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equivalently conservative approach and is applied consistently over time and laid down in its internal rules. 3.3.1.2.2. Specialised Lending 172. Specialised Lending (SL) exposures form a subclass of the corporate exposure class. These exposures are characterised by a strong linkage between pledged assets and the payments that service the loan. 173. Specialised Lending exposures within the corporate exposure class possess the following characteristics according to Article 86(6) of the CRD: (a) (b) (c) the exposure is to an entity which was created specifically to finance and/or operate physical assets; the contractual arrangements give the lender a substantial degree of control over the assets and the income that they generate; the primary source of repayment of the obligation is the income generated by the assets being financed, rather than the independent capacity of a broader commercial enterprise. 174. Not all of these requirements have necessarily to be met to the same full extent. Individual elements of the definition could be somewhat relaxed in order to capture different kinds of exposures. However, all three elements of the Specialised Lending definition should be fulfilled in one way or another, at least in substance. The most critical criterion for SL classification is the criterion that the primary source of repayment is the income generated by the assets. 175. The institution should pay special attention to the definition of Specialised Lending in borderline cases between Specialised Lending and the securitisation framework. Certain items might be classified both as Specialised Lending and as a securitised position. The institution should classify such positions consistently over time. 176. The typical counterparty in a Specialised Lending arrangement is a special purpose entity which takes its own legal form and whose payments are segregated from other entities or from the group. There should be a legal contract between the entity and the assets as regards the income that is generated. 177. The number of assets involved in an arrangement is not important in defining Specialised Lending. What is important is whether or not the pledged assets are the source of repayment of the loan. Similarly, it should not be considered important for the definition whether or not the entity has entered into some kind of longterm lease that contractually cannot be terminated. Although such arrangements represent a transfer of risk, this does not alter the fact that Page 42 of 123
payments are originating from the same object that is being financed and serves as security. Demonstration of fulfilment of requirements 178. According to Annex VII, Part 1, Paragraph 5, institutions can use PD estimates for their Specialised Lending exposures only if they meet the minimum requirements for the IRB approach. In order to reduce opportunities for regulatory arbitrage, it was considered necessary to apply these minimum requirements at the level of certain defined subclasses of Specialised Lending, rather than at the level of individual exposures. 179. One possible solution is to use the subclasses of Specialised Lending defined in the Basel II framework. The Basel Committee specified five subclasses. 10 It is suggested that Specialised Lending be divided into the four main Basel II subclasses. The introduction of the fifth subclass, HighVolatility Commercial Real Estate (HVCRE), shall remain a national option for supervisors. Exceptions from the Basel II subclasses can be allowed and will be handled flexibly. Application of SL risk weights 180. Article 87(5) of the CRD requires that the risk weighted exposure amount is calculated in either of two different ways. 181. “Notwithstanding Paragraph 3 [referring to the calculation of risk weights for ordinary corporate exposures], the calculation of risk weighted exposure amounts for credit risk for Specialised Lending exposures may be calculated in accordance with Annex VII, Part 1, Paragraph 5 [referring to the alternative method for Specialised Lending exposures]. Competent authorities shall publish guidance on how institutions should assign risk weights to Specialised Lending exposures under Annex VII, Part 1, Paragraph 5 and shall approve institutions assignment methodologies”. 182. The best way of providing such guidance would be to apply the approach of the Basel II framework. The Basel Committee has already developed ‘Supervisory Slotting Criteria’ for riskweighting Specialised Lending exposures. 11 These criteria should be used as the primary guidance for <strong>European</strong> institutions. 183. Risk weights for Specialised Lending exposures are only available to IRB institutions. Institutions that use the Standardised Approach to credit risk are not allowed to use the SL risk weights. Furthermore, the use of the Basel II Supervisory Slotting Criteria requires that the 10 The five Basel II subclasses are Project Finance, Object Finance, Commodities Finance, and IncomeProducing Real Estate (these are the main subclasses), and HighVolatility Commercial Real Estate. 11 Supervisory Slotting Criteria for Specialised Lending, International Convergence of Capital Measurement and Capital Standards, Annex 4. Page 43 of 123
Page 1 and 2: CEBS CP 10 11 July 2005 Guidelines
Page 3 and 4: ANNEXES ...........................
Page 5 and 6: to use these approaches. 6. The gui
Page 7 and 8: IRB approach can be given only if t
Page 9 and 10: approaches for regulatory purposes
Page 11 and 12: purposes, when the group has submit
Page 13 and 14: efficient running of the process, u
Page 15 and 16: and/or 105 of the CRD, subject to t
Page 17 and 18: 58. Institutions intending to move
Page 19 and 20: translated, supervisors will organi
Page 21 and 22: 76. The issues that supervisors are
Page 23 and 24: holding company, the competent auth
Page 25 and 26: · A new approval process shall not
Page 27 and 28: · Institutions may not be ready to
Page 29 and 30: 2. Asking institutions to notify su
Page 31 and 32: 116. ‘Immaterial’ should refer
Page 33 and 34: 128. The EU Council has proposed th
Page 35 and 36: should start with inputs, and those
Page 37 and 38: to be only broadly compliant with t
Page 39 and 40: institutions to be able to identify
Page 41: differentiated if their loss rates
Page 45 and 46: any of its subsidiaries in full, wi
Page 47 and 48: 197. As a general rule, the rating
Page 49 and 50: · Their discounting method results
Page 51 and 52: grades. In this case, all of the re
Page 53 and 54: of challenges, including choosing t
Page 55 and 56: 228. In principle, supervisors do n
Page 57 and 58: prices on defaulted exposures, and
Page 59 and 60: LGD estimation, they have to be tak
Page 61 and 62: The exposure value for the followin
Page 63 and 64: investigating the potential drivers
Page 65 and 66: advisable in some circumstances not
Page 67 and 68: terms) the proof of consistency wit
Page 69 and 70: 302. The information used in credit
Page 71 and 72: exposures to obligors or facilities
Page 73 and 74: Pooled data sets for good predictiv
Page 75 and 76: inputs to the IRB approach. Supervi
Page 77 and 78: used to quantify the risk parameter
Page 79 and 80: years for the economy as a whole, a
Page 81 and 82: · Institutions must be able to bri
Page 83 and 84: Benchmarking the outputs of interna
Page 85 and 86: model, and the internal use of the
Page 87 and 88: systems” (Annex VII, Part 4, Para
Page 89 and 90: · Examining reports from Internal
Page 91 and 92: organisational point of view (e.g.,
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conclusions are wellfounded. Inte
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401. The role played by the CRC fun
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subsidiary, or by different subsidi
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way of a formal notification). The
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· The rollout plan should have a
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Principles and examples 1. The purp
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etween systems, recording of data t
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· The definition of an appropriate
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incorporate forwardlooking elemen
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· Approving proactive risk managem
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frequency and format of the interna
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· Development of internal processe
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· Understanding the extent and nat
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‣ If not, inform the other superv
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the decision. ‣ Agree on the proc
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