| (h) | Securitisation exposure: conditions relating to a bank's internal assessment process |
For the calculation of a bank's minimum required amount of capital and reserve funds relating to unrated exposures such as liquidity facilities or credit-enhancement facilities, which facilities are extended by the bank to an asset-backed commercial paper programme, the bank may use its internal assessments relating to the said exposures, provided that—
| (i) | the relevant asset-backed commercial paper programme— |
| (A) | shall be externally rated, which rated exposures relating to the asset-backed commercial paper programme shall be subject to the SEC-ERBA; |
[Regulation 23(11)(h)(i)(A) substituted by section 2(ff) of Notice No. 2561, GG46996, dated 30 September 2022 - effective 1 October 2022]
| (i) | appropriate credit and investment guidelines, that is, underwriting standards; |
| (ii) | a duly established collection process, which collection process, amongst other things— |
| (aa) | shall consider the operational capability and credit quality of the relevant servicer; |
| (bb) | shall prevent the co-mingling of funds; |
| (iii) | sufficiently robust procedures in order to consider all sources of potential risk, including credit and dilution risk, when estimating the aggregate amount of potential loss relating to the assets/exposures to be purchased by the special-purpose institution, that is, when the credit enhancement provided by the seller is based only on credit-related losses, a separate reserve shall be established to cover any material risk of dilution; |
| (iv) | structural features such as wind-down triggers for every pool of purchased assets/exposures in order to reduce the risk relating to a deterioration in the credit quality of the underlying pool of assets/exposures; |
| (ii) | the bank's internal assessment— |
| (A) | of the credit quality of the said securitisation exposure shall be based on criteria similar to the criteria used by an eligible external credit assessment institution for the particular exposure type and shall be equivalent to at least investment grade when initially assigned by the bank; |
| (B) | shall correspond to the external credit ratings used by eligible external credit assessment institutions; |
| (iii) | in order to ensure that a credit-enhancement facility is sufficient, the bank shall review historical information in respect of the assets/exposures transferred to the special-purpose institution, which review shall be based on information for a sufficient number of years and shall include matters such as— |
| (D) | the turnover rate of receivables; |
| (i) | a credit analysis of the risk profile of the seller of the relevant assets/exposures, which analysis shall include matters such as— |
| (aa) | past and expected future financial performance; |
| (bb) | current market position; |
| (cc) | expected future competitiveness; |
| (ii) | a review of the seller's— |
| (aa) | underwriting standards; |
| (bb) | servicing capabilities; |
| (cc) | collection processes; |
| (B) | shall evaluate the characteristics of the underlying pool of assets/exposures, which evaluation shall include matters such as— |
| (i) | the weighted average credit score; |
| (ii) | any concentrations in respect of a particular obligor, industry or geographical region; |
| (iii) | the granularity of the underlying pool of assets/exposures; |
| (C) | shall apply the relevant internal assessment in the bank's internal risk management processes, including the bank's management information and economic capital systems; |
| (D) | shall, subject to the provisions of item (E) below, demonstrate to the satisfaction of the Registrar— |
| (i) | that the criteria, standards and methodology used in the bank's internal assessment process correspond with the relevant criteria, standards and methodology applied by the eligible external credit assessment institution that rated the relevant asset-backed commercial paper programme, provided that when the methodology or stress factors applied by the said eligible external credit assessment institution change, which change adversely affects the external rating of the programme's commercial paper, the bank shall consider the potential impact of the revised rating methodology or stress factors in order to determine whether the bank's internal assessments assigned to eligible exposures extended to the asset-backed commercial paper programme exposures remain relevant; |
| (ii) | which internal assessment category corresponds to which external rating category used by the relevant eligible external credit assessment institution; |
| (E) | shall not apply the rating methodology used by an external credit assessment institution to derive an internal assessment unless the rating process and rating criteria applied by the relevant external credit assessment institution are publicly available, provided that, subject to the prior written approval of and such conditions as may be specified in writing by the Registrar, the Registrar may allow a bank in exceptional cases when the rating process and rating criteria applied by the relevant external credit assessment institution are not publicly available, to derive an internal assessment in respect of a particular exposure extended by the bank to an asset-backed commercial paper programme; |
| (i) | review its internal assessment process; |
| (ii) | assess the validity of its internal assessments, |
which review or assessment may be conducted by the bank's internal or external auditors, an eligible external credit assessment institution or the bank's risk management function, provided that when the review or assessment is conducted by the bank's internal auditors or risk management function, the said auditors/function shall be independent from the business line involved in the relevant asset-backed commercial paper programme and underlying customer relationships;
| (G) | shall track the performance of its internal assessments over time in order to— |
| (i) | evaluate the performance of the bank's assigned internal assessments; and |
| (ii) | make timely adjustments to the said internal assessments; |
| (v) | the bank's internal assessment process— |
| (A) | shall provide a meaningful differentiation and distribution of risk; |
| (B) | shall include stress factors relating to credit enhancement, which stress factors shall be at least as conservative as the publicly available rating criteria applied by the major eligible external credit assessment institutions that rate the particular asset/exposure type being purchased into the particular asset-backed commercial paper programme; |
| (vi) | when the commercial paper issued in terms of an asset-backed commercial paper programme is rated by two or more eligible external credit assessment institutions, the stress factors of which institutions require different levels of credit enhancement to achieve the same external rating, the bank shall apply the stress factor that requires the most conservative or highest level of credit protection. For example, when one eligible external credit assessment institution requires enhancement of 2,5 to 3,5 times historical losses for an asset type to be assigned a single A rating and another eligible external credit assessment institution requires 2 to 3 times historical losses, the bank shall use the higher range of stress factors in order to determine the appropriate level of credit enhancement; |
| (vii) | in respect of each relevant asset-backed commercial paper programme, the programme administrator shall ensure that— |
| (A) | the said asset-backed commercial paper programme is subject to prudent underwriting standards; |
| (B) | an appropriate structure relating to each potential purchase transaction is in place, which structure— |
| (i) | shall be used to determine whether or not the particular assets/ exposures should be purchased by the special purpose institution; |
| (ii) | shall deal comprehensively with— |
| (aa) | the type of asset that may be purchased by the special-purpose institution; |
| (bb) | the type and monetary value of exposures arising from the provision of liquidity facilities and credit-enhancement facilities; |
| (cc) | the manner in which losses shall be absorbed; |
| (dd) | matters relating to the legal and economic isolation of the assets/exposures transferred to the special-purpose institution; |
| (viii) | the underwriting policy of the asset-backed commercial paper programme shall contain minimum eligibility criteria, which criteria— |
| (A) | shall prevent the purchase of assets/exposures that are significantly past due or defaulted; |
| (i) | excess concentration to an individual obligor; |
| (ii) | excess concentration to a geographic area; |
| (iii) | the tenor of the assets to be purchased. |
