| (i) | Subject to such conditions as may be specified in writing by the Registrar, a bank that adopted the foundation IRB approach for the measurement of the bank's exposure to credit risk in respect of positions held in the bank's banking book shall apply the said approach in respect of all the bank's material asset classes and business units. |
| (ii) | For a minimum period of three years prior to a bank's implementation of the foundation IRB approach for the measurement of the bank's exposure to credit risk, the rating and risk estimation systems and processes of the bank should have— |
[Regulation 23(11)(b)(ii) substituted by regulation 2(j) of Notice No. R. 261, GG 38616, dated 27 March 2015]
(A) provided a meaningful assessment of borrower and transaction characteristics;
| (B) | provided a meaningful differentiation of risk; |
| (C) | provided materially accurate and consistent quantitative estimates of risk; |
| (D) | produced internal ratings and default and loss estimates that formed an integral part of the bank's— |
| (i) | credit approval process; |
| (ii) | risk management process; |
| (iii) | internal capital allocation process; |
| (iv) | corporate governance process; |
| (E) | been subjected to appropriate internal controls and independent review; |
| (F) | been broadly in compliance with the minimum requirements specified in this subregulation (11). |
| (iii) | As a minimum, a bank that adopted the IRB approach for the measurement of the bank's exposure to credit risk in respect of positions held in the bank's banking book shall have in place a duly documented credit policy, which credit policy— |
| (A) | shall be applied consistently over time for internal risk management purposes and in terms of the IRB approach; |
| (B) | shall in the case of exposures relating to corporate institutions, sovereigns or banks duly specify the relationship between borrower grades in terms of the level of risk that each grade implies, that is, the perceived and measured risk shall increase as the credit quality of an exposure declines from one grade to the next; |
| (C) | shall in the case of exposures relating to corporate institutions, sovereigns or banks duly specify the risk represented in each risk grade in terms of both a description of the probability of default risk typical for obligors assigned to the specific grade and the criteria used to distinguish that level of credit risk; |
| (D) | shall be sufficiently robust to ensure that— |
| (i) | each relevant individual legal entity or person to which the bank is exposed is separately rated; |
| (ii) | the bank duly specifies the treatment of individual entities in a connected group, including the circumstances under which the same rating may or may not be assigned to all or some related entities; |
| (iii) | the bank develops and maintains a robust process for the identification of specific wrong way risk for each relevant person or legal entity to which the bank is exposed; |
| (iv) | transactions with counterparties where specific wrong way risk has been identified are appropriately treated in accordance with the relevant requirements specified in these Regulations; |
| (E) | shall reinforce and foster the independence of the rating process; |
| (F) | shall duly specify the bank's process relating to the assignment of ratings to credit exposures; |
| (G) | shall duly specify the situations in which the senior management of the bank may override the output of the rating process, including how and to what extent such overrides may be used, and the names of senior management who may approve overrides of the model's output; |
| (H) | shall contain comprehensive requirements to assess the creditworthiness of persons with overdraft facilities; |
| (I) | shall comprehensively deal with— |
| (i) | overdue amounts, including the manner in which the bank determines the number of past due days in respect of credit exposures; |
| (ii) | exposures that are in default; |
| (iii) | re-ageing of facilities or exposures, which re-aging, amongst other things, shall comprehensively deal with— |
| (aa) | persons responsible for approval; |
| (bb) | reporting requirements; |
| (cc) | the minimum age of a facility or exposure before it is eligible for re-ageing; |
| (dd) | the delinquency levels of facilities or exposures that are eligible for re-ageing; |
| (ee) | the maximum number of exposures per facility, eligible for re-ageing; |
| (ff) | a reassessment of the borrower's capacity to repay amounts due; |
| (iv) | the granting of extensions, deferrals, renewals or rewrites in respect of existing accounts. |
| (iv) | A bank that uses multiple systems to support its assessment of credit risk— |
| (i) | the rationale for assigning a particular obligor to a particular rating system; |
| (ii) | the specific industries or market segments to which a particular rating system applies; |
| (B) | shall allocate the bank's obligors to a rating system in a manner that best reflects the level of risk of a particular obligor. |
| (v) | Without derogating from the provisions of subparagraphs (i) to (iv) above, the rating and risk estimation systems and processes of a bank that adopted the IRB approach for the measurement of the bank's exposure to credit risk in respect of positions held in the bank's banking book— |
| (A) | shall in the case of exposures to corporate institutions, sovereigns or banks, excluding any exposures relating to specialised lending that were mapped into the standardised rating categories specified in paragraph (d)(iii)(C) below, have separate and distinct dimensions relating to— |
| (i) | the risk of borrower default, that is, separate exposures to the same obligor shall be assigned to the same borrower grade, irrespective of any differences in the nature of each specific transaction unless— |
| (aa) | the one exposure is denominated in local currency whilst the other exposure is denominated in foreign currency; or |
| (bb) | protection was obtained in the form of a guarantee, which protection resulted in an adjusted borrower grade, |
in which case separate exposures may result in multiple grades in respect of the same obligor.
