Supervisory Regulation on Solvency Requirements for Credit Risk

Transcription

1 DE NEDERLANDSCHE BANK N.V. Supervisory Regulation on Solvency Requirements for Credit Risk Regulation of De Nederlandsche Bank N.V. dated 11 December 2006, no. Juza/2006/02447/CLR, providing for rules regarding the solvency requirements for credit risk for banks, investment firms and clearing institutions (Supervisory Regulation on Solvency Requirements for Credit Risk) De Nederlandsche Bank N.V., Having consulted Euronext, the Netherlands Bankers Association (Nederlandse Vereniging van Banken) and the Council for the Securities Industry (Raad van de Effectenbranche); Having regard to Articles 61(5), 69(2), 70(2), 71(3), 72(1), 73(2), 75(1), 76(1)(h), 78(3) and (5), 81(6), 82(1), 84(1)(b), 84(4), 85(2) and (3), 86(2), 102(3) and (4) and 105(4) of the Decree on Prudential Rules for Financial Undertakings (Besluit prudentiële regels Wft); Having regard to Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006 relating to the taking up and pursuit of the business of credit institutions (recast) (OJ L177); Having regard to Directive 2006/49/EC of the European Parliament and of the Council of 14 June 2006 on the capital adequacy of investment firms and credit institutions (recast) (OJ L 177); Decides: Chapter 1 General provisions Section 1.1 Introductory provisions Article 1:1 In this Regulation, the following terms shall be defined as follows: (a) nominated credit assessment institution: a credit assessment institution as referred to in Article 1 of the Decree which has been recognised as eligible pursuant to Article 88 of the Decree and in respect of which a financial undertaking has indicated that it will use that institution s credit assessments in the calculation of the capital requirement for its credit risk; (b) Decree: the Decree on Prudential Rules for Financial Undertakings (Besluit prudentiële regels Wft); (c) board of directors: the persons referred to in Section 3:15 of the Act who meet the requirements under Sections 3:8 and 3:9(1), first sentence, of the Act; (d) derivatives: the instruments listed in Annex B to the Decree; (e) E* (fully adjusted exposure value): the value of the exposure after recognition of the risk mitigating effects of collateral and after application of volatility adjustments; (f) foundation IRB approach: the IRB approach where a financial undertaking uses its own estimates of PD but does not use its own estimates of LGD or conversion factors; 1

2 (g) eligible credit assessment institution: a credit assessment institution as referred to in Article 1 of the Decree which has been recognised as eligible pursuant to Article 88 of the Decree; (h) financial undertaking: bank or investment firm; (i) advanced IRB: the IRB approach where a financial undertaking uses its own estimates of PD, LGD and conversion factors; (j) covered bonds: bonds as referred to in Article 22(4) of the UCITS Directive, provided that they are collateralised by at least one of the assets listed in Annex 1; (k) IRB (internal ratings-based approach): the internal models approach referred to in Article 69 of the Decree; (l) credit event: an event defined in a contract agreed between parties that triggers payment under the contract; (m) credit quality step: a ranking of risk weights; (n) LGD*: the adjusted value of the loss given default after recognition of the effects of credit risk mitigation; (o) liquidation period (holding period): the transaction type-based number of days during which a price movement must be monitored in order to determine volatility; (p) management: the body of persons to whom the board of directors has delegated management responsibility with respect to all or part of the operations; (q) market value: the market value as referred to in Article 4 of the Decree on Mark-to-Market Value (Besluit actuele waarde); (r) public sector entity: a non-profit body established under public law hierarchically subordinate to the central, regional or local government; (s) reference obligation: the obligation used for determining the value of the cash settlement or of the deliverable obligation in the context of the credit derivative; (t) repo-style transaction: a transaction causing the origination of: (i) repurchase/reverse repurchase transactions, (ii) securities lending and borrowing transactions, or (iii) commodities lending and borrowing transactions, unless these are specifically excluded in the present Regulation; (u) risk weight: the weighting factor at which an exposure is included in the calculation of the minimum capital requirement; (v) risk-weighted exposure amounts: the assets and off-balance sheet items weighted by credit or dilution risk or, as applicable, the risk-weighted securitisation positions; (w) supervisory body: the body referred to in Section 3:9(1), second sentence, of the Act; (x) type of security: securities which: (i) have been issued by the same entity on the same issue date; (ii) have the same maturity, and (iii) are subject to the same liquidation period and the same terms and conditions as those under the financial collateral comprehensive method; (y) volatility adjustment: an adjustment to the exposure or collateral value reflecting price volatility or currency volatility; (z) exposure: an asset or contingent asset, including off-balance sheet amounts; (aa) Act: the Financial Supervision Act (Wet op het financieel toezicht). Article 1:1 Chapters 1, 2 and 7, as well as the standardised approach in Chapter 6 of this Regulation shall apply mutatis mutandis to clearing institutions, unless: (a) this Regulation provides otherwise; (b) the nature of the provisions of an Article rules out such application, or 2

