirely from Tier 1 capital, credit enhancing I/Os deducted from Total Capital, and other exposures deducted from total capital should be disclosed separately by type of underlying asset.

167 For example: originator, investor, servicer, provider of credit enhancement, sponsor of asset backed commercial paper facility, liquidity provider, swap provider.

168 For example, credit cards, home equity, auto, etc.

169 Securitisation transactions in which the originating bank does not retain any securitisation exposure should be shown separately but need only be reported for the year of inception.

170 Where relevant, banks are encouraged to differentiate between exposures resulting from activities in which they act only as sponsors, and exposures that result from all other bank securitisation activities that are subject to the securitisation framework.

171 For example, charge-offs/allowances (if the assets remain on the bank’s balance sheet) or write-downs of I/O

strips and other residual interests.

172 Securitisation exposures, as noted in Part 2, Section IV, include, but are not restricted to, securities, liquidity facilities, other commitments and credit enhancements such as I/O strips, cash collateral accounts and other subordinated assets.

(h) For securitisations subject to the early amortisation treatment, the following items by underlying asset type for securitised facilities:

w the aggregate drawn exposures attributed to the seller’s and investors’

interests;

w the aggregate IRB capital charges incurred by the bank against its retained

(i.e. the seller’s) shares of the drawn balances and undrawn lines; and

w the aggregate IRB capital charges incurred by the bank against the investor’s shares of drawn balances and undrawn lines.

(i) Banks using the standardised approach are also subject to disclosures (g) and

(h), but should use the capital charges for the standardised approach.

(j) Summary of current year’s securitisation activity, including the amount of exposures securitised (by exposure type), and recognised gain or loss on sale by asset type.

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