| (ii) | transaction-specific factors such as collateral, seniority and product type, provided that— |
| (aa) | when the rating system of a bank that adopted the foundation IRB approach contains a facility dimension, which facility dimension reflects both borrower and transaction-specific factors, that is, the rating dimension reflects expected loss by incorporating both borrower strength (PD) and loss severity (LGD) considerations, the rating system shall be deemed to comply with the requirements of this item (A); |
| (bb) | a separate rating system that exclusively reflects LGD ratios shall be deemed to comply with the relevant requirements of this item (A); |
| (cc) | when the rating dimension reflects expected loss but it does not separately quantify the LGD ratio in respect of the said exposure, the bank shall apply the LGD estimates determined by the Registrar. |
| (B) | shall in the case of exposures to corporate institutions, sovereigns or banks ensure a meaningful distribution of exposures across risk grades, that is, the bank shall not have excessive concentrations of exposure in any one of the bank's borrower rating or facility rating scales. |
As a minimum, a bank that adopted the IRB approach—
| (i) | [Regulation 23(11)(b)(v)(B)(i) deleted by regulation 6(o) of Notice No. R. 297, GG 40002, dated 20 May 2016] |
| (ii) | shall in the case of exposures relating to specialised lending, which exposures were mapped into the standardised rating categories specified in paragraph (d)(iii)(C) below, have no less than four borrower grades in respect of borrowers that are not in default and one grade for borrowers that have defaulted; |
| (iii) | shall assign a rating to each obligor and all eligible guarantors, which rating shall be reviewed or approved by a person who does not directly benefit from the extension of credit; |
| (iv) | shall associate each exposure with a facility rating as part of the loan approval process; |
| (v) | shall review assigned borrower and facility ratings on a regular basis, but not less frequently than once a year, provided that the bank shall review all relevant ratings as soon as material new information comes to the attention of the bank; |
| (vi) | shall have in place an effective process in order to obtain and update all relevant information; |
| (C) | may in the case of exposures relating to specialised lending, which exposures were mapped into the standardised rating categories specified in paragraph (d)(iii)(C) below, have a single rating dimension, which rating dimension reflects expected loss by incorporating both borrower strength, that is, PD, and loss severity, that is, LGD; |
| (D) | shall in the case of retail exposures— |
| (i) | be oriented towards and comprehensively capture— |
| (aa) | borrower risk, which borrower risk shall include matters such as borrower type and demographics such as age or occupation; and |
| (bb) | transaction risk, which transaction risk shall include matters relating to product and collateral types such as loan-to-value or lending-to-value measures, guarantees and seniority, and any cross-collateral provision where present; |
[Sub-sub-item (bb) of subregulation (11)(b)(v)(D)(i) substituted by regulation 2(l) of Notice No. R. 261 dated 27 March 2015]
| (cc) | the delinquency status of all relevant exposures, that is, the bank shall separately identify exposures that are delinquent and exposures that are not delinquent; |
| (ii) | be sufficiently robust to ensure that the bank assigns each retail exposure to a relevant pool of retail exposures as part of the bank's loan approval process, which loan approval process shall make provision for— |
| (aa) | a meaningful differentiation of risk, that is, there shall be a meaningful distribution of borrowers and exposures across the relevant retail pools of exposure in order to ensure that no single pool of exposures results in undue concentration in relation to the bank's total retail exposure; |
| (bb) | a grouping of sufficiently homogenous exposures provided that the bank shall consider the risk drivers in respect of borrower risk, transaction risk and the delinquency status of retail exposures when the bank assigns a particular exposure to a particular retail pool of exposures; |
| (cc) | accurate and consistent estimates of loss characteristics at a pool level, that is, for each pool of retail exposures, the bank shall estimate the risk components of PD, LGD and EAD, provided that the number of exposures in a particular exposure pool shall be sufficient to allow for a meaningful quantification and validation of the loss characteristics at the pool level; |
| (dd) | regular review, but not less frequently than once a year, of the status of individual borrowers within each pool and the loss characteristics and delinquency status of each relevant pool, provided that the bank— |
| (i) | shall review all relevant risk characteristics as soon as material new information comes to the attention of the bank; |
| (ii) | may make use of a representative sample to review the status of individual borrowers within each pool; |
| (E) | shall make provision for specific rating definitions and criteria in order to assign exposures to relevant risk grades, which definitions and criteria— |
