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BIPRU 4.5 The IRB approach: Specialised lending exposures

Application

BIPRU 4.5.1R

BIPRU 4.5 applies with respect to the exposures referred to in BIPRU 4.5.3 R.

BIPRU 4.5.2R

Except for BIPRU 4.5.1 R and BIPRU 4.5.3 R, BIPRU 4.5 only applies to the extent that a firm applies the method in BIPRU 4.5 (slotting).

Definition of specialised lending

BIPRU 4.5.3R

Within the corporate exposure IRB exposure class, a firm must separately identify as specialised lending exposures, exposures which possess the following characteristics:

  1. (1)

    the exposure is to an entity which was created specifically to finance and/or operate physical assets;

  2. (2)

    the contractual arrangements give the lender a substantial degree of control over the assets and the income that they generate; and

  3. (3)

    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.

[Note: BCD Article 86(6)]

Treatment of specialised lending

BIPRU 4.5.4R

If a firm is using or is applying to use the advanced IRB approach for some or all of its exposures in the sovereign, institution and corporate IRB exposure class, then specialised lending exposures treated under BIPRU 4.5.8 R (Slotting) must be treated as being dealt with under the advanced IRB approach for the purposes of the calculations in BIPRU 4.2.30 R and BIPRU 4.2.31 R. If a firm is not using or applying to use the advanced IRB approach for any of its exposures in the sovereign, institution and corporate IRB exposure class, in the cases in which it is necessary to distinguish between the advanced IRB approach and the foundation IRB approach, then specialised lending exposures treated under BIPRU 4.5.8 R must be treated as being dealt with under the foundation IRB approach for the purposes of the calculations in BIPRU 4.2.30 R and BIPRU 4.2.31 R.

Structure of rating system

BIPRU 4.5.5R

A firm using the methods set out in BIPRU 4.5.8 R (Slotting) for assigning risk weights for specialised lending exposures is exempt from the requirement to have an obligor rating scale which reflects exclusively quantification of the risk of obligor default for these exposures. Notwithstanding BIPRU 4.4.7 R (Seven grades for exposures to sovereigns, institutions and corporates), a firm must have for these exposures four grades for non-defaulted obligors and one grade for defaulted obligors.

[Note: BCD Annex VII Part 4 point 12 and point 21]

Assignment of exposures

BIPRU 4.5.6R
  1. (1)

    A firm using the methods set out in BIPRU 4.5.8 R (Slotting) for assigning risk weights for specialised lending exposures must assign each of these exposures to a grade in accordance with BIPRU 4 Annex 1 R, taking into account the following factors:

    1. (a)

      financial strength;

    2. (b)

      political and legal environment;

    3. (c)

      transaction and/or asset characteristics;

    4. (d)

      strength of the sponsor and developer including any public private partnership income stream; and

    5. (e)

      security package.

  2. (2)

    A firm must slot exposures into the five columns in the tables in BIPRU 4.5.9 R and BIPRU 4.5.13 R as follows:

    1. (a)

      a firm must slot an exposure categorised as strong under Annex X into column 1;

    2. (b)

      a firm must slot an exposure categorised as good under the Annex X into column 2;

    3. (c)

      a firm must slot an exposure categorised as satisfactory under Annex X into column 3;

    4. (d)

      a firm must slot an exposure categorised as weak under Annex X into column 4;

    5. (e)

      in accordance with BIPRU 4.5.5 R a firm must slot an exposure in default into column 5.

[Note: BCD Annex VII Part 1 point 6 (part)]

Calculation of risk-weighted exposure amounts

BIPRU 4.5.7R

Notwithstanding BIPRU 4.3.5 R (Use of relevant parameters for calculating risk weighted exposure amounts), the calculation of risk weighted exposure amounts for credit risk for specialised lending exposures may be calculated in accordance with BIPRU 4.5.8 R.

[Note: BCD Article 87(5)]

BIPRU 4.5.8R

For specialised lending exposures in respect of which a firm cannot demonstrate that its PD estimates meet the minimum IRB standards it must assign risk weights to these exposures according to the table in BIPRU 4.5.9 R.

[Note: BCD Annex VII Part 1 point 6 (part)]

BIPRU 4.5.9R

Table: Risk weights for specialised lending

This table belongs to BIPRU 4.5.8 R1

Remaining maturity

Category 1 (Strong)

Category 2 (Good)

Category 3 (Satisfactory)

Category 4 (Weak)

Category 5

Less than 2.5 years

50%

70%

115%

250%

0%

Equal or more than 2.5 years

70%

90%

115%

250%

0%

The coverage of each of the categories is set out in BIPRU 4.5.6 R

[Note: BCD Annex VII Part 1 point 6 (part)]

BIPRU 4.5.10R

A firm may generally assign preferential risk weights of 50% to exposures in category 1, and a 70% risk weight to exposures in category 2 if:

  1. (1)

    its IRB permission allows this; and

  2. (2)

    the firm's underwriting characteristics and other risk characteristics are substantially strong for the relevant category.

[Note: BCD Annex VII Part 1 point 6 (part)]

BIPRU 4.5.11G
  1. (1)

    If a firm applies for an IRB permission or for a variation of an IRB permission that permits the treatment in BIPRU 4.5.10 R it should demonstrate that its standards exceed those of the slotting criteria provided for in BIPRU 4.5 and result in ratings that are stronger than the benchmarks referred to in (3).

  2. (2)

    If a firm has an IRB permission that permits the treatment in BIPRU 4.5.10 R it should continue to be able to demonstrate the matters in (1) to the appropriate regulator if asked.

  3. (3)

    Although a firm should map its internal ratings to the supervisory categories set out in the table in BIPRU 4.5.9 R using the slotting criteria provided in BIPRU 4.5.6 R, each supervisory category broadly corresponds to a range of external credit assessments of BBB- or better, BB+ or BB, BB- or B+ and B to C- (or their equivalents). The fifth category covers default.

Calculation of expected loss amounts

BIPRU 4.5.12R

The EL values for specialised lending exposures where a firm uses the methods set out in BIPRU 4.5.8 R for assigning risk weights must be assigned according to the table in BIPRU 4.5.13 R.

[Note: BCD Annex VII Part 1 point 31 (part)]

BIPRU 4.5.13R

Table: Expected loss values for specialised lending

This table belongs to BIPRU 4.5.12 R

Remaining maturity

Category 1 (Strong)

Category 2 (Good)

Category 3 (Satisfactory)

Category 4 (Weak)

Category 5

Less than 2.5 years

0%

0.4%

2.8%

8%

50%

Equal or more than 2.5 years

0.4%

0.8%

2.8%

8%

50%

The coverage of each of the categories is set out in BIPRU 4.5.6 R

[Note: BCD Annex VII Part 1 point 31 (part)]

BIPRU 4.5.14R

Where a firm's IRB permission authorises it generally to assign preferential risk weights as outlined in BIPRU 4.5.10 R of 50% to exposures in category 1, and 70% to exposures in category 2, the EL value for exposures in category 1 must be 0%, and for exposures in category 2 must be 0.4%.

[Note: BCD Annex VII Part 1 point 31 (part)]