3 (b) the system of this Regulation rules out such application. Section 1.2 Indexation of residential property Subsection Principles Article 1:3 1. If this Subsection has been declared applicable, a financial undertaking may use the indexation method referred to in this Subsection in order to determine the forced-sale value of residential property within an existing residential mortgage portfolio, but only to the extent that: (a) application of the indexation method leads to a reliable and prudent estimate of the forcedsale value of the residential property in the mortgage portfolio and of the associated credit risk, and (b) the indexation method is applied and validated in an unequivocal, consistent and verifiable manner. 2. For the purposes of this Subsection, the 99% confidence interval lower limit outcomes shall be calculated with the aid of the following formula: average sample value minus (2.33 * (1/ n) * the standard deviation of the sample values), where n is the size of the sample. Article 1:4 1. A financial undertaking shall apply the indexation method at regular intervals, but at least once a year, to all residential property included in its residential mortgage portfolio, except for: (a) residential property where the mortgage loans were granted under a government guarantee; (b) residential property where total mortgage loans are lower than or equal to 25% of the most recent individually appraised forced-sale value; (c) residential property which, because of its extremely high value, unique characteristics or other factors, does not in reason lend itself to application of the indexation method. 2. For the purposes of subparagraph 1(b) above, De Nederlandsche Bank may, if developments give cause for such a measure, request the financial undertaking to update the loan-to-value ratio by means of a re-appraisal. 3. Notwithstanding the provisions of subparagraph 1(a) and (b) above, the financial undertaking may yet apply the indexation method to residential property as referred to in those subparagraphs, provided that it pursues a consistent policy in this regard. Article 1:5 Without prejudice to the requirements imposed on the management of credits and collateral under Chapter 4, the financial undertaking shall ensure that the system used in the context of its administrative organisation: (a) provides for such detail that proper re-appraisal of the forced-sale value is possible for each dwelling on the basis of the portfolio approach; (b) the most recent individually appraised forced-sale value is not exceeded by the forced-sale value estimated using the indexation method, and (c) differences between the forced-sale value estimated using the indexation method and the forced-sale value based on an individual re-appraisal are recorded. Subsection Indexation method 3

4 Article 1:6 1. Before being subjected to the indexation method, all eligible residential property shall be broken down into relatively homogeneous portfolio segments, providing for at least a regional breakdown; under no circumstances shall the breakdown reflect the loan-to-value ratio. Following the breakdown, the residential property shall not, except on account of natural wastage, be shifted into, out of or between portfolio segments. 2. For the determination of the indexed forced-sale value of the residential property in the portfolio segments, the financial undertaking shall adjust the individually appraised forcedsale value, as determined immediately prior to the application of the indexation method, using one of the following indices: (a) an index of the Netherlands Association of Estate Agents (Nederlandse Vereniging van Makelaars); (b) an index of the Netherlands Land Register (Kadaster), or (c) another index, provided that the financial undertaking is able to demonstrate that this alternative index is determined independently and truly reflects the value development of residential property in the Netherlands. 3. The indices referred to in paragraph 2 above shall be used only if they have the same breakdown into portfolio segments as that used by the financial undertaking. Article 1:7 1. Where no individual appraisal has been performed immediately prior to the application of the indexation method, the indexed forced-sale value of a dwelling shall be equal to the most recent forced-sale value multiplied by the revaluation factor for the portfolio segment in which the dwelling has been classified. 2. The revaluation factor shall be: (a) in the event of an increase in the index for the portfolio segment: 75% of that increase; (b) in the event of a decrease in the index for the portfolio segment: 100% of that decrease. 3 Where individual appraisal has been performed prior to the application of the indexation method, the revaluation factor referred to in paragraph 2 above shall be adjusted for the fact that the value change concerns a different period. To that end, the change in value shall be assumed to have been evenly spread over the revaluation period concerned, unless market developments prompt more prudent adjustment of the revaluation factor. Subsection Validation and supervision Article 1:8 1 The valuation on the basis of the indexation method shall be validated prior to its first application and shall subsequently be validated regularly, but at least once every three years. A financial undertaking shall perform an interim validation, if so requested by De Nederlandsche Bank in the event of specific circumstances or market developments. 2. The validation shall be performed on the basis of a random sample, drawn at one single moment from the entire indexed residential mortgage portfolio. 3. The size of the validating sample shall be set before the data on the individual dwellings are gathered and processed and shall comprise at least 100 dwellings from the indexed residential mortgage portfolio. 4. The dwellings included in the sample shall be appraised in a relatively brief period. If the sample includes dwellings for which a recently appraised forced-sale value is known, that forced-sale value may be used as a sample observation, provided that it is not older than six months and that the market has not undergone any major changes. 4

5 Article 1:9 1. For the purposes of the validation referred to in the Article 1:8, the following steps shall be taken: (a) the financial undertaking shall calculate for each dwelling in the sample the ratio of the dwelling s forced-sale value on the basis of the indexation (Wi) to the forced-sale value of the dwelling on the basis of the appraisal in the sample (Wt). This ratio is denoted as Qi and is calculated as follows: Qi = Wi / Wt. (b) using recognised statistical methods, the financial undertaking shall ascertain whether the average value of Qi is significantly lower than 1, using a one-tailed 99% confidence interval. (c) if the average value of Qi is significantly lower than 1, the indexation method may, on the basis of this statistical test, be regarded as sufficiently prudent. Article 1:10 On the basis of the results of the validating sample, all dwellings in the indexed portfolio may be revalued upwards or all dwellings in the sample shall be revalued downwards by a factor k in such a way that the test statistic calculated for the test as referred to in Article 1:9 is equal to the lower limit of the 99% confidence interval. Article 1:11 1. Without prejudice to the other provisions of this Section, the financial undertaking shall make downward interim adjustments to the indexed forced-sale values if prompted by market developments or if so requested by De Nederlandsche Bank. 2. If the application of the indexation method by a financial undertaking does not meet the requirements set out in Article 1:3(1)(a) or (b), De Nederlandsche Bank may require the financial undertaking to revert to individual appraisals for the calculation of the credit risk associated with its mortgage portfolio. Chapter 2 Standardised approach Section 2.1 General provisions Article 2:1 In this Chapter, the following terms shall be defined as follows: (a) regional governments and local authorities: regional and local administrative and executive bodies of a State, with the proviso that, for the Netherlands, this term only covers the provinces, municipalities and water boards; (b) Regulation 1745/2003: Regulation (EC) No 1745/2003 of the European Central Bank of 12 September 2003 on the application of minimum reserves (ECB/2003/9) (OJ L 250). (c) tangible assets: the assets referred to in Article 336 of Volume 2 of the Dutch Civil Code (Burgerlijk Wetboek); (d) undrawn credit facilities: agreements to lend, purchase securities, or to provide guarantees or acceptance facilities, and Section 2.2 Risk weights Subsection Exposures to central governments and central banks Article 2:2 5

