2013 - ICC India

34ICC BANKING COMMISSION | 2013 GLOBAL RISKS TRADE FINANCE | APPENDIX AIn this year’s report we have also sought to estimate Basel-aligned riskmeasures, being prudent where data is scarce. As a result, across thevarious measures laid out in this report, there is variation between thecalculations familiar to the business and those required under Basel. Afurther implication is that the results of this 2013 report and the 2011 reportare not directly comparable. The table below summarises the methodologyfor each measure.FIGURE 28Methodology to estimate Basel-aligned risk measuresMEASURE BUSINESS VIEW BASEL VIEW IMPLICATIONSDefault rateMeasured as % oftransactions whichdefault12-month default rateCustomer definition ofdefaultNeed to annualiseobserved default rate(e.g. 12-month is ~4times 3-month defaultrate)MaturityIndividual transactionsare contractually shortAssumes maturingtransactions arereplacedMaturity adjustmentin RWA reflects ratingmigration onlyCapital requirementis for whole year,assuming portfolioreplenishesSome countries allowfor lower migration ofshort-term productsExposure At Default(EAD)Non-compliantdocumentation isrejectedTransactions expirewithout bankobligationAdvanced banks maybe able to reflect thisLow conversion ratebut further discussionof treatment isrequired, but mayimpact capitalestimatesLoss Given Default(LGD)Loss measured onlyon those trade financetransactions whichdefaultReflects cashrecoveriesMeasured oncustomers whodefault (irrespective ofwhether trade financeproduct performs)Cash-flows should bediscountedTransaction loss ratevery different fromLGDDiscounting hassignificant impact onmedium-/long-termrecoveriesWorkout and othercosts should bededucted fromrecoveriesLGD higher thanloss as % of writtenexposureMeasured as % ofexposures whichdefaultExpected Loss (EL)% of business writtenover whole year/per transaction12-month estimateof losses assumingportfolio remainssameBasel EL higher thanbusiness perspective(as is annual not atransaction EL)