Title[ Part 2: The First Pillar - Minimum Capital Requirements
Section[ D. The standardised approach -- credit risk mitigation
1. Overarching issues
(i) Introduction
109. Banks use a number of techniques to mitigate the credit risks to which they are exposed. For example, exposures may be collateralised by first priority claims, in whole or in part with cash or securities, a loan exposure may be guaranteed by a third party, or a bank may buy a credit derivative to offset various forms of credit risk. Additionally banks may agree to net loans owed to them against deposits from the same counterparty.
110. Where these techniques meet the requirements for legal certainty as described in paragraph 117 and 118 below, the revised approach to CRM allows a wider range of credit risk mitigants to be recognised for regulatory capital purposes than is permitted under the
1988 Accord.
(ii) General remarks
111. The framework set out in this Section II is applicable to the banking book exposures in the standardised approach. For the treatment of CRM in the IRB approach, see Section III.
112. The comprehensive approach for the treatment of collateral (see paragraphs 130 to
138 and 145 to 181) will also be applied to calculate the counterparty risk charges for OTC
derivatives and repo-style transactions booked in the trading book.
113. No transaction in which CRM techniques are used should receive a higher capital requirement than an otherwise identical transaction where such techniques are not used.
114. The effects of CRM will not be double counted. Therefore, no additional supervisory recognition of CRM for regulatory capital purposes will be granted on claims for which an issue-specific rating is used that already reflects that CRM. As stated in paragraph 100 of the section on the standardised approach, principal-only ratings will also not be allowed within the framework of CRM.
115. While the use of CRM techniques reduces or transfers credit risk, it simultaneously may increase other risks (residual risks). Residual risks include legal, operational, liquidity and market risks. Therefore, it is imperative that banks employ robust procedures and processes to control these risks, including strategy; consideration of the underlying credit; valuation; policies and procedures; systems; control of roll-off risks; and management of concentration risk arising from the bank’s use of CRM techniques and its interaction with the bank’s overall credit risk profile. Where these risks are not adequately controlled, supervisors may impose additional capital charges or take other supervisory actions as outlined in Pillar 2.
116. The Pillar 3 requirements must also be observed for banks to obtain capital relief in respect of any CRM techniques.
(iii) Legal certainty
117. In order for banks to obtain capital relief for any use of CRM techniques, the following minimum standards for legal documentation must be met.
118. All documentation used in collateralised transactions and for documenting on- balance sheet netting, guarantees and credit derivatives 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.
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