| (i) | shall be plausible and intuitive in order to ensure a meaningful differentiation of risk; |
| (ii) | shall be sufficiently detailed to allow— |
| (aa) | persons responsible for assigning of ratings to consistently assign borrowers or facilities that pose similar risk to the same grade; |
| (bb) | third parties such as the internal audit department or an equally independent function, and the Registrar, to understand the assignment of ratings and to evaluate the appropriateness of the grade or pool assignments; |
| (iii) | shall be duly documented; |
| (iv) | shall be consistent with the bank's internal lending standards; |
| (v) | shall take into consideration all relevant and material information; |
| (vi) | shall periodically be reviewed in order to ensure that the definitions and criteria remain relevant and current. |
| (F) | shall incorporate an appropriate time horizon in order to assign a risk rating to a borrower, which rating shall be based on a sufficiently long time horizon— |
| (i) | to estimate an obligor's probability of default; |
| (ii) | to represent the borrower's ability and willingness to repay contractual obligations despite adverse economic conditions or the occurrence of unexpected events; |
| (G) | shall be sufficiently robust to ensure that all relevant PD estimates of highly leveraged borrowers, or borrowers of which the assets consist predominantly of traded assets, reflect the performance of the relevant underlying assets based on periods of stressed volatilities; |
| (H) | may include statistical models and mechanical methods to assign borrower and facility ratings or estimate PD ratios, LGD ratios and |
EAD amounts, which models and methods—
| (i) | shall take into account all relevant and material information; |
| (ii) | shall be used appropriately; |
| (iii) | shall have good predictive power; |
| (iv) | shall incorporate a reasonable set of risk predictors and the bank shall have in place clear guidelines and processes to monitor situations in which variables or risk inputs were altered; |
| (v) | shall be materially accurate across a range of borrowers or facilities; |
| (vi) | shall not contain any known material biases; |
| (vii) | shall be subject to a regular validation process of data inputs, including an assessment of accuracy, completeness and appropriateness; |
| (viii) | shall be subject to written policies and procedures for human review and judgement, provided that when human judgement is used to override the model's output, the bank shall separately keep track of the performance of the relevant exposure; |
| (ix) | shall be subject to regular backtesting. |
| (I) | shall be duly documented, which documentation, as a minimum— |
| (i) | shall address matters such as— |
| (aa) | specific definitions of default and loss, which definitions shall materially be consistent with the definitions contained in this subregulation (11) and in regulation 67; |
| (bb) | portfolio differentiation; |
| (cc) | rating criteria and the rationale for the bank's choice of particular internal rating criteria, provided that the bank shall be able to demonstrate to the satisfaction of the Registrar that the selected rating criteria and procedures are likely to result in ratings that meaningfully differentiate risk; |
| (dd) | the responsibilities of persons responsible for the rating of borrowers and facilities; |
| (ee) | definitions relating to rating exceptions and the persons authorized to approve any rating exceptions; |
| (ff) | the frequency of rating reviews; |
| (gg) | management oversight and the bank's internal control structure; |
| (hh) | the history of major changes in the bank's risk rating process; |
| (ii) | shall provide adequate evidence of the bank's compliance with all relevant minimum requirements; |
| (iii) | shall duly indicate any differences between the bank's risk estimates for purposes of complying with the IRB approach and for internal risk management purposes, such as pricing, provided that when a bank does not use the same estimates for both IRB and internal purposes, the bank shall not only document such differences but shall also be able to demonstrate their reasonableness to the satisfaction of the Registrar; |
[Sub-item (11)(b)(v)(l)(iii) substituted by regulation 2(m) of Notice No. R. 261 dated 27 March 2015]
| (iv) | shall in the case of statistical models used in the bank's rating process, comprehensively deal with— |
| (aa) | the relevant methodologies, including a detailed outline of the theory, assumptions and/ or mathematical and empirical basis to assign risk estimate to risk grades, individual obligors, exposures or pools; |
| (bb) | the data sources used; |
| (cc) | the process to validate the model; |
| (dd) | any circumstances under which the model does not work effectively. |
| (J) | shall be subject to appropriate independent review. |
| (A) | Unless specifically otherwise provided, a bank shall in the case of exposures to corporate institutions, sovereigns or banks, estimate a PD ratio in respect of each internal borrower grade, which PD estimate— |
