CONFIDENCIAL REVISION TO THE STANDARDISED APPROACH FOR CREDIT RISK SPECIALISED LENDING, REAL ESTATE & CRM Second consultative document ASBA-FSI Meeting on Interest Rate Risk in the Banking Book (IRRBB) and therevised Standardised Approach (RSA) for Credit Risk Sao Paolo, 27-28 April 2016.
SUMMARY SPECIALISED LENDING - Project Finance - Object Finance - Commodities Finance LOANS SECURED BY REAL ESTATE -General Treatment -IPRE -ADC CREDIT RISK MITIGATION -Financial Collateral -Guarantees & Credit Derivatives -Netting 2
SPECIALISED LENDING - Project Finance ----------------------------- PROJECT - Object Finance ----------------------------- OBJECT - Commodities Finance ----------------------------- COMMODITY LOANS SECURED BY REAL ESTATE -General Treatment ----------------------------- BORROWER + PROPERTY -IPRE ----------------------------- PROPERTY -ADC ----------------------------- PROPERTY CREDIT RISK MITIGATION -Financial Collateral -------------------------- BORROWER + FIN. COLLATERAL -Guarantees -------------------------- BORROWER + GUARANTOR -Netting -------------------------- BORROWER + DEPOSIT 3
SPECIALISED LENDING Repayment of exposure is dependent on cash flows generated by the asset being financed rather than the independent capacity of a broader commercial enterprise. Current Basel II SA: No specific sub-category: treated as corporates. Rated: RW according to rating Unrated: RW 100% 2014 Proposal: Project ; Object and Commodities finance and Income Producing Real Estate (IPRE): Max (RW counterparty ; 120%) Acquisition, construction and development (ADC): Max (RW counterparty ; 150%) 4
SPECIALISED LENDING 2015 Proposal SPECIALISED LENDING PROJECT FINANCE, OBJECT FINANCE & COMMODITIES FINANCE Rated Exposures in jurisdictions that allow the use of ratings for regulatory purposes: Issue rating AAA to AA- A+ to A- BBB+ to BBB- BB+ to BB- Below BB- RW 20% 50% 100% 100% 150% Unrated exposures & exposures in jurisdictions that do not allow the use of ratings for regulatory purposes: Project Finance: Pre-operational phase 150% Operational phase 100% Object Finance: 120% Commodities Finance: 120% IPRE & ADC To Real Estate Exposure Class 5
REAL ESTATE Current Basel II SA Residential Real Estate Current treatment: RW 35% as long as «applied restrictively for residential purposes and in accordance with strict prudential criteria, such as the existence of substantial margin of additional security over the amount of the loan based on strict valuation rules.» Commercial Real Estate Current treatment: RW 100%, or RW 50% under national discretion, subject to strict conditions 6
REAL ESTATE 2014 Proposal Residential Real Estate: 1. Requirements: Finished property, Legal enforceability, Prudent value of the property. 2. Look-up table based on two risk drivers: LTV and Debt Service Coverage ratio: LTV < 40% 40% LTV < 60% 60% LTV < 80% 80% LTV < 90% 90% LTV < 100% LTV 100% Loans to individuals DSC 35% 25% 30% 40% 50% 60% 80% Other loans 30% 40% 50% 70% 80% 100% 3. Value at origination Commercial Real Estate: 2 options for consultation: 1. RW of the loan depends on the counterparty 2. RW of the loan depends on LTV of the CRE 7
REAL ESTATE 2015 Proposal 1. New taxonomy: All loans secured by real estate => Real Estate asset class, including specialised lending categories related to real estate (before in corporates). The same taxonomy is used for residential and commercial real estate. General Treatment: repayment of the loan does not depend on the cash flows generated by the property. IPRE: repayment of the loan depends on the cash flows generated by the property (e.g. rent). [more conservative risk-weights] ADC: Loans to corporates or SPVs financing Land Acquisition, Development and Construction when the repayment depends on the cash flows that are future and uncertain (e.g. future uncertain sale of the property). Also loans financing acquisition of property with the purpose to resale it (cash flow future and uncertain). [most conservative risk-weight: 150%] 8
REAL ESTATE 2. Requirements: 1. Finished property, 2. legal enforceability, 3. Prudent value of the property: Value at origination 4. Senior claim (exceptionally, at national discretion, junior claim under certain conditions) 5. Required documentation 6. ABILITY OF THE BORROWER TO REPAY 3. Look-up table based on LTV. 4. Value at origination [national discretion to update downwards] 9
.. REAL ESTATE Exposure Class Residential RE loans Commercial RE loans General Treatment RRE General Treatment CRE Requirements NO: 100% Requirements NO: 100% LTV LTV <40% 40% LTV < 60% LTV 80% LTV 90% LTV 60% < 80% < 90% < 100% LTV 100% RW 25% 30% 35% 45% 55% Counterparty % Repayment materially depends on cash-flows from property (IPRRE). Requirements NO: 150% LTV LTV <60% LTV 60% RW [60%, counterparty] Counterparty Repayment materially depends on cash flows from property (IPCRE). Requirements NO: 150% LTV<60 60<LTV<80 LTV>80 70% 90% 120% LTV <60% 60% LTV <80% LTV >80% RW 80% 100% 130% ADC loans: RW 150%
CREDIT RISK MITIGATION (CRM) Current BASEL II SA Financial Collateral: - Simple approach: Collateralised part: RW of the collateral Remaining part of the loan: RW of counterparty - Comprehensive approach: Reduced Exposure E* = Exposure Collateral (haircut) - supervisory haircuts (external ratings) - own estimated haircuts - VaR for Repos E*= max {0,[Ex(1+He)-C(1-Hc-Hfx)]} RWA = E* x RW counterparty Guarantees: Guarantor eligibility: Sovereign, PSE, Banks, and securities firms with a lower risk weight than the borrower. Other entities rated A- or better. Substitution approach: Guaranteed part: RW of the guarantor Remaining mortgage loan: RW of counterparty On balance sheet netting: legally enforceable netting arrangements & Basel II conditions. Loans - Deposits 11
CREDIT RISK MITIGATION (CRM) 2015 Proposal Simple Approach No change Financial collateral Comprehensive Approach Ratings allowed Haircuts according to type of issuer, type of collateral maturity and rating (Supervisory haircut recalibration) Ratings not allowed Haircuts according to type of issuer, type of collateral and maturity (Supervisory haircut calibration) Guarantees (& Credit Derivatives) Ratings allowed Sovereign, PSE, Banks, and other regulated financial institutions with RW lower than the Borrower. Ratings not allowed Sovereign, PSE, Banks, and other regulated financial institutions with RW lower than the Borrower Onbalance sheet netting Supervisory haircut recalibrated Internal models no longer allowed - own-estimate haicuts - VaR for repo transactions. Other entities (e.g. corporates) with external rating Other entities (e.g. corporates) qualified as "investement grade" 12/16
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