The proposals address reforms previously announced by the Basel Committee including that a current value adjustment (CVA) capital charge is to be incorporated within the overall measurement of CCR to estimate exposure at default. These proposals follow previously introduced ‘Basel 2.5’ capital changes.
APRA will issue final prudential standards and reporting requirements in late 2012. It intends to implement the Basel CCR capital requirements plus other measures as from 1 January 2013.
APRA’s proposals do not yet permit recognition of an Internal Models Method (IMM) approach to the measurement of CCR. This means that as from 1 January 2013:
- ADIs will continue to calculate the counterparty credit risk default component of their total CCR measurement using the existing current exposure method
- ADIs will not be required to also adopt a modelled approach to calculating an ‘advanced’ CVA risk capital charge. Instead ADIs will apply a ‘standardised’ CVA risk capital charge based on a regulatory specified formula and risk weights. These specified weights incorporate a mapping of the counterparty’s credit rating
- those ADIs currently applying standardised risk models for Basel II capital calculations will be permitted a CVA calculation concession by APRA. This allows the additional CVA capital charge to be equivalent to the existing counterparty credit default capital requirement.
APRA says it is willing to consider the future adoption of the IMM and it intends to review ADIs’ approaches to counterparty credit risk management and measurement during 2013. Permissible implementation of an IMM framework will not occur before July 2014.
Written submissions on the CCR proposals are to be made by 28 September 2012.
It should be noted that APRA’s proposals also include the capital charges to be applied to exposures to qualifying central counterparties, including with respect to the treatment of collateral postings and default fund exposures, and the capital charges to be applied to non-qualifying central counterparties.
APRA also advises that the previously issued Guidance Notes 220.1 to 220.4 on credit risk impairment and provisioning are to be incorporated as attachments to APS 220.
For more information on the proposals please contact us.