| (i) | may be based on one or more of the three techniques specified below, provided that the underlying historical observation period shall be a minimum period of five years in respect of at least one of the said techniques. |
| (aa) | Internal default experience |
A bank—
| (i) | shall demonstrate that the PD estimates are based on the bank's underwriting standards and sufficiently reflect any differences between the rating system that generated the data and the bank's current rating system. |
| (ii) | may use pooled data provided that the bank shall demonstrate to the satisfaction of the Registrar that the internal rating systems and criteria of the other banks in the pool are comparable with the bank's own internal rating systems and criteria. |
| (bb) | Mapping to external data, that is, the bank may map its internal risk grades to a risk scale used by an eligible external credit assessment institution and then attribute the default rate observed in respect of the external credit assessment institution's grades to the bank's grades, provided that— |
| (i) | the bank shall compare and avoid any biases or inconsistencies between the bank's internal rating criteria and the criteria used by the external institution; |
| (ii) | the bank shall compare and avoid any biases or inconsistencies between the internal and external ratings of any common borrowers; |
| (iii) | the external institution's criteria underlying quantification shall be oriented to the risk of borrower default and shall not reflect transaction characteristics; |
| (iv) | the bank shall compare and avoid any biases or inconsistencies between the definitions used in respect of default; |
| (v) | the bank shall document the basis on which the mapping was done. |
| (cc) | Statistical default models, that is, the bank may use a simple average of default-probability estimates in respect of individual borrowers assigned to a particular grade, which estimates were generated by statistical default prediction models, provided that the statistical model shall comply with the relevant minimum requirements specified in subparagraph (v)(H) above; |
[Sub-sub-item (cc) of subregulation (11)(b)(vi)(A)(i) substituted by regulation 2(n) of Notice No. R. 261 dated 27 March 2015]
| (ii) | shall be based on the definition of default, specified in regulation 67; |
| (iii) | shall be based on a population of exposures that closely matches or is at least comparable to the bank's existing exposures and lending standards; |
| (iv) | shall be based on economic and market conditions that are relevant and current; |
| (v) | shall be a long-run average of the one-year default rates relating to the borrowers in a particular grade; |
| (vi) | shall incorporate all relevant and material information; |
| (vii) | shall take into account any changes in lending practice or the process for pursuing recoveries over the observation period; |
| (viii) | shall be reviewed on a regular basis but not less frequently than once a year or when material new information is obtained; |
| (ix) | shall be based on historical experience and empirical evidence; |
| (x) | shall be based on a sufficient number of exposures and data periods that will ensure accurate and robust PD estimates; |
| (xi) | shall be based on an estimation technique that performs well in out-of-sample tests; |
| (B) | Unless specifically otherwise provided, a bank shall in the case of retail exposures estimate a PD ratio and a LGD ratio in respect of each retail pool of exposures, which PD estimate and LGD estimate— |
| (i) | shall be based on the bank's internal data as the primary source of information; |
| (ii) | shall be based on a number of exposures in a particular exposure pool that is sufficient to allow for a meaningful quantification and validation of the loss characteristics; |
| (iii) | shall be based on the definition of default, specified in regulation 67; |
| (iv) | may rely on external data or statistical models for quantification provided that the bank shall demonstrate to the satisfaction of the Registrar a strong link between— |
| (aa) | the bank's process of assigning exposures to a particular pool and the process used by the external data source; |
| (bb) | the bank's internal risk profile and the composition of the external data; |
| (v) | shall incorporate all relevant and material information; |
| (vi) | shall be based on a population of exposures that closely matches or is at least comparable to the bank's existing exposures and lending standards; |
| (vii) | shall be based on economic and market conditions that are relevant and current; |
| (viii) | shall be based on an estimation technique that performs well in out-of-sample tests; |
| (ix) | shall be reviewed on a regular basis but not less frequently than once a year or when material new information is obtained; |
| (x) | shall be based on long-run average estimates of PD and default-weighted average loss rates given default, based on an estimate of the expected long-run loss rate, provided that— |
| (aa) | the bank may use an appropriate PD estimate to infer the long-run default-weighted average loss rate given default; |
| (bb) | the bank may use a long-run default-weighted average loss rate given default to infer the appropriate PD; |