6 1. Exposures to central governments or central banks for which there is a credit assessment by a nominated credit assessment institution shall be assigned a risk weight derived from the credit quality step including that rating, as set out in table A in Annex 2A. 2. Notwithstanding the provisions of paragraph 1 above, exposures to the European Central Bank shall be assigned a risk weight of 0%. Article 2:3 1. In assigning risk weights to exposures to central governments and central banks, a financial undertaking may apply the credit assessments of an export credit agency, if the credit assessments are a consensus risk score from export credit agencies participating in the OECD Arrangement on Guidelines for Officially Supported Export Credits, or if: (a) the export credit agency publishes its credit assessments; (b) the export credit agency subscribes to the OECD agreed methodology, and (c) the credit assessment is associated with one of the eight MEIPs (minimum export insurance premiums) that the OECD agreed methodology establishes. 2. Exposures to central governments or central banks for which there is a credit assessment by an export credit agency as referred to in paragraph 1 above, shall be assigned a risk weight that corresponds with the relevant MEIP as set out in table B in Annex 2B. Article 2:4 Notwithstanding the provisions of Articles 2:2 and 2:3, exposures to European Union Member States' central governments or central banks denominated and funded in the domestic currency of the Member State concerned shall be assigned a risk weight of 0 %. Article 2:5 Notwithstanding the provisions of Articles 2:2, 2:3 and 2:4, a financial undertaking may assign to exposures to the central government or the central bank of a country which is not a Member State of the European Union the same lower risk weight which the supervisory authority of that country has assigned to exposures to its central government or central bank, if: (a) the exposures are denominated and funded in the domestic currency of that country, and (b) that country applies supervisory practices and arrangements at least equivalent to those in the European Union, and (c) the supervised financial undertakings in that country are also allowed to assign to exposures to their national central government or central bank a lower risk weight than the risk weights referred to in Articles 2:2, 2:3 and 2:4. Article 2:6 Exposures to central governments or central banks not covered by the provisions of Articles 2:2 to 2:5 shall be assigned a risk weight of 100%. Subsection Exposures to regional governments and local authorities Article 2:7 1. Exposures to regional governments or local authorities shall be assigned a risk weight derived from the credit quality step that includes the assessment for their central government, as set out in table A in Annex 2A. 2. Exposures to regional governments or local authorities of countries with a central government for which no credit assessment is available shall be assigned a risk weight of 100%. 6

7 Article 2:8 Notwithstanding the provisions of Article 2:7, exposures to regional governments and local authorities listed in Annex 2B shall be assigned the same risk weight as exposures to the central government of the country of those regional governments or local authorities. Article 2:9 Notwithstanding the provisions of Articles 2:7 and 2:8, a financial undertaking may assign to exposures to regional governments or local authorities of a country which is not a Member State of the European Union the same lower risk weight which the supervisory authority of that country has assigned to exposures to its regional governments or local authorities, if: (a) that country applies supervisory practices and arrangements at least equivalent to those in the European Union, and (b) the supervised financial undertakings in that country are also allowed to treat exposures to their regional governments or local authorities in the same manner as exposures to their central government. Subsection Exposures to public sector entities, churches and other religious communities constituted as a legal entity Article 2:10 Exposures to public sector entities or to churches or other religious communities established under public law shall be assigned a risk weight of 100%, unless otherwise provided for in this Subsection. Article 2:11 1. Exposures to public sector entities established in the Netherlands shall be assigned a risk weight of 20%, unless the provisions of paragraph 2 below are applicable. 2. Exposures to public sector entities which are established in the Netherlands and in respect of which the financial undertaking holding the exposure can show that a central government guarantee is available, shall be assigned a risk weight of 0% up to the amount of the guarantee. 3. That part of the exposure for which no central government guarantee is available shall be subject to the provisions of paragraph 1 above. Article 2:12 If in a Member State of the European Union exposures to public sector entities are treated as exposures to financial undertakings or as exposures to the central government of the country where they are established, exposures of financial undertakings established in the Netherlands to those public sector entities shall be treated in the same manner. Article 2:13 In accordance with the provisions of Subsection 2.2.6, a financial undertaking may treat exposures to public sector entities of a country which is not a Member State of the European Union as exposures to financial undertakings, if: (a) that country applies supervisory practices and arrangements at least equivalent to those in the European Union, and (b) the supervisory authority of that country also allows its financial undertakings to treat exposures to that country s public sector entities as exposures to financial undertakings. 7

