Appendix I: Details of Exemptions, Deductions, and Discounts Allowed While Measuring Exposures
A. Regulation allows banks to exempt the following items of credit risk exposures for asset classification and consequently provisioning:15
other short-term, highly liquid instruments with original maturity up to three months or less, for which a low level of risk from change in value exists;
derivative instruments used as hedging instruments;
investment in immovable properties, properties, and plant and equipment;
financial assets included in the trading book;
guarantees received; and
B. Regulation allows banks to exempt or deduct fully, among others, the following items of credit risk exposures for the calculation of exposures to a single party or a group of connected parties:16
in the case of spot foreign exchange transactions, exposures incurred in the ordinary course of settlement during the two working days following payment;
in the case of spot transactions for the purchase or sale of securities, exposures incurred in the ordinary course of settlement during five working days following payment or delivery of the securities, whichever is the earlier;
exposures arising from delayed receipts of funds and other exposures arising from customer’s activity and maturing at the latest on the following business day, in case of providing payment services, including money transfer services, as well as clearing and settlement services in local or foreign currency, financial instruments clearing, correspondent banking, and custody services;
intra-day exposures to institutions providing payment services, including money transfer services, clearing and settlement services in local and foreign currency, and correspondent banking services;
exposures constituting claims on central governments, which, unsecured, would be assigned a zero risk weight according to the “Decision on capital adequacy of banks”;
exposures secured by unconditional guarantees of the central governments or public sector entities, where unsecured claims on the entity providing the guarantee would be assigned a zero risk weight according to the “Decision on capital adequacy of banks”;
exposures to regional governments or local self-governments, or guaranteed by them, where unsecured claims on those entities would be assigned a zero risk weight according to the “Decision on capital adequacy of banks”;
exposures secured by certificates of deposit, issued by the lending bank, its parent undertaking or its subsidiary and lodged with either of them;
exposures arising from undrawn credit facilities that are classified as low-risk off-balance sheet items under Article 13 of the Decision on capital adequacy of banks, provided that an agreement has been concluded, under which the facility may be drawn only if it has been ascertained that it will not cause exceeding of large exposure limit under Article 58, paragraph 1 of the Banking Law; and
covered bonds falling within the terms of Article 46 of the Decision on capital adequacy of banks.
C. Regulation allows banks to deduct 80 percent of, among others, the following items of credit risk exposures for the calculation of exposures to a single party or a group of connected parties:17
exposures guaranteed by regional governments or local self-governments, if unsecured claims to those entities would be assigned a 20 percent risk weight according to the Decision on capital adequacy of banks; and
exposures of the bank, including also equity participation or other types of investments, to its superior bank, subsidiaries of superior bank and its subsidiaries if they are subject to consolidated supervision in accordance with the applicable regulations in the European Union or equivalent supervisory standards on consolidated basis applied in a third country.
D. Regulation allows banks to deduct 50 percent of, among others, the following items of credit risk exposures for the calculation of exposures to a single party or a group of connected parties:18
exposures secured by mortgage or fiduciary on residential property which fall within 35 percent risk weight requirements under the Decision on capital adequacy of banks; and
exposures secured by mortgage or fiduciary on commercial property, which fall within 50 percent risk weight requirements under the Decision on capital adequacy of banks;
Basel Committee on Banking Supervision: Core principles for effective banking supervision, September 2012.
The Technical Note is prepared by Damodaran Krishnamurti (Lead Financial Sector Specialist, World Bank) and Michael Deasy (Consultant, IMF).
The selected principles include those dealing with risk management, credit risk, problem loans, provisioning, large exposures, related-party transactions, liquidity risk, capital adequacy, supervisory approach, consolidated supervision, disclosure and transparency in banks, and licensing criteria.
“A Macrofinancial Approach to Supervisory Standards Assessments,” IMF, August 18, 2014 (https://www.imf.org/external/np/pp/eng/2014/081814a.pdf)
The largest foreign investor-banks are OTP (Hungary), Erste Bank (Austria), NLB (Slovenia), and Société Générale (France). The remaining, smaller foreign banks do not belong to large international groups.
Legal entities meeting any two out of the three criteria shall be classified as the large legal entities: (i) having the average number of employees more than 250; (ii) having aggregate annual revenue of more than EUR 50,000,000; and (iii) having aggregate assets of more than EUR 43,000,000.
Obtained on the basis of interactions with a cross section of banks, auditing firms and legal firms and professionals in these fields.
Doing Business, 2015.
Prime collateral is defined in Article 29 of the Decision on minimum standards for credit risk management.
Adequate collateral is defined in Article 30 of the Decision on minimum standards for credit risk management.
Excerpts from the Basel Committee Paper – “Measuring and controlling large credit exposures” (1991): …. Since a large exposure measure is concerned with concentrations of risk, the measure of exposure needs to reflect the maximum possible loss from the failure of a single counterparty. The Committee has therefore concluded that to use the capital weights for measuring credit concentrations could significantly underestimate potential losses. It would, for example, mean ignoring credit commitments with an original maturity of under one year, whereas it is highly likely that a client in difficulties would draw down its credit lines. It would also mean relying on the value attributed to collateral or guarantees which, in extreme cases, often turn out to be illusory. It is therefore suggested that the measure of exposure should encompass the amount of credit risk arising from both actual claims (including participations, equities and bonds) and potential claims of all kinds (e.g., future claims which the bank is committed to provide), as well as contingent liabilities. Thus, the measure should include at par value credit substitutes such as guarantees, acceptances, letters of credit and bills; securitized assets and other transactions with recourse; and all other forms of contingent liabilities, notably credit commitments.”
The definitions largely and explicitly cover the types of related parties mentioned in footnote 73 of the BCPs.
The definitions largely and explicitly cover the types of related-party transactions mentioned in footnote 74 of the BCPs.
The supervisor requires that transactions with related parties and the write-off of related-party exposures exceeding specified amounts or otherwise posing special risks are subject to prior approval by the bank’s Board.
Art. 14 of the Decision on the minimum standards for management of credit risk.
Art. 2 and 6, of the Decision on measurement of exposures.
Art. 6 of the Decision on measurement of exposures.
Art. 6 of the Decision on measurement of exposures.