| (cc) | the LGD ratio used to calculate the bank's IRB capital requirement shall not be less than the long-run defaultweighted average loss rate given default; |
| (xi) | shall, irrespective whether the bank is using external, internal, pooled data sources or a combination of the said three sources for the estimation of loss characteristics, be based on an underlying historical observation period of not less than five years, provided that the bank may with the prior written approval of the Registrar place more reliance on recent data when the said data better reflects loss rates in respect of the bank's retail exposures; |
| (C) | Based on the definition of default specified in regulation 67, a bank shall record all actual defaults in respect of all exposures subject to the IRB pproach; |
| (D) | When the status of a previously defaulted exposure subsequently changes, and as such no longer constitutes a defaulted exposure, the reporting bank shall rate the relevant obligor and estimate the relevant LGD ratio in a manner similar to a non-defaulted facility, provided that when the relevant exposure subsequently triggers one of the criteria relating to default, which criteria are specified in regulation 67, the relevant bank shall record a second default in respect of the said exposure; |
| (i) | shall determine and specify a credit limit in respect of all authorized overdraft facilities, which credit limit— |
| (aa) | shall in writing be brought to the attention of the relevant client of the bank; |
| (bb) | shall on a continuous basis be monitored by the relevant bank for compliance with the limit by the relevant client; |
| (ii) | shall assign a limit of zero to any unauthorized overdraft facility. |
| (F) | Unless specifically otherwise provided, a bank that obtained the approval of the Registrar to apply the "top-down" approach for default risk and/or the IRB approach for dilution risk in respect of purchased corporate receivables or purchased retail receivables— |
| (i) | shall group the relevant receivables into sufficiently homogeneous pools in order to accurately and in a consistent manner estimate PD ratios, LGD ratios or expected loss ratios for default risk and dilution risk; |
| (ii) | shall comply with the relevant minimum risk quantification standards for retail exposures specified in item (B) above; |
| (iii) | shall take into account all relevant information, including information in respect of the quality of the underlying receivables and data relating to similar pools; |
| (iv) | shall establish whether or not the data provided by the seller in respect of the type, volume and on-going quality of the receivables are consistent with the bank's information; |
| (v) | shall ensure that the bank maintains effective ownership and control over the cash remittances derived from the receivables including in cases of seller or servicer distress or bankruptcy; |
| (vi) | shall ensure that all relevant payments are forwarded completely and within the contractually agreed terms when the obligor makes payments directly to a seller or servicer; |
| (vii) | shall be able to monitor the quality of the receivables and the financial condition of the seller or servicer; |
| (viii) | shall assess any correlation between the quality of the receivables and the financial condition of the seller or servicer; |
| (ix) | shall conduct periodic reviews in respect of sellers or servicers in order to— |
| (aa) | verify the accuracy of any reports received from the seller or servicer; |
| (bb) | detect any fraud or operational weaknesses; |
| (cc) | verify the quality of the seller's credit policies and servicer's collection policies and procedures; |
| (x) | shall duly document the findings of the reviews envisaged in sub-item (ix) above; |
| (xi) | shall be able to assess the characteristics relating to the pool of receivable amounts, including— |
| (aa) | any relevant over-advances; |
| (bb) | the history relating to the seller's arrears, bad debts, and allowances for bad debt; |
| (dd) | potential contra accounts; |
| (xii) | shall receive timely and sufficiently detailed reports in respect of the ageing and dilution of receivable amounts in order to— |
| (aa) | ensure continuous compliance with the bank's eligibility criteria and policies relating to purchased receivables; |
| (bb) | monitor and confirm the seller's terms of sale; |
| (xiii) | shall have in place clear and effective policies and procedures, and sufficiently robust information systems— |
| (aa) | to detect any concentration risk within and across pools of receivable amounts; |
| (bb) | to monitor compliance with all contractual terms of the facility, including covenants, advancing formulas, concentration limits and early amortisation triggers; |
| (cc) | to monitor compliance with the bank's internal policies in respect of advance rates; |
| (dd) | to limit inappropriate drawings; |
| (ee) | to effectively deal with financially weakened sellers or servicers and/or a deterioration in the quality of the pool of receivable amounts; |
| (ff) | to initiate legal actions or deal with problem receivables; |