8 Article 2:14 1. The risk weights referred to in Subsection shall apply mutatis mutandis to churches or other religious communities which: (a) have been established under public law; (b) have been conferred a statutory right to raise taxes, and (c) use that statutory right to raise taxes. 2. The churches and other religious communities referred to in paragraph 1 above shall not be subject to the provisions of Article 76(1) of the Decree. Subsection Exposures to multilateral development banks Article 2:15 1. Exposures to multilateral development banks shall be assigned the same risk weight as referred to in Article 2: Notwithstanding the provisions of paragraph 1 above, exposures to the multilateral development banks listed in Annex 2C shall be assigned a risk weight of 0%. 3. Notwithstanding the provisions of paragraphs 1 and 2 above, a risk weight of 20% shall be assigned to the portion of unpaid capital subscribed to the European Investment Fund. Subsection Exposures to international organisations Article 2:16 Exposures to the European Community, the International Monetary Fund and the Bank for International Settlements shall be assigned a risk weight of 0%. Subsection Exposures to financial undertakings and financial institutions Article 2:17 Without prejudice to the provisions of Articles 2:18 to 2:22, exposures to financial undertakings which are supervised by a supervisory authority and are subject to prudential requirements equivalent to the prudential requirements applied to financial undertakings pursuant to the Act shall be assigned the same risk weight as exposures to financial undertakings, unless otherwise provided for in this Subsection. Article 2:18 1. Exposures to financial undertakings with an original effective maturity of more than three months for which a credit assessment by a nominated credit assessment institution is available shall be assigned a risk weight derived from the credit quality step including that rating, as set out in table A in Annex 2A. 2. Exposures to financial undertakings with an original effective maturity of more than three months for which no credit assessment by a nominated credit assessment institution is available shall be assigned a risk weight of 50%. 3. Notwithstanding the provisions of paragraph 2 above, the risk weight of an exposure to a financial undertaking for which no credit assessment by a nominated credit assessment institution is available shall not be lower than the risk weight of exposures to the central government of the country where the financial undertaking has its registered office.. Article 2:19 1. Exposures to financial undertakings with an original effective maturity of three months or less for which a credit assessment by a nominated credit assessment institution is available 8

9 shall be assigned a risk weight derived from the credit step including that rating, as set out in table A in Annex 2A. 2. Exposures to financial undertakings with an original effective maturity of three months or less for which no credit assessment by a nominated credit assessment institution is available shall be assigned a risk weight of 20%. Article 2:20 1. If there is no specific short-term exposure assessment, paragraph 1 of Article 2:19 shall apply mutatis mutandis to all exposures to financial undertakings of up to three months residual maturity. 2. If there is a specific short-term exposure assessment and such an assessment determines the assignment of an identical or lower risk weight than the risk weight that should be assigned under the provisions of paragraph 1 of Article 2:19, that short-term exposure assessment shall be used for that specific exposure only. Other short-term exposures shall be treated in accordance with paragraph 1 of Article 2: If there is a specific short-term exposure assessment and such an assessment determines the assignment of a higher risk weight than the risk weight that should be assigned under the provisions of paragraph 1 of Article 2:19, the provisions of paragraph 1 of Article 2:19 shall not apply. Instead, all unrated short-term exposures shall be assigned the risk weight arising from the specific short-term exposure assessment. Article 2:21 A financial undertaking may assign to exposures to financial undertakings with a residual maturity of three months or less denominated and funded in the currency of the country where the financial undertaking to which the exposure is held has its registered office, a risk weight that is one category less favourable than the risk weight of the central government of that country. Article 2:22 Investments in equities or regulatory capital instruments issued by financial undertakings shall be risk-weighted at 100%, unless deducted from own funds. Subsection Minimum reserves required by the European Central Bank Article 2:23 Where an exposure to a financial undertaking is in the form of minimum reserves required by the European Central Bank or by the central bank of a Member State of the European Union, that exposure may be assigned the risk weight of an exposure to the central bank concerned, provided that: (a) the reserves are held in accordance with Regulation 1745/2003 or subsequent Community legislation replacing that Regulation or are held in conformity with national regulations that, in a material sense, are fully equivalent to said Regulation, and (b) in the event of the bankruptcy or insolvency of the financial undertaking where the reserves are held, the reserves must, under the terms of the underlying agreement, be repaid in full and in time to the owner financial undertaking and may not be available to meet other liabilities of the financial undertaking where the exposure is held. Subsection Exposures to corporates Article 2:24 9

10 Exposures to corporates for which a credit assessment by a nominated credit assessment institution is available shall be assigned a risk weight that is derived from the credit quality step including that rating, as set out in table A in Annex 2A. Article 2:25 Exposures to corporates for which no credit assessment by a nominated credit assessment institution is available shall be assigned a risk weight of 100% or the risk weight that applies to the central government of the country where the corporate has its registered office, whichever is the higher. Subsection Short-term exposures to financial undertakings and corporates Article 2:26 Short-term exposures to a financial undertaking or corporate for which a specific credit assessment by a nominated credit assessment institution is available shall be assigned a risk weight that is derived from the credit quality step including that rating, as set out in table A in Annex 2A. Subsection Retail exposures Article 2:27 An exposure that meets the following conditions shall be assigned a risk weight of 75%: (a) the exposure is either to an individual person or individual persons, or to a small or medium-sized entity; (b) the exposure does not exceed 0.2% in value terms of a portfolio of similar exposures; (c) the total amount owed to the financial undertaking and any parent undertaking and subsidiaries, including any past due exposure, by the obligor client or group of connected clients, but excluding claims or contingent claims secured by residential real estate collateral, does not, to the knowledge of the financial undertaking, which shall have taken reasonable steps to confirm the situation, exceed 1 million, and (d) the exposure is not in the form of securities. Subsection Exposures secured by property Article 2:28 Exposures secured in full by property shall be assigned a risk weight of 100%, unless otherwise provided for in this Subsection. Article 2:29 The following exposures or any part of an exposure fully and completely secured as referred to in Article 2:28 shall be assigned a risk weight of 35%: (a) exposures or any part of an exposure secured by mortgages on residential property which is or will be occupied or let by the owner; (b) exposures or any part of an exposure secured by shares in Finnish residential housing companies, operating in accordance with the Finnish Housing Company Act of 1991 or subsequent equivalent legislation, in respect of residential property which is or will be occupied or let by the owner, and (c) exposures to a tenant under a residential property leasing transaction under which the financial undertaking is the lessor and the tenant has an option to purchase. 10

