The guidance is intended to ensure that the costs, as well as the benefits, of purchased credit protection are appropriately recognised in regulatory and other capital adequacy assessments.
This statement is intended to alert banks that supervisors will closely scrutinise credit protection transactions in both the specific context of the evaluation of credit risk transfer within the securitisation framework, as well as within the broader context of the Basel Pillar 2 supervisory review process and assessment of capital adequacy.
The Basel capital framework recognises that credit risk mitigation techniques can significantly reduce credit risk and can serve as an effective risk management tool. In particular, paragraph 140 of the framework establishes that where guarantees or credit derivatives are direct, explicit, irrevocable and unconditional, and supervisors are satisfied that banks fulfil certain minimum operational conditions relating to risk management processes, banks may take account of such credit protection in calculating capital requirements.
These considerations are intended to provide supervisors with the tools necessary to assess effectively the degree of risk transference of certain credit protection transactions, while also providing the flexibility to deal with the variety of transaction structures that have been observed in the market, as well as those that might appear in the future. The Basel Committee will continue to monitor developments with respect to high-cost credit protection transactions, and will consider taking a more comprehensive Pillar 1 approach to these transactions.
Press release
© BIS - Bank for International Settlements
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