| (gg) | that specify all material elements of the bank's programme relating to purchased receivables, including— |
| (iii) | required documentation; |
| (iv) | concentration limits; |
| (v) | the manner in which cash receipts should be handled; |
| (hh) | that ensure that funds are advanced only when specified supporting collateral and documentation such as servicer attestations, invoices or shipping documents are received; |
| (xiv) | shall have in place an effective internal control process in order to assess the bank's continued compliance with all critical policies and procedures, which internal control process shall include— |
| (aa) | regular internal and/or external audits of all critical phases of the bank's programme relating to purchased receivables; |
| (bb) | verification of the separation of duties between— |
| (i) | the assessment of the seller or servicer and the assessment of the obligor; |
| (ii) | the assessment of the seller or servicer and the field audit of the seller or servicer; |
| (cc) | evaluations of the effectiveness of the back-office operations, with specific emphasis being placed on qualifications, experience, staffing levels and supporting systems. |
| (vii) | Unless specifically otherwise provided, a bank that obtained the prior written approval of the Registrar to adopt the internal model market-based approach for the measurement of the bank's risk exposure in respect of equity instruments held in the bank's banking book shall in addition to such conditions as may be determined by the Registrar continuously comply with the quantitative and qualitative requirements specified below: |
| (A) | Quantitative requirements |
In order to calculate a bank's risk exposure relating to equity positions held in the bank's banking book in terms of the internal model market-based approach, the bank—
| (i) | may use any type of value-at-risk ("VaR") model, including models based on variance-covariance, historical simulation or Monte Carlo, provided that the model— |
| (aa) | shall duly capture all material risks contained in the bank's equity positions, including general market risk and specific risk exposure; |
| (bb) | shall be sufficiently robust to adequately explain historical price variation; |
| (cc) | shall duly capture the magnitude of and changes in any concentration risk; |
| (dd) | shall be robust to adverse market conditions; |
| (ee) | shall be appropriate for the risk profile and complexity of the bank's equity positions, including positions in respect of non-linear instruments such as options; |
| (ff) | shall have good predictive power and shall not produce materially incorrect capital requirements; |
| (gg) | may with the prior written approval of the Registrar incorporate portfolio correlations into the bank's internal risk measures provided that the said correlations shall be based on empirical evidence and analysis; |
| (ii) | may use modelling techniques such as historical scenario analysis, provided that the said modelling technique shall produce a capital requirement equivalent to a potential loss based on a 99th percentile, one-tailed confidence interval of the difference between quarterly returns and the appropriate risk-free rate computed over a long-term sample period; |
| (iii) | may use single or multi-factor models, provided that— |
| (i) | shall be sufficient to capture the risks inherent in the bank's equity portfolio; |
| (ii) | shall correspond to the appropriate equity market characteristics in which the bank holds significant positions; |
| (bb) | the bank shall demonstrate by way of empirical analyses, to the satisfaction of the Registrar, the appropriateness of the risk factors, including the risk factors' ability to cover both general risk and specific risk; |
| (iv) | shall calculate estimated losses, which estimated losses— |
| (aa) | shall be sufficiently robust to adverse market movements; |
| (bb) | shall be relevant to the long-term risk profile of the bank's specific equity holdings; |
| (cc) | shall incorporate all relevant and material data, information and methods; |
| (i) | realistic long-run experience, including a period of a reasonably severe decline in equity prices; |
| (ii) | a number of risk exposures in the sample and a data period sufficient to provide the bank with confidence in respect of the accuracy and the robustness of its estimates; |
| (v) | shall use internal data and/or data from external sources, including pooled data, which data— |
| (aa) | shall reflect the longest sample period for which data are available; |
| (bb) | shall be meaningful in the sense that the data shall represent the risk profile of the bank's specific equity holdings; |
| (cc) | shall be sufficient to provide conservative, statistically reliable and robust loss estimates; |
| (dd) | shall be closely matched to or comparable with the bank's equity exposures; |
| (ee) | shall be independently reviewed. |
| (B) | Qualitative requirements |
A bank that adopted the internal model market-based approach for the calculation of the bank's risk exposure in respect of equity instruments held in the bank's banking book shall comply with the relevant qualitative requirements specified in regulation 39(14)(a).