11 Article 2:30 An exposure is fully and completely secured as referred to in Article 2:29, if: (a) the value of the property does not materially depend upon the credit quality of the obligor; (b) the risk of the borrower does not materially depend upon the performance of the underlying property or project, but rather on the underlying capacity of the borrower to repay the debt from other sources. (c) repayment of the facility as such does not materially depend on any cash flow generated by the underlying property serving as collateral; (d) the amount of the exposure is less than or equal to 75% of the value of the property; (e) the provisions of Articles 4:57 to 4:59 have been duly observed. Article 2:31 In the case of an existing portfolio of mortgages on residential property, a financial undertaking may determine the forced-sale value of the residential property in the portfolio using the indexation method referred to in Section 1.2. Article 2:32 Exposures or any part of an exposure fully and completely secured, as referred to in Article 2:30, by one or more mortgages on commercial property situated in the Federal Republic of Germany shall be assigned a risk weight of 50%, provided that the conditions set by the German supervisory authority for the application of a risk weight of 50% by financial undertakings established in the Federal Republic of Germany are satisfied. Subsection Past due items Article 2:33 1. The unsecured portion of any item that is past due for more than 90 days shall, irrespective of the amount of that unsecured portion, be assigned a risk weight of: (a) 150% if value adjustments are less than 20% of the unsecured part of the exposure, gross of value adjustments; (b) 100% if value adjustments are 20% or more of the unsecured part of the exposure, gross of value adjustments. 2. For the purpose of defining the secured part of the past due item, eligible collateral and guarantees shall be those eligible under Chapter 4. Article 2:34 Exposures referred to in Article 2:29 shall be assigned a risk weight of 100% net of value adjustments if they are past due for more than 90 days. If value adjustments are 20% or more of the exposures gross of value adjustments, the risk weight applicable to the remainder of the exposure shall be 50%. Article 2:35 Exposures referred to in Article 2:32 shall be assigned a risk weight of 100% if they are past due for more than 90 days. Subsection Items belonging to regulatory high-risk categories Article 2:36 The following items shall be assigned a risk weight of 150%: (a) investments in venture capital firms; 11

12 (b) private equity investments; (c) exposures to obligors whose external credit assessment by an eligible credit assessment institution has been withdrawn. Article 2:37 Non-past-due items which would be assigned a risk weight of 150% pursuant to Article 2:36 and for which value adjustments have been established shall be assigned a risk weight of: (a) 100% if the value adjustments are 20% or more of the exposure value, gross of value adjustments, and (b) 50% if the value adjustments are 50% or more of the exposure value, gross of value adjustments. Subsection Positions in covered bonds Article 2:38 A financial undertaking shall comply with the minimum requirements and the valuation rules referred to in Subsection for real estate collateralising covered bonds. Article 2:39 Notwithstanding the provisions of Article 1:1(j) and of Article 2:38, bonds meeting the definition of Article 22(4) of the UCITS Directive and issued before 31 December 2007 shall be eligible for treatment in accordance with Article 2:40 until maturity. Article 2:40 Covered bonds shall be assigned a risk weight derived from the risk weight of senior nonguaranteed exposures to the financial undertaking issuing them, with the following correspondence applying between the two risk weights: (a) if the exposures to the financial undertaking are assigned a risk weight of 20%, the covered bond shall be assigned a risk weight of 10%; (b) if the exposures to the financial undertaking are assigned a risk weight of 50%, the covered bond shall be assigned a risk weight of 20%; (c) if the exposures to the financial undertaking are assigned a risk weight of 100%, the covered bond shall be assigned a risk weight of 50%, and (d) if the exposures to the financial undertaking are assigned a risk weight of 150%, the covered bond shall be assigned a risk weight of 100%. Subsection Items representing securitisation positions Article 2:41 Risk-weighted exposure amounts for securitisation positions shall be determined in accordance with the provisions of Subsection 10.4 and Article 88 of the Decree. Subsection Exposures in the form of collective investment undertakings (CIUs) Article 2:42 Exposures in the form of a CIU shall be assigned a risk weight of 100%, unless otherwise provided in this Subsection.. Article 2:43 12

