Module 1 Standardised Approach to Credit Risk Guidance (Guidance to completing the Standardised Approach to Credit Risk module of BSL/2)

Summary

This is technical guidance from the Guernsey Financial Services Commission explaining how incorporated banks must complete Module 1 (Standardised Approach to Credit Risk) of the BSL/2 regulatory return. It sets out how balance sheet assets and off-balance sheet exposures, including OTC derivatives, must be classified into portfolios, risk-weighted, and reported after applying credit risk mitigation techniques.

• Scope: Applies to every incorporated bank that uses the standardised approach to calculate its credit risk capital requirement.
• Portfolio classification: Balance sheet assets must be allocated to one of eleven mutually exclusive portfolios (sovereigns, PSEs, corporates, banks, securitisations, cash, retail, residential mortgages, past due, 250%/1,250% weighted and deducted items, and other exposures).
• Risk weighting: Risk weights for rated portfolios are derived from ECAI ratings (Moody's, S&P, Fitch) mapped via tables in Section 9 and Appendix A; specific rules apply for sovereigns, PSEs, corporates, banks, CIS exposures, retail exposures and residential mortgages (including LTV-based weighting).
• Credit risk mitigation (CRM): Banks must choose exclusively between the simple and comprehensive approaches for collateral, and follow prescribed methods (substitution of risk weights or reduction of exposure) for netting, guarantees and credit derivatives, subject to operational requirements in Appendix F.
• Off-balance sheet exposures and derivatives: Separate sections govern determination of credit conversion factors, categorisation and add-on factors for OTC derivative contracts, and associated CRM and risk-weighted amount calculations.
• Reporting principles: Amounts must be reported net of specific provisions (except OTC derivatives, where provisions are deducted from the credit equivalent amount), double counting of exposures must be avoided, and accruals should generally be classified and weighted the same as the underlying claim.
• Retail and mortgage classification criteria: Appendix H sets out criteria (orientation, product, granularity, low value thresholds) for classifying exposures as regulatory retail, and criteria (security type, occupancy, LTV bands) for residential mortgage risk weighting.

The guidance is technical and procedural in nature, aimed at ensuring consistent completion of the BSL/2 return rather than imposing new prudential standards beyond correct and consistent reporting.

Key obligations

• Incorporated banks using the standardised approach must complete Module 1 of the BSL/2 return covering balance sheet assets and off-balance sheet exposures, including OTC derivatives.
• Each asset must be reported in only one mutually exclusive portfolio (e.g. past due assets must be reported only in Portfolio J).
• Amounts must be reported net of specific provisions for balance sheet assets and off-balance sheet exposures other than OTC derivatives; for OTC derivatives, specific provisions must be deducted from the credit equivalent amount.
• Banks must choose exclusively between the simple and comprehensive approaches for recognising collateral and use that method consistently.
• Netting must be treated under the comprehensive approach; guarantees and credit derivatives must be treated under the simple approach.
• CRM techniques (collateral, netting, guarantees, credit derivatives) must satisfy the operational requirements and conditions in Appendix F to be recognised.
• Double counting of exposures from the same contract or transaction must be avoided (e.g. only undrawn portions of loan commitments reported as off-balance sheet exposures).
• Accruals must be classified and weighted the same as the underlying claim; unclassifiable accruals require prior consent of the Commission to be categorised within Portfolio L.
• Banks must set out their own criteria for granularity of the Regulatory Retail Portfolio, subject to supervisory review, and may need Commission-required changes to use the 75% risk weight.
• Residential mortgage exposures must be risk-weighted based on loan-to-value bands (35% up to 80% LTV, 75% on the portion above 80% LTV, or 50% on the whole exposure if LTV data is not held), and LTVs should be assessed on a regular basis.

Applies to

incorporated banks