QIS 3 FAQ: C. Standardised Approach
1. How should real estate leasing be treated in the standardised approach?
Answer: For QIS3 purposes, real estate leasing is to be treated as claims secured by real estate mortgages. The risk weights applicable will depend upon whether the real estate leasing is residential or commercial. If the former, the real estate leasing can be eligible to the 40% risk provided the use of strict valuation rules for determining the value of the leased property. If the latter, then a risk weight of 100% should be applied to the claim derived from the real estate leasing (i.e. such claims would not, for QIS3 purposes, receive a preferential risk weight of 50%).
2. The Technical Guidance indicates that past due retail claims cannot be included in the regulatory retail portfolios for risk-weighting purposes. What does this mean?
Answer: As indicated in paragraphs 43 and 46, such claims should be slotted in the same way as any other past due assets in the standardised approach, i.e. they are risk weighted at 150% (or 100% if secured against residential real estate and if not past due would qualify for a 40% risk weight). Moreover, under the standardised approach past due exposures do not qualify as retail exposures for calculating the granularity limit as described in paragraph 43. (Refer also FAQ C.10)
3. When data on the availability of external ratings for certain exposures are not readily available, can we allocate all these exposures to the 'unrated' bucket or should we proceed in another way (e.g. categorising them according to the mapping from our internal grades)?
Answer: For QIS purposes we want to make sure that we approximate capital requirements as accurately as possible. Ideally each exposure should be classified according to its rating. When necessary sampling procedures should be used. Unrated exposures should never be included in any other but the unrated bucket.
4. Does the 'past-due' concept include also overdrafts?
Answer: If the overdraft is within limit and the bank has not sought repayment from the customer, then do not treat as past due. If the bank has sought repayment of funds and the account is not brought within the limit within 90 days, treat as past due. Also note that in the standardised approach it is possible to encounter situations where an exposure to a single counterparty is past due while other exposures to the same counterparty are not past due.
5. Under the standardised approach, for non-mortgage retail exposures, what number of days counts as past due and what risk weight are past due exposures allocated to (100% or 150%)?
Answer: For QIS, use 90 days and place the past due non-mortgage exposures in the 150% bucket. Note that for QIS purposes this applies even if your national supervisor has indicated that a longer past-due trigger should be used for the IRB approach.
6. Under the standardised approach, how will the risk weights for retail commitments be determined?
Answer: Under the standardised approach undrawn retail exposures that are unconditionally cancellable receive no capital charge. Other retail commitments are converted to credit equivalent amounts at 20% or 50%, depending on whether the maturity of the commitment is up to or beyond one year. Next the credit equivalent amount is risk weighted at 75%.
7. What are the criteria to be eligible for the preferential treatment (i.e. 40% risk weight) for residential mortgage loans?
Answer: As specified in the Technical Guidance document, the 40% risk weight can be applied to loans that satisfy criteria, such as the requirement to have a 'substantial margin of additional security over the amount of the loan based on strict evaluation rules', mentioned in paragraph 44. The Technical Guidance document also specifies that:
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a) Specific requirements left to national discretion.
These requirements, including any specific loan-to-value standards or valuation rules, are not prescribed by the Basel Committee but are instead left up to national supervisory agencies in order to account for the particular circumstances in domestic markets and, more generally, 'national arrangements for the provision of housing finance.'
b) Some implications of a restrictive application in accordance with strict prudential criteria.
However, the document also states that the concessionary risk weight is to be applied 'restrictively for residential purposes and in accordance with strict prudential criteria'.
The first implication of such a principle, which was also part of the 1988 Basel Accord (see paragraph 41 of this document), is that all claims secured by residential mortgages should not automatically qualify for the concessionary risk weight but should only qualify to the extent that they satisfy strict prudential criteria developed on a national basis.
c) Treatment of performing loans not 'fully secured' by residential mortgages.
Performing loans that are not regarded as being 'fully secured' by residential mortgages and therefore would not qualify for a 40% risk weight but that otherwise meet the general criteria for inclusion in the 'regulatory retail portfolio' would qualify for a 75% risk weight. The 75% risk weight should in such cases be applied to the whole loan, i.e. the loan would not be split into secured and unsecured positions.
8. What risk weight should be applied to an SME loan that is secured by residential real estate?
Answer: For QIS-purposes the following guidelines should be followed. If this loan satisfies the criteria for claims secured by residential property (set out in paragraph 44 of the Technical Guidance) it obtains a 40% risk weight (unless it is more than 90 days past due, in which case the risk weight will be 100%). If it does not satisfy these criteria, a 75% risk weight may be applicable, as long as the loan is not past due and satisfies the criteria for the regulatory retail portfolio. In all other cases it would be treated as a corporate exposure.
9. Does the € 1 million limit for the regulatory retail portfolio apply to the aggregate exposure to an individual counterpart? In other words if Mr X has multiple retail loans to a bank for a total amount of € 1.5 million, would this full amount obtain a 100%, rather than a 75% risk weighting?
Answer: You are correct. Once the aggregate exposure to a counterpart-excluding exposures against this counterpart that are eligible for the residential mortgage asset class-exceeds the € 1 million limit, all exposures to this counterpart are excluded from the retail portfolio. Banks that experience difficulty in applying this rule to their QIS-submissions should contact their supervisor and try to come up with a reasonable approximation.
10. Paragraph 46 of the Technical Guidance states that "past due retail claims cannot be included in the regulatory retail portfolio to calculate the granularity limit, as specified in paragraph 43, for risk-weighting purposes". Does this mean that past due claims should be excluded from both the denominator and numerator when determining whether an obligor's exposure falls below or above the granularity criterion of 0.2% of the overall regulatory retail portfolio?
Answer: Paragraph 46 says that past due claims should be excluded from the overall regulatory retail portfolio when calculating the granularity limit in absolute terms (i.e. 0.2% x size of overall retail portfolio). This limit should then be compared with the obligor's total exposures (including any past due exposures) to determine whether the obligor's exposures belong in the retail portfolio.
The limit can identically be thought of in relative terms (i.e. size of obligor's exposure / size of overall retail portfolio). Again, past due exposures should be excluded from the overall retail portfolio (the denominator) but should remain in the obligor's total exposures (the numerator).
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