13 Exposures in the form of a CIU for which a credit assessment by a nominated credit assessment institution is available shall be assigned a risk weight derived from the credit quality step including that rating, as set out in table A in Annex 2A. Article 2:44 Positions in a CIU associated with particularly high risks, irrespective of whether a credit assessment by a nominated credit assessment institution is available, shall be assigned a risk weight of 150%. Article 2:45 1. Notwithstanding the provisions of the Articles 2:42 to 2:44, a financial undertaking may determine the risk weight for a CIU in accordance with the remaining Articles of this Subsection, if the CIU is managed by a company which is subject to supervision by a supervisory authority in the European Union. 2. On request, a financial undertaking may, notwithstanding the provisions of the preceding Articles, be given permission to determine the risk weight of a CIU in accordance with the remaining Articles of this Subsection, if the CIU is managed by a company which is subject to supervision by a supervisory authority in a country which is not a Member State of the European Union, provided that: (a) the supervisory practices and arrangements in that country are at least equivalent to the practices and arrangements in the European Union, and (b) the cooperation between De Nederlandsche Bank and the supervisory authority of the third country concerned is sufficiently ensured. 3. For the purposes of paragraphs 1 and 2 above, the business of the CIU shall be reported on at least an annual basis to enable an assessment to be made of the assets and liabilities, income and operations over the reporting period. 4. For the purposes of paragraphs 1 and 2 above, the financial undertaking shall ensure that the CIU's prospectus or equivalent document includes: (a) the categories of assets in which the CIU is authorised to invest, and (b) if investment limits apply, the relative limits and the methodologies to calculate them. Article 2:46 Where a financial undertaking is aware of the underlying exposures of a CIU, it may look through to those underlying exposures in order to calculate an average risk weight for the CIU in accordance with the methods set out this Chapter. Article 2:47 Where a financial undertaking is not aware of the underlying exposures of a CIU, it may calculate an average risk weight for the CIU in accordance with the methods set out in this Chapter with the proviso that, in doing so, it shall assume that the CIU first invests, to the maximum extent allowed under its mandate, in the exposure classes attracting the highest capital requirement, and then continues making investments in descending order until the maximum total investment limit is reached. Article 2:48 A financial undertaking may rely on a third party to calculate and report a risk weight for the CIU, in accordance with the methods set out in Articles 2:46 and 2:47, provided that the correctness of the calculation and report is adequately ensured. Subsection Other risk weights 13

14 Article 2:49 In the case of asset sale and repurchase agreements and outright forward purchases, the risk weights shall be those assigned to the assets in question and not to the counterparties to the transactions. Article 2:50 1. Where a financial undertaking provides credit protection for a number of exposures under terms that the n th default among the exposures shall trigger payment and that this credit event shall terminate the contract, and where the product has an external credit assessment from an eligible credit assessment institution, the risk weights prescribed in Subsection 10.4 and Article 88 of the Decree shall be assigned. 2. If the product has no external credit assessment by an eligible credit assessment institution, the risk weights of the exposures included in the basket shall be aggregated, excluding n-1 exposures, up to a maximum of 1250% and multiplied by the nominal amount of the protection provided by the credit derivative to obtain the risk-weighted exposure amount. 3. The n-1 exposures to be excluded from the aggregation shall be determined on the basis that they shall include those exposures each of which produces a lower risk-weighted exposure amount than the risk-weighted exposure amount of any of the exposures included in the aggregation. Article 2:51 Gold bullion held in the financial undertaking s own vaults or on an assigned basis to the extent that it is backed by bullion liabilities, and cash in hand and equivalent cash items shall attract a 0% risk weight. Article 2:52 Cash items in process of collection shall attract a 20% risk weight. Article 2:53 The following assets shall attract a risk weight of 100%: (a) tangible assets; (b) prepayments and accrued income for which a financial undertaking is unable to determine the counterparty; (c) holdings of equity and other participations except where deducted from own funds, and (d) exposures not listed in this Section. Section 2.3 Use of credit assessments from credit assessment institutions for the determination of risk weights Subsection Treatment Article 2:54 1. A financial undertaking may nominate one or more eligible credit assessment institutions whose credit assessments it will use for the determination of risk weights applicable to the assets and the items referred to in Annex 2D. 2. A financial undertaking which decides to use the credit assessments produced by an eligible credit assessment institution shall use them in a continuous and consistent way over time. Article 2:55 14

15 A financial undertaking which decides to use the credit assessments produced by an eligible credit assessment institution for a certain class of items shall use those credit assessments consistently for all exposures belonging to that class. Article 2:56 A financial undertaking shall only use credit assessment institutions credit assessments that take into account all amounts both in principal and in interest owed to it. Article 2:57 1. If only one credit assessment is available from a nominated credit assessment institution for a rated item, that credit assessment shall be used to determine the risk weight for that item. 2. If two or more credit assessments are available from nominated credit assessment institutions for a rated item, the second highest credit assessment shall be used to determine the risk weight. If the two most favourable credit assessments lead to the same risk weight, that risk weight shall be applied. Subsection Credit assessment of issuing parties and new issues Article 2:58 Where a credit assessment exists for a specific issuing programme or facility to which the item constituting the exposure belongs, that credit assessment shall be used to determine the risk weight applicable to that item. Article 2:59 Where no directly applicable credit assessment exists for a certain item, but a credit assessment exists for a specific issuing programme or facility to which the item constituting the exposure does not belong or a general credit assessment exists for the issuer, that credit assessment shall be used if: (a) it produces a higher risk weight than would otherwise be the case, or (b) it produces a lower risk weight and the exposure in question ranks pari passu or senior in all respects to the specific issuing program or facility or to senior unsecured exposures of that issuer. Subsection Long-term and short-term credit assessments Article 2:60 1. Short-term credit assessments shall only be used for assets and items as referred to in Annex 2D, constituting short-term exposures to financial undertakings and corporates. 2. Any short-term credit assessment shall only apply to the item to which the credit assessment refers and shall not be used to derive risk weights for any other item. 3. Notwithstanding the provisions of paragraph 2 above, if a short-term rated facility attracts a 150% risk weight, then all unrated unsecured exposures to that debtor, whether short-term or long-term, shall also attract a 150% risk weight. 4. Notwithstanding the provisions of paragraph 2 above, if a short-term rated facility attracts a 50% risk weight, no unrated short-term exposure shall attract a risk weight lower than 100%. Subsection Domestic and foreign currency items Article 2:61 15

