March 22, 2013
http://www.bis.org/press/p130322.htm
The Basel Committee on Banking Supervision has today published a proposal that would strengthen capital requirements when banks engage in certain high-cost credit protection transactions.
The Committee has previously expressed concerns about potential regulatory capital arbitrage
related to certain credit protection transactions. At that time it
noted that it would continue to monitor developments with respect to
such transactions and would consider imposing a globally harmonised
minimum capital Pillar 1 requirement if necessary. After further
consideration, the Committee decided to move forward with a more
comprehensive Pillar 1 proposal.
While the Committee recognises that the purchase of credit
protection can be an effective risk management tool, the proposed
changes are intended to ensure that the costs, and not just the
benefits, of purchased credit protection are appropriately recognised in
regulatory capital. It does this by requiring that banks, under certain
circumstances, calculate the present value of premia paid for credit
protection, which should be considered as an exposure amount of the
protection-purchasing bank and be assigned a 1,250% risk weight.
---
Recognising the cost of credit protection purchased
The proposal set out in this consultative document would
strengthen capital requirements when banks engage in certain high-cost
credit protection transactions. The Committee has previously expressed concerns about potential regulatory capital arbitrage
related to certain credit protection transactions. At that time it
noted that it would continue to monitor developments with respect to
such transactions and would consider imposing a globally harmonised
minimum capital Pillar 1 requirement if necessary. After further
consideration, the Committee decided to move forward with a more
comprehensive Pillar 1 proposal.
While the Committee recognises that the purchase of credit
protection can be an effective risk management tool, the proposed
changes are intended to ensure that the costs, and not just the
benefits, of purchased credit protection are appropriately recognised in
regulatory capital. It does this by requiring that banks, under certain
circumstances, calculate the present value of premia paid for credit
protection, which should be considered as an exposure amount of the
protection-purchasing bank and be assigned a 1,250% risk weight.
---
Full text of the consultative doc: http://www.bis.org/publ/bcbs245.pdf
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