Banks Act, 1990 (Act No. 94 of 1990)RegulationsRegulations relating to BanksChapter II : Financial, Risk-based and other related Returns and Instructions, Directives and Interpretations relating to the completion thereof23. Credit risk: monthly returnDirectives and interpretations for completion of monthly return concerning credit risk (Form BA 200)Subregulation (14) Credit-risk mitigation: advanced IRB approachSubregulation (14)(c) Guarantees |
(c) Guarantees
| (i) | Minimum requirements |
As a minimum, a bank that adopted the advanced IRB approach for the recognition of risk mitigation in respect of guarantees—
| (A) | shall comply with the relevant requirements specified in subregulations (7)(c)(iv), (11)(b)(v) and (11)(b)(vi) above; |
| (B) | shall assign to all relevant obligors and eligible guarantors a borrower rating and calculate its own estimates of LGD in respect of the bank's various exposures, provided that the bank shall have in place duly specified criteria— |
| (i) | to adjust its borrower grades; |
| (ii) | to adjust its LGD estimates; |
| (iii) | to allocate exposures to relevant retail or receivable pools, |
which criteria—
| (aa) | shall comply with the relevant minimum requirements for assigning borrower or facility ratings specified in subregulation (11)(b) above; |
| (bb) | shall be plausible and intuitive; |
| (cc) | shall take into account all relevant information; |
| (dd) | shall incorporate— |
| (i) | the guarantor's ability and willingness to honour its commitments in terms of the guarantee; |
| (ii) | any correlation between the guarantor's ability to honour its commitments in terms of the guarantee and the obligor's ability to repay any amounts due; |
| (iii) | the effect of any residual risk, such as a currency mismatch between the guarantee and the underlying exposure; |
| (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 (f) 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 (f) 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
A bank that adopted the advanced IRB approach for the recognition of risk mitigation relating to guarantees may recognise the effect of a guarantee obtained from any guarantor, provided that—
| (A) | the guarantee shall comply with the relevant minimum requirements specified in subregulation (7)(c)(iv) above; |
| (B) | the bank shall have in place a comprehensive policy and criteria in respect of the types of guarantors acceptable to the bank for risk mitigation purposes; |
| (C) | 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 advanced IRB approach for the measurement of the bank's risk-weighted credit exposure obtains—
| (A) | protection from a guarantor in respect of the bank's credit exposure to a corporate institution, sovereign or bank, the bank— |
| (i) | shall reflect the risk mitigation effect of the guarantee by way of an adjustment either to the PD ratio or LGD ratio of the relevant exposure provided that the bank shall apply the adjustments to the PD ratio or LGD ratio in a consistent manner; or |
| (ii) | may reflect the risk mitigation effect of the guarantee in accordance with the relevant requirements relating to the recognition of guarantees in terms of the foundation IRB approach prescribed in subregulation (12)(d) 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 shall apply the relevant adjustments to PD or LGD in a consistent manner in respect of a given type of guarantee, and over time; |
| (C) | protection against dilution risk in respect of purchased receivables, the bank may apply the double default approach specified in paragraph (f) below in order to calculate the required risk-weighted asset amount for dilution risk provided that the bank shall comply with the relevant requirements specified in subregulation (12)(d)(iii)(D). |