16 A credit assessment that refers to an item denominated in the debtor s domestic currency shall not be used to derive a risk weight for another exposure to that same debtor that is denominated in a foreign currency. Article 2:62 Notwithstanding the provisions of Article 2:61, when an exposure arises through a financial undertaking s participation in a loan that has been extended by a multilateral development bank whose preferred creditor status is recognised in the market, the financial undertaking may determine the risk weight using the credit assessment on an item denominated in the domestic currency of the debtor. Chapter 3 Internal ratings-based approach Section 3.1 Definitions Article 3:1 In this Chapter, the following terms shall be defined as follows: (a) ancillary services undertaking: an undertaking as referred to in Article 3:268(1)(h) of the Act; (b) commodities finance: a method of funding of exchange-traded commodities, with a selfliquidating character of the exposures in the sense that the repayment obligation is met from the proceeds of the sale of commodities and the obligor, apart from structuring the transaction, has no other independent capacity to repay the loan; (c) finance of income-producing real estate: a method of funding where the repayment obligation is met from the income produced by the real estate such as rent, lease income or the sale of the real estate; (d) internal audit function: an independent function reporting directly to the board of directors, with the duty of checking and assessing the organisational structure and control mechanism; (e) object finance: a method of funding where the repayment obligation depends primarily and almost exclusively on the proceeds generated by the assets that serve as collateral for the loan; (f) project finance: a method of funding where the repayment obligation depends primarily and almost exclusively on the proceeds generated by the project to be funded; and (g) rating system: a system that comprises all of the methods, processes, controls and systems that support the assessment of credit risk, the assignment of obligors and exposures to grades or pools (rating) and the quantification of estimates of default, losses given default and conversion factors for a given type of obligor or exposure; Section 3.2 General provisions on applying the internal ratings-based approach Subsection Application package requirements and prohibition on permanent combination of approaches Article 3:2 1. The following information and documentation shall be supplied with the application as referred to in Article 69(1) of the Decree: (a) a general description of the way in which the financial undertaking applies the IRB approach; 16

17 (b) a risk management framework; (c) a list of the rating systems used by the financial undertaking; (d) an analysis of the impact on the financial undertaking s capital adequacy of moving to the IRB approach; (e) a self-assessment as to whether the provisions of the Decree are complied with. 2. A financial undertaking that wishes to claim the exemptions referred to in Article 76 of the Decree shall also include with the application a list of the exposures which will continue to be covered by the standardised approach. This list must be accompanied by the rationale for the choice, an estimate of the risk attaching to these exposures and an indication of the relative size of these exposures. Article 3:3 1. A financial undertaking may obtain permission to apply the foundation IRB approach or the advanced IRB approach. A permanent mix of the foundation IRB approach and the advanced IRB approach is not permitted. 2. Notwithstanding the provisions of paragraph 1 above, exposures as referred to in Article 3:6(1) may be treated permanently under the foundation IRB approach, even if the financial undertaking rolls out the advanced IRB approach for other exposures. 3. Notwithstanding the provisions of paragraph 1 above, exposures as referred to in Article 71(1)(d) of the Decree may only be treated under the advanced IRB approach, even if the financial undertaking implements the foundation IRB approach for other exposures. Subsection Supplementary rules regarding the classification of exposures Article 3:4 The following exposures shall also be assigned to the class referred to in Article 71(1)(a) of the Decree: (a) exposures to regional governments, local authorities or public sector entities which are treated as exposures to central governments under Articles 2:8, 2:11(2) or 2:12; (b) exposures to multilateral development banks or international organisations which are assigned a risk weight of 0% under Articles 2:15(2) or 2:16. Article 3:5 The following exposures shall also be assigned to the class referred to in Article 71(1)(b) of the Decree: (a) exposures to regional governments and local authorities which are not treated as exposures to central governments under Article 2:7; (b) exposures to public sector entities which are treated as exposures to financial undertakings under Article 2:12; (c) exposures to multilateral development banks which are not assigned a risk weight of 0% under Article 2:15(2). Article 3:6 1. Exposures in the class referred to in Article 71(1)(c) of the Decree shall be recorded separately as specialised lending if they have the following characteristics: (a) the exposure shall be to an entity with the specific purpose of financing and/or operating physical assets; (b) the contractual arrangements shall give the lender a substantial degree of control over the assets and the income that they generate; and 17

18 (c) repayment of the obligation shall depend primarily on the income generated by the assets being financed, rather than the independent payment capacity of a broader commercial enterprise. 2. In recording these exposures separately as referred to in paragraph 1 above, a financial undertaking shall distinguish between the following types of funding: (a) project finance; (b) object finance; (c) commodities finance; and (d) finance of income-producing real estate. 3. Exposures which have the characteristics referred to in paragraph 1 above but which cannot be assigned to any of the classes referred to in paragraph 2 above shall be recorded as project finance for the application of the IRB approach. Article 3:7 1. Only exposures that meet the following conditions shall be assigned to the class referred to in Article 71(1)(d) of the Decree: (a) they shall be either to one or more natural persons or to a small or medium-sized entity; (b) they shall be treated by the financial undertaking in its risk management consistently over time and in a similar manner; (c) they shall not be managed individually; and (d) they shall each represent one of a significant number of similarly managed exposures. 2. Exposures to small or medium-sized entities must meet the supplementary condition that the total amount owed to the financial undertaking and to any parent undertaking and its subsidiaries by the obligor client or group of connected clients may not exceed 1 million. This limit shall include any past due exposure but shall exclude claims secured by residential real estate. The financial undertaking must take reasonable steps to confirm that the latter requirement is met. 3. Only exposures secured by real estate that meet the following conditions shall be included in the class referred to in Article 71(1)(d) of the Decree: (a) none of the counterparties shall own more than five real estate objects that are secured by mortgage loans granted by the financial undertaking; and (b) none of the real estate objects referred to in subparagraph (a) above shall consist of more than five residential units. 4. The present value of retail minimum lease payments shall be eligible for inclusion in the class referred to in Article 71(1)(d) of the Decree. Article 3:8 1. A distinction shall be drawn in the class referred to in Article 71(1)(d) of the Decree between: (a) exposures secured by real estate; (b) qualifying revolving exposures; and (c) other retail exposures. 2. Exposures shall only be classified as qualifying revolving exposures if they meet the following conditions: (a) they shall be to individuals; (b) they shall be revolving, unsecured positions and, to the extent that they are not drawn, shall be immediately and unconditionally cancellable by the financial undertaking; (c) the maximum exposure to a single individual in the subportfolio shall be 100,000; and 18

