Prudential reporting of credit risk under the standardised approach to credit risk

Summary

This JFSC guidance note explains how Jersey incorporated registered deposit takers (JIBs) that use the standardised approach to credit risk must complete the credit risk sections of their prudential return. It sets out how balance sheet assets, off-balance sheet exposures and OTC derivatives should be classified into portfolios, risk-weighted, and adjusted for credit risk mitigation (CRM) techniques.

• Portfolio classification: Balance sheet assets must be allocated to one of the mutually exclusive Portfolios A to L (sovereigns, PSEs, corporates, banks, securitisations, cash, retail, residential mortgages, past due exposures, other exposures), based on defined criteria.
• Risk weighting: Risk weights for ECAI ratings-based portfolios are derived from Moody's, Standard & Poor's and Fitch ratings mapped via Tables 1 to 6, with specified weights for unrated assets.
• Credit risk mitigation: Institutions must choose exclusively between the simple and comprehensive approaches for collateral, and apply the comprehensive approach for netting and the simple approach for guarantees and credit derivatives, subject to Appendix F recognition criteria.
• Reporting mechanics: Amounts must be reported net of specific provisions (except OTC derivatives, where provisions are deducted from the credit equivalent amount), avoiding double counting between balance sheet and off-balance sheet items.
• Repo-style transactions: Repos, reverse repos, securities lending and securities borrowing must be reported using the economic substance approach as detailed in the guidance.
• Retail and mortgage criteria: Retail exposures must meet orientation, product, granularity and low-value criteria (including a £750,000 aggregate exposure cap and £2m turnover threshold for small businesses); residential mortgages are risk-weighted by loan-to-value band (35% up to 80% LTV, 75% above, 50% if LTV data is unavailable).

The note is technical implementation guidance for prudential reporting rather than a standalone rule; it operationalises existing capital adequacy requirements for JIBs using the standardised approach and does not itself introduce new licensing or notification obligations beyond correct completion of the prudential return.

Key obligations

• Every Jersey incorporated registered deposit taker (JIB) using the standardised approach to credit risk must complete the relevant credit risk sheets in the prudential return covering balance sheet assets, off-balance sheet exposures and OTC derivatives.
• Amounts must be reported net of specific provisions for all balance sheet and off-balance sheet exposures other than OTC derivatives, where provisions are deducted from the credit equivalent amount instead.
• Institutions must select and consistently apply either the simple or comprehensive approach for recognising collateral, and use the comprehensive approach for netting and the simple approach for guarantees and credit derivatives.
• CRM techniques (collateral, netting, guarantees, credit derivatives) may only be recognised for capital purposes if they satisfy the operational requirements and conditions in Appendix F.
• Each asset must be reported in only one Portfolio (A to L), avoiding double counting of exposures arising from the same contract or transaction.
• Repo-style transactions (repos, reverse repos, securities lending and borrowing) must be reported using the economic substance approach as specified.
• Accruals that cannot be classified with the relevant claim must obtain the JFSC's prior consent before being categorised within Portfolio L.
• Reporting institutions relying on the Regulatory Retail Portfolio 75% risk weight must set out and satisfy the Commission's granularity criteria and observe the £750,000 maximum aggregated exposure threshold per counterparty.
• Residential mortgage exposures must be risk-weighted according to loan-to-value bands (35% up to 80% LTV, 75% on the portion above 80% LTV, or 50% where LTV data is unavailable), with LTVs assessed on a regular basis.

Applies to

Jersey incorporated registered deposit takers (JIBs) using the standardised approach to credit risk