Banks Act, 1990 (Act No. 94 of 1990)

Regulations

Regulations relating to Banks

Chapter II : Financial, Risk-based and other related Returns and Instructions, Directives and Interpretations relating to the completion thereof

23. Credit risk: monthly return

Directives and interpretations for completion of monthly return concerning credit risk (Form BA 200)

Subregulation (19) Calculation of counterparty credit exposure in terms of the internal model method

Subregulation (19)(b) Matters relating to own estimates of alpha
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(b)        Matters relating to own estimates of alpha

 

Subject to the prior written approval of and such conditions as may be specified in writing by the Registrar, a bank that adopted the internal model method for the measurement of the bank's exposure to counterparty credit risk may calculate its own internal estimates of alpha, provided that—

 

(i)the alpha factor shall in no case be less than 1.2, that is, any internally estimated alpha factor shall be subject to an absolute minimum of 1.2;

 

(ii)        alpha shall constitute a ratio, calculated as—

 

(A)economic capital derived from a joint simulation of all relevant market and credit risk factors relating to counterparty exposure across all relevant counterparties, as the numerator; divided by

 

(B)economic capital based on expected positive exposure, as the denominator,

 

(iii)any internal estimate of alpha shall take into account the granularity of the relevant exposures;

 

(iv)        the bank—

 

(A)shall comply with all relevant operating requirements relating to internal estimates of expected positive exposure specified in paragraph (f) below;

 

(B)shall demonstrate to the satisfaction of the Registrar that its internal estimate of alpha captures in the numerator the material sources of stochastic dependency of distributions of market values of transactions or portfolios of transactions across counterparties, such as the correlation of defaults across counterparties and between market risk and default;

 

(C)shall in respect of the denominator, apply expected positive exposure in a manner similar to a fixed outstanding loan amount;

 

(D)shall ensure that the numerator and denominator of alpha are calculated in a consistent manner with respect to the modelling methodology, parameter specifications and portfolio composition;

 

(E)shall ensure that the approach applied by the bank in order to determine alpha is based on the internal economic capital approach adopted by the bank, which approach—
(i)shall be duly documented;
(ii)shall be subject to independent validation.

 

(F)shall frequently review its internal estimates of alpha, but in no case less frequently than once a quarter or more frequently when the composition of the relevant portfolio varies over time;

 

(G)shall continuously assess its model risk;

 

(v)when appropriate, any volatility and correlation of market risk factors used in the joint simulation of market risk and credit risk shall be conditioned on the credit risk factor in order to reflect potential increases in volatility or correlation in an economic downturn situation.