19 (d) the use of a correlation factor of 0.04 shall be restricted to portfolios that have exhibited low volatility of loss rates, suitable to the correlation, relative to their average level of loss rates, especially within the low PD bands. 3. For the purposes of subparagraph 2(d) above, the financial undertaking shall review the volatility of the loss rates of all qualifying revolving subportfolios separately and the aggregate qualifying revolving portfolio and shall relate this volatility to that of the other subclasses listed in paragraph 1 above. Article 3:9 The following exposures shall also be assigned to the class referred to in Article 71(1)(e) of the Decree: (a) indirect equity exposures; (b) non-debt exposures conveying a subordinated, residual claim on the assets or income of the issuing financial undertaking; (c) debt exposures, the economic substance of which is similar to the exposures specified in subparagraph (b) above. Article 3:10 The class referred to in Article 71(1)(g) of the Decree shall also include the residual value of leased properties insofar as this residual value is not included in the lease exposure as defined in Article 3:54(4). Subsection Supplementary conditions regarding state-reinsured guarantees that are eligible for treatment under the standardised approach Article 3:11 Guarantees as referred to in Article 4:83 shall be recognised as state guarantees or as statereinsured guarantees as defined in Article 76(1)(h) of the Decree. Subsection Supplementary rules regarding the requirements for a phased implementation of the IRB approach Article 3:12 1. The permission to adopt a phased roll out of the IRB approach as referred to in Article 70(1) of the Decree shall be granted if: (a) the financial undertaking has a roll-out plan; (b) the financial undertaking has set up structures to manage the roll-out project, including control of the roll out at a senior management level in the financial undertaking; and (c) it may reasonably be expected from the roll-out plan and details of the project structure that the financial undertaking will have placed all relevant exposures under its chosen form of the IRB approach within three years. 2. The roll-out plan referred to in paragraph 1 above shall be submitted for approval to De Nederlandsche Bank and shall at least include the following information: (a) the type of IRB approach that the financial undertaking wishes to implement; (b) the sequence of roll out that the financial undertaking will use, supported from the risk management and operational viewpoints; (c) the deployment of people and resources; (d) the business units for which the capital requirements on the basis of the IRB approach will be calculated and at what time; and 19

20 (e) in outline, the activities that the financial undertaking still has to implement at a specific business unit in order to move to calculating the capital requirements on the basis of the IRB approach. 3. Separate permission from De Nederlandsche Bank is required to calculate the capital requirements using the IRB approach for a specific business unit or class as referred to in Article 71 of the Decree. The information as referred to in Article 3:2(1)(d) and (e) shall be supplied with the application for such approval. Article 3:13 1. The following shall apply to each type of phased roll out of the IRB approach as referred to in Article 70(1) of the Decree: (a) the transitional period within which a phased roll out must be completed is three years, irrespective of the type of IRB approach that a financial undertaking wishes to apply on implementation; (b) the roll out of the advanced IRB approach cannot begin until the phased roll out of the foundation IRB approach has been fully completed; (c) minimising the capital requirements by means of a strategic roll out during the roll-out period shall not be permitted; and (d) Article 25a of the Decree shall apply in full during the roll-out period. 2. If the IRB approach is rolled out in a business unit for the class referred to in Article 71(1)(c) of the Decree, the IRB approach shall also be rolled out on the subclass referred to in Article 3:6(1). Article 3:14 1. From the start of the roll out, a financial undertaking shall collect the following relevant information for the IRB approach for all exposures on which a type of IRB will be rolled out in accordance with the approved roll-out plan: (a) for exposures assigned to the class referred to in Article 71(1)(a), (b) or (c) of the Decree: the information set out in Article 3:74(2)(e) and (f), and the information referred to in Article 3:74(4)(e) and (g) insofar as this information refers to realised defaults; and (b) for exposures assigned to the class referred to in Article 71(1)(d) of the Decree: the information set out in Article 3:75(2)(c), (d) and (e) insofar as this information refers to realised defaults. 2. During the roll-out period, and in the event of an extension of the application of the IRB approach after the roll-out period, the financial undertaking shall publish comparative figures at least once a year on the exposures placed under the IRB approach during that year. Article 3:15 1. A financial undertaking shall forthwith inform DNB of any changes and problems which could endanger the realisation of the roll-out plan. 2. The financial undertaking shall draw up a revised roll-out plan and submit it for approval to De Nederlandsche Bank if there is a change of circumstances that could lead to significant departures from the approved roll-out plan. The revised roll-out plan shall at least contain the information referred to in Article 3:12(2). Section 3.3 Calculation of risk-weighted assets for credit risk and dilution risk and offbalance sheet items and expected loss amounts Subsection General provisions 20