As a minimum, a bank that adopted the foundation IRB approach for the recognition of risk mitigation in respect of guarantees—
| (A) | shall continuously comply with the relevant requirements specified in subregulation (7)(c)(iv) above; |
| (B) | shall, except in the case of retail exposures and purchased retail receivables, use the LGD ratios specified in writing by the Registrar in respect of the bank's various exposures; |
| (C) | shall not in the calculation of the bank's risk-weighted exposure reflect the effect of double default otherwise than in accordance with the relevant requirements specified in paragraph (g) below, that is, the adjusted risk weight relating to a particular exposure shall not be less than a comparable direct exposure to the relevant guarantor unless the bank calculates the said adjusted risk weight in accordance with the relevant requirements specified in paragraph (g) below, |
provided that whenever a guarantee obtained in respect of an exposure results in a higher capital requirement for the reporting bank than before the recognition of such guarantee, the reporting bank may ignore the effect of the said guarantee.
(ii) Eligible guarantors
In addition to the eligible guarantors specified in the standardised approach in subregulation (7)(c), a bank that adopted the foundation IRB approach for the recognition of risk mitigation relating to guarantees obtained in respect of its exposures to corporate institutions, sovereigns, banks or purchased receivables may also recognise the effect of a guarantee obtained from a guarantor internally rated by the bank, provided that—
| (A) | the said guarantee shall comply with the relevant minimum requirements specified in subregulation (7)(c) above; |
| (B) | for purposes of calculating the minimum required amount of capital and reserve funds of a branch in terms of the provisions of the Banks Act, 1990, read with these Regulations, no guarantee received from the parent foreign institution or any other branch of the parent foreign institution in respect of an exposure incurred by the branch in the Republic shall be regarded as an eligible guarantee. |
(iii) Risk weighting
When a bank that adopted the foundation IRB approach for the measurement of the bank's risk-weighted credit exposure obtains—
| (A) | protection from an eligible guarantor in respect of the bank's credit exposure to a corporate institution, sovereign or bank the bank— |
| (i) | shall divide the relevant exposure into a protected portion and an unprotected portion; |
| (ii) | shall in respect of the protected portion apply— |
(aa) the risk-weight function relating to the relevant guarantor; and
| (bb) | the PD ratio relating to the relevant guarantor, or a higher PD ratio relating to a risk grade between the underlying obligor and the relevant guarantor when the bank deems a complete substitution approach inappropriate, |
provided that, based on its seniority or any collateralisation of a guaranteed commitment, the bank may replace the LGD ratio of the underlying transaction with the relevant LGD ratio relating to the said guaranteed position;
| (iii) | shall in respect of the unprotected portion, apply the risk weight relating to the underlying obligor; |
| (iv) | shall in the case of— |
| (aa) | proportional protection comply with the relevant requirements specified in subregulation (9)(c)(v) above; |
| (bb) | a currency mismatch between the underlying obligation and the protection obtained comply with the relevant requirements specified in subregulation (9)(c)(vi) above. |
| (B) | protection in the form of a guarantee in respect of a retail exposure or pool of retail exposures, the bank may reflect the risk reducing effect of the guarantee through an adjustment to the relevant PD ratio or LGD ratio, provided that the bank— |
| (i) | shall comply with the relevant minimum requirements specified in subregulation (14)(c)(i) below; |
| (ii) | shall apply the relevant adjustment to the PD ratio or LGD ratio in a consistent manner in respect of a given type of guarantee, and over time. |
| (C) | protection in the form of a guarantee in respect of purchased receivables, the bank shall in the case of a guarantee— |
| (i) | that covers both default risk and dilution risk, substitute the risk weight relating to default risk and dilution risk for the risk weight of the guarantor; |
| (ii) | that covers only default risk or dilution risk, but not both, substitute the relevant risk weight relating to default risk or dilution risk for the risk weight of the guarantor, and add the relevant capital requirement for the other component; |
| (iii) | that covers only a portion of the default risk and/or dilution risk, substitute the risk weight in respect of the protected exposure in accordance with the relevant directives specified above, and add the relevant risk weights relating to the unprotected exposure. |
| (D) | protection against dilution risk in respect of purchased receivables, the bank may apply the double default approach specified in paragraph (g) below in order to calculate the required risk-weighted asset amount for dilution risk, provided that— |
| (i) | the bank shall at all times comply with the relevant requirements specified in paragraph (g) below; |
| (ii) | PD0 shall be equal to the estimated EL amount; |
| (iii) | LGDg shall be equal to 100 percent; |
| (iv) | the bank shall determine the effective maturity of the relevant exposure in accordance with the relevant requirements specified in subregulation (11)(d)(vi)(A)(ii). |
