AGN 112 2 Standardised Approach To Credit Risk Risk Weighted Off Balance Sheet Credit Exposures April 2005

Topics: Derivative, Credit risk, Derivatives Pages: 10 (2917 words) Published: April 13, 2015
January 2008


Guidance Note AGN 112.2
Standardised Approach to Credit Risk: Risk-weighted
Off-balance Sheet Credit Exposures

This Guidance Note and its Attachments set out the procedures and requirements for calculating the risk-weighted amount of an authorised deposittaking institution’s (ADI’s) off-balance sheet credit exposures under the standardised approach for capital adequacy purposes.


The risk-weighting process used for measuring an ADI’s off-balance sheet credit exposures covers all the ADI’s off-balance sheet business, including both market-related and non-market-related transactions.

Risk-weighted amount

An ADI’s total risk-weighted off-balance sheet credit exposure is calculated as the sum of the risk-weighted amount of all its market-related and non-marketrelated transactions.


The risk-weighted amount of an off-balance sheet transaction that gives rise to credit exposure is generally calculated by means of a two-step process: (a)

first, the notional amount of the transaction is converted into an onbalance sheet equivalent (i.e. credit equivalent amount) by multiplying the amount by a specified credit conversion factor; and


second, the resulting credit equivalent amount is multiplied by the riskweight (refer AGN 112.1 Standardised Approach to Credit Risk: Riskweighted On-balance Sheet Credit Exposures) applicable to the counterparty or type of asset. Where the transaction is secured by eligible collateral, guarantee or credit derivative, the credit risk mitigation techniques detailed in AGN 112.3 Standardised Approach to Credit Risk: Simple Approach to Credit Risk Mitigation, AGN 112.4 Standardised Approach to Credit Risk: Comprehensive Approach to Credit Risk Mitigation and AGN 112.6 Standardised Approach to Credit Risk: Treatment of Credit Derivatives in the Banking Book may be used to reduce the regulatory capital charge of the exposure.

AGN 112.2 – 1

January 2008


An ADI must consult APRA in case of doubt about the risk-weighted amount of a particular off-balance sheet transaction.

Non-market-related off-balance sheet transactions

The credit equivalent amount in relation to a non-market-related off-balance sheet transaction referred to in Attachment A to this Guidance Note (these transactions are broadly categorised into direct credit substitutes, trade and performance related contingent items and other commitments) is determined by multiplying the contracted amount of that particular transaction by the relevant credit conversion factor specified in the Attachment.


Where the non-market-related off-balance sheet transaction is an undrawn or partially undrawn facility, the amount of undrawn commitment to be included in calculating an ADI’s off-balance sheet non-market-related credit exposures is the maximum unused portion of the commitment that could be drawn during the remaining period to maturity. Any drawn portion of a commitment forms part of an ADI’s on-balance sheet credit exposure.


With regard to irrevocable commitments to provide off-balance sheet facilities, the original maturity will be measured from the commencement of the commitment up until the time the associated facility expires. For example, an irrevocable commitment, with an original maturity of six months, to provide finance with a nine-month term, is deemed to have an original maturity of 15 months.


Irrevocable commitments to provide off-balance sheet facilities should be assigned the lower of the two applicable credit conversion factors. For example, an irrevocable commitment with an original maturity of six months to provide a guarantee in support of a counterparty for a period of nine months, attracts the 50 per cent credit conversion factor applicable to the commitment.


All commitments are to be included in the capital ratio calculation regardless of whether or not they contain “material adverse change”...
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