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Capital Adequacy Requirements (CAR) Guideline Subject: Capital Adequacy Requirements (CAR) Chapter 3 – Credit Risk – Standardized Approach Effective Date: November 2017 / January 20181 The Capital Adequacy Requirements (CAR) for banks (including federal credit unions), bank holding companies, federally regulated trust companies, federally regulated loan companies and cooperative retail associations are set out in nine chapters, each of which has been issued as a separate document. This document, Chapter 3 – Credit Risk – Standardized Approach, should be read in conjunction with the other CAR chapters which include: Chapter 1 Overview Chapter 2 Definition of Capital Chapter 3 Credit Risk – Standardized Approach Chapter 4 Settlement and Counterparty Risk Chapter 5 Credit Risk Mitigation Chapter 6 Credit Risk- Internal Ratings Based Approach Chapter 7 Structured Credit Products Chapter 8 Operational Risk Chapter 9 Market Risk 1 For institutions with a fiscal year ending October 31 or December 31, respectively Banks/BHC/T&L/CRA Credit Risk-Standardized Approach November 2017 Chapter 3 - Page 1 Table of Contents 3.1. Risk Weight Categories ............................................................................................. 4 3.1.1. Claims on sovereigns ............................................................................... 4 3.1.2. Claims on unrated sovereigns ................................................................. 5 3.1.3. Claims on non-central government public sector entities (PSEs) ........... 5 3.1.4. Claims on multilateral development banks (MDBs) ............................... 6 3.1.5. Claims on deposit taking institutions and banks ..................................... 7 3.1.6. Claims on securities firms ....................................................................... 8 3.1.7. Claims on corporates .............................................................................. 8 3.1.8. Claims included in the regulatory retail portfolios ................................. 8 3.1.9. Claims secured by residential property ................................................... 9 3.1.10. Reverse mortgages................................................................................. 10 3.1.11. Mortgage-backed securities .................................................................. 12 3.1.12. Pass-through type mortgage-backed securities ..................................... 12 3.1.13. Repurchase and reverse repurchase agreements .................................. 14 3.1.14. Securities lending .................................................................................. 14 3.1.15. Claims secured by commercial real estate ............................................ 14 3.1.16. Past due loans........................................................................................ 15 3.1.17. Higher-risk categories ........................................................................... 15 3.1.18 Equity Investments in Funds .................................................................. 15 3.1.19 Other assets ........................................................................................... 20 3.1.20 Treatment of purchased receivables .................................................... 21 3.2. Categories of off-balance sheet instruments .......................................................... 21 3.2.1. Direct credit substitutes ......................................................................... 22 3.2.2. Transaction-related contingencies ........................................................ 23 3.2.3. Trade-related contingencies .................................................................. 23 3.2.4. Sale and Repurchase Agreements ......................................................... 24 3.2.5. Forward Asset Purchases ...................................................................... 24 3.2.6. Forward/Forward Deposits................................................................... 24 3.2.7. Partly Paid Shares and Securities ......................................................... 24 3.2.8. Note Issuance/Revolving Underwriting Facilities ................................. 24 Banks/BHC/T&L/CRA Credit Risk-Standardized Approach November 2017 Chapter 3 - Page 2 3.2.9. Future/Forward Rate Agreements ......................................................... 24 3.2.10. Interest Rate Swaps ............................................................................... 25 3.2.11. Interest Rate Options and Currency Options ........................................ 25 3.2.12. Forward Foreign Exchange Contracts ................................................. 25 3.2.13. Cross Currency Swaps .......................................................................... 25 3.2.14. Cross Currency Interest Rate Swaps ..................................................... 25 3.2.15. Financial and Foreign Currency Futures ............................................. 25 3.2.16. Precious Metals Contracts and Financial Contracts on Commodities . 25 3.2.17. Non-equity Warrants ............................................................................. 26 3.3. Credit conversion factors ........................................................................................ 26 3.4. Forwards, swaps, purchased options and other similar derivative contracts .... 27 3.4.1. Interest rate contracts............................................................................ 27 3.4.2. Foreign exchange rate contracts ........................................................... 28 3.4.3. Equity contracts ..................................................................................... 28 3.4.4. Precious metals (i.e., silver, platinum, and palladium) contracts ......... 28 3.4.5. Contracts on other commodities ............................................................ 28 3.5. Commitments ........................................................................................................... 29 3.5.1. Credit conversion factors ...................................................................... 29 3.5.2. Maturity ................................................................................................. 30 3.5.3. Specific types of commitments ............................................................... 31 3.6. External credit assessments and the mapping process ......................................... 32 3.6.1. External credit assessments ................................................................... 32 3.6.2. Implementation considerations ............................................................. 34 Banks/BHC/T&L/CRA Credit Risk-Standardized Approach November 2017 Chapter 3 - Page 3 Chapter 3- Credit Risk – Standardized Approach 1. This chapter is drawn from the Basel Committee on Banking Supervision’s (BCBS) Basel II and III frameworks, International Convergence of Capital Measurement and Capital Standards – June 2006 and Basel III: A global regulatory framework for more resilient banks and banking systems – December 2010 (rev June 2011). For reference, the Basel II text paragraph numbers that are associated with the text appearing in this chapter are indicated in square brackets at the end of each paragraph2. 2. Note that all exposures subject to the standardized approach should be risk-weighted net of specific allowances3. 3.1. Risk Weight Categories 3. The risk weight categories apply to on-balance sheet and off-balance sheet credit equivalent amounts with the exception of items that are deducted from capital as regulatory adjustments pursuant to section 2.3 of Chapter 2 – Definition of Capital. Individual claims 3.1.1. Claims on sovereigns 4. Claims on sovereigns and their central banks are risk weighted as follows: Credit AAA A+ to A- BBB+ to BB+ to B- Below B- Unrated Assessment4 to AA- BBB- Risk Weight 0% 20% 50% 100% 150% 100% [BCBS June 2006 par 53] 5. National supervisors may allow a lower risk weight to be applied to banks’ exposures to their sovereign (or central bank) of incorporation denominated in domestic currency and funded5 in that currency.6 Institutions operating in Canada that have exposures to sovereigns meeting the above criteria may use the preferential risk weight assigned to those sovereigns by their national supervisors. [BCBS June 2006 par 54] 2 Following the format: [BCBS June 2006 par x] 3 Under IFRS 9, Stage 3 allowances and partial write-offs are considered to be specific allowances, while Stage 1 and Stage 2 allowances are considered to be general allowances. 4 This notation refers to the methodology used by Standard and Poor’s. Refer to section 3.6.2.1. to determine the applicable risk weight for other rating agency methodologies. 5 This is to say that the bank would also have corresponding liabilities denominated in the domestic currency. 6 This lower risk weight may be extended to the risk weighting of collateral and guarantees. See section 5.1.3. and 5.1.5. Banks/BHC/T&L/CRA Credit Risk-Standardized Approach November 2017 Chapter 3 - Page 4 3.1.2. Claims on unrated sovereigns 6. For claims on sovereigns that are unrated, institutions may use country risk scores assigned by Export Credit Agencies (ECAs). Consensus risk scores assigned by ECAs participating in the “Arrangement on Officially Supported Export Credits” and available on the OECD website7, correspond to risk weights as follows: ECA risk scores 0-1 2 3 4 to 6 7 Risk weight 0% 20% 50% 100% 150% [BCBS June 2006 par 55] 7. Claims on the Bank for International Settlements, the International Monetary
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