Free Accounting Dissertations - Under The Internal Ratings Based Approach, The Committee Expects The Bank To
Under the Internal Ratings Based Approach, the committee expects the bank to categories their exposures in order to identify the different underlying risk characteristics. The categories include corporate, sovereign, bank, retail and equity. These are identified as the corporate asset classes and the approach further expects the bank to identify the subclasses associated with the asset classes in order to measure the credit risk associated with the exposure. The detailed analysis of every corporate class and its associated subclasses is beyond the scope of this report.
In essence the Internal Ratings Based Approach gives the bank more liberty to calculate its credit-risk on the minimum capital requirement for a given exposure. But the producers laid by the Basel II Accord is very tedious to adopt and implement for every corporate class exposure and identifying the subclasses associated.
2.4.4: Credit Risk- Securitisation Framework
The Basel Committee in its revised accord, has made it mandatory for the banks to apply the Securitisation Framework for determining regulatory capital requirements on exposure arising from traditional and synthetic Securitisation or similar structures that contain features common to both. The Basel II accord also states that the capital treatment of the Securitisation exposure must be determined on the basis of the economic substance rather than the legal form of the structure. It is apparent that the securities can be structured in many different ways and the committee has approved the use of either the traditional Securitisation or the synthetic Securitisation framework. Also the Basel II accord expects the supervisor to look at the economic substance of transaction in order to determine whether it should be subject to Securitisation framework or not. This gives the discretionary power to the supervisor to decide on a specific transaction whether to include it in the framework or to eliminate it from the framework towards determining the regulatory capital framework. The traditional Securitisation and the synthetic Securitisation framework are discussed below.
Traditional Securitisation:
The Basel II Accord defines the traditional framework as a structure where the cash flow from an underlying pool of exposures is used to service at least two different stratified risk positions or tranches reflecting different degrees of credit risk. The advantage with this approach is that the payment to the investors is based on the performance of the specified underlying exposures rather than a derivation from an obligation of the entity originating those exposures.