As a minimum, a bank that adopted the IRB approach for the measurement of the bank's exposure to credit risk shall collect and store data in respect of all key borrower and facility characteristics, which data—
| (A) | shall provide effective support to the bank's internal credit risk measurement and management process; |
| (B) | shall be sufficiently detailed to allow retrospective re-allocation of obligors and facilities to the bank's various risk grades; |
| (C) | shall in the case of corporate, sovereign or bank exposures include— |
| (i) | the rating histories in respect of obligors and eligible guarantors; |
| (ii) | the date on which a rating was assigned; |
| (iii) | the methodology, key data and the model /person used to derive the rating; |
| (iv) | the identity of borrowers and facilities that defaulted, and the timing and circumstances of such defaults; |
| (v) | the PD ratios and realised default rates associated with the bank's rating grades; |
| (vi) | rating migration in order to keep track of the predictive power of the rating system; |
| (D) | shall in the case of retail exposures include— |
| (i) | the data that was used to allocate particular exposures to particular pools, including the data relating to borrower and transaction risk characteristics; |
| (ii) | the data in respect of delinquent exposures; |
| (iii) | data related to the estimated PD ratios, LGD ratios and EAD amounts associated with each relevant pool of exposures; |
| (E) | shall in the case of defaulted retail exposures include data in respect of the pool to which the exposure was assigned during the year preceding the default and the realised outcomes in respect of the LGD ratio and the EAD amount. |
As a minimum, a bank that adopted the IRB approach for the measurement of the bank's exposure to credit risk shall have in place a stress-testing process in respect of the bank's exposure to credit risk, which stress testing process—
| (A) | shall include an identification of possible events or future changes in economic conditions that may have an unfavourable effect on the bank's risk exposures and an assessment of the bank's ability to withstand such events or changes, which events or changes may include— |
| (i) | economic or industry downturns; |
| (iii) | liquidity constraints; |
| (iv) | mild recession scenarios; |
| (B) | shall in the case of protected exposure subject to the double default approach envisaged in subregulation (12)(g) include an assessment of the impact of— |
| (i) | a deterioration in the credit quality of protection providers, in particular the impact of protection providers falling outside the eligibility criteria specified in subregulation (12)(g) due to rating changes; |
| (ii) | the default of one but not both the obligor and the protection provider, |
and the consequent increase in risk exposure and the required amount of capital and reserve funds at the time of the said default;
| (C) | shall be meaningful, based on the environment in which the bank conducts business; |
| (D) | shall assess the effect of a recession on the bank's PD ratios, LGD ratios and EAD amounts; |
| (E) | shall make provision for an internal ratings migration in respect of at least some of the bank's exposure to credit risk; |
| (F) | shall appropriately evaluate evidence of rating migration in respect of external ratings. |
| (x) | Validation of internal estimates |
As a minimum, a bank that adopted the IRB approach for the measurement of the bank's exposure to credit risk—
| (A) | shall have in place a robust system to validate the accuracy and consistency of the bank's rating systems and processes, including all estimates of relevant risk components, which internal assessments shall be based on long data histories, covering a range of economic conditions and ideally one or more complete business cycles; |
| (B) | shall regularly compare realised default rates with estimated PD ratios in respect of each grade and shall demonstrate to the satisfaction of the Registrar that the realised default rates are within the expected range for a particular grade; |
| (C) | shall duly document the data and the methods used to compare realised default rates with estimated PD ratios in respect of each grade, including the periods that were covered and any changes in the data and methods that were used, which analysis and documentation shall be updated at appropriate intervals, but not less frequently than once every year; |
| (D) | shall make use of quantitative validation tools and comparisons with relevant external data sources in order to validate the bank's internal estimates of risk components; |
| (E) | shall demonstrate to the satisfaction of the Registrar that the bank's quantitative testing methods and validation methods do not vary systematically with the economic cycle; |
| (F) | shall have in place sufficiently robust internal standards to deal with situations where realised PD ratios deviate substantially from expected PD ratios provided that when the realised values continue to be higher than expected values the bank shall adjust its estimates of risk components upward in order to reflect the appropriate default and loss experiences. |
A bank that obtained the approval of the Registrar to adopt the IRB approach for the measurement of the bank's exposure to credit risk shall disclose in its annual financial statements and other disclosures to the public sufficiently detailed qualitative and quantitative information in accordance with the relevant requirements specified in regulation 43(2).
| (xii) | Securitisation and/or resecuritisation exposures |
A bank shall apply the SEC-IRBA for the measurement of the bank’s securitisation exposure of an IRB pool as defined in subregulation (6)(h)(i)(B), provided that—
| (A) | the bank shall in addition to such conditions as may be specified in writing by the Authority comply with the relevant requirements specified in this subregulation (xii) and the relevant requirements specified in paragraphs (e) to (p) below; |
| (B) | Unless the Authority determines otherwise, where a bank is unable to calculate IRB parameters for all underlying exposures, the pool will be regarded as a mixed pool and treated in accordance with subregulation (6)(h)(i)(A)(v); |
[Regulation 23(11)(b)(xii) substituted by section 2(s) of Notice No. 2561, GG46996, dated 30 September 2022 - effective 1 October 2022]
(C)
| (i) | subject to the approval of the Authority and requirements specified in subregulation (6)(h)(i)(A)(iii) in respect of an unrated securitisation exposure to an SA pool, the bank may apply the IAA as specified in subregulation (23)(11)(g) below, provided that the IAA shall only be applied to exposures that relate to an asset-backed commercial paper programme, which exposures shall comply with the relevant requirements specified in subregulation (23)(11)(g); |
| (ii) | in the case of eligible liquidity facilities, that is, a facility that complies with the conditions specified in paragraph 7 of the exemption notice relating to securitisation schemes, a bank that acts as an originator shall in no case provide any liquidity facility in respect of the securitisation scheme in respect of which that bank acts as such an originator; |
| (iii) | in the case of servicer cash advance, a bank shall comply with the requirements specified in subregulation (6)(h)(i)(F) |
[Regulation 23(11)(b)(xii)(C) substituted by section 2(t) of Notice No. 2561, GG46996, dated 30 September 2022 - effective 1 October 2022]
| (D) | [Regulation 23(11)(b)(xii)(D) deleted by section 2(u) of Notice No. 2561, GG46996, dated 30 September 2022 - effective 1 October 2022] |
| (E) | [Regulation 23(11)(b)(xii)(E) deleted by section 2(v) of Notice No. 2561, GG46996, dated 30 September 2022 - effective 1 October 2022] |
| (F) | the bank shall treat any exposures that overlap in accordance with the relevant requirements specified in subregulation (6)(h)(ix) above; |
[Regulation 23(11)(b)(xii)(F) substituted by section 2(w) of Notice No. 2561, GG46996, dated 30 September 2022 - effective 1 October 2022]
| (G) | the bank shall treat any exposure relating to a securitisation scheme that contains an early amortisation provisions in accordance with the relevant requirements specified in subregulation 6(h)(xi) above; |
[Regulation 23(11)(b)(xii)(G) substituted by section 2(x) of Notice No. 2561, GG46996, dated 30 September 2022 - effective 1 October 2022]
| (H) | the bank shall comply with the relevant requirements specified in subregulation (12) when the bank obtains any protection in respect of a securitisation exposure; |
| (I) | the maximum amount of capital to be maintained by a bank that adopted the SEC-IRBA for the measurement of the bank’s exposures relating to a securitisation scheme shall be calculated in accordance with the relevant requirements specified in subregulation (6)(h)(xviii), read with the relevant provisions of subregulation (10), (11), (12), (21) and (22), provided that the bank shall deduct from its common equity tier 1 capital and reserve funds the entire amount included in the banks capital and reserve funds in respect of any gain-on-sale or credit enhancing interest-only strips that arose from the securitisation transaction. |
Regulation 23(11)(b)(xii)(I) substituted by section 2(y) of Notice No. 2561, GG46996, dated 30 September 2022 - effective 1 October 2022]
