• BANK Part 4.3 BANK Part 4.3 Credit risk assessment

    • BANK 4.3.1 BANK 4.3.1 Introduction

      This Part sets out a standardised approach for credit risk assessment and requires a banking business firm to establish and implement policies to identify, measure, evaluate, manage and control or mitigate credit risk and to calculate its credit risk capital requirement.

      Derived from QFCRA RM/2014-2 (as from 1st January 2015).

      • BANK 4.3.1 Guidance

        1 Credit risk assessment under this Part is different from the evaluation (often called credit assessment) made by a firm as part of its credit approval process.
        2 Credit assessment is part of the firm's internal commercial decision-making for approving or refusing credit; it consists of the evaluation of a prospective counterparty's repayment ability. In contrast, credit risk assessment is done by the firm (using ratings and risk-weights set out in these rules) as part of calculating its credit risk capital requirement.
        Amended by QFCRA RM/2015-3 (as from 1st January 2016).

    • BANK 4.3.2 BANK 4.3.2 Policies — credit risk assessment

      A banking business firm must establish and implement appropriate policies to enable it to assess credit risk when the credit is granted or the risk is incurred and afterwards. In particular, the policies must enable the firm:

      (a) to measure credit risk (including the credit risk of off-balance-sheet items, such as derivatives, in credit equivalent terms);
      (b) to effectively use its internal credit risk assessment;
      (c) to rate and risk-weight a counterparty;
      (d) to monitor the condition of individual credits;
      (e) to administer its credit portfolio, including keeping the credit files current, getting up-to-date financial information on counterparties, and the electronic storage of important documents;
      (f) to ensure that the value of collateral and the value of the other CRM techniques used by the firm are assessed regularly;
      (g) to assess whether its CRM techniques are effective; and
      (h) to calculate its credit risk capital requirement.
      Amended by QFCRA RM/2015-3 (as from 1st January 2016).

      • BANK 4.3.2 Guidance

        A banking business firm involved in loan syndications or consortia should not rely on other parties' assessments of the credit risk involved but should carry out a full assessment based on its own credit risk management policy.

        Derived from QFCRA RM/2014-2 (as from 1st January 2015).

    • BANK 4.3.3 Categories of credits

      (1) Unless a banking business firm has established something more detailed, the firm must classify credits into 1 of the 5 categories in table 4.3.3. Nothing in the table prevents a banking business firm from classifying a credit under a higher risk category than the table requires.
      (2) Unless there is good reason not to do so, the same category must be given to all credit exposures to the same counterparty.

      Table 4.3.3 Categories of credit

      column 1 item column 2 category column 3 description
      1 performing In this category, there is no uncertainty about timely repayment of the outstanding amounts. This category comprises credits that are currently in regular payment status with prompt payments.
      2 special mention This category comprises:
      (a) credits with deteriorating or potentially deteriorating credit quality that may adversely affect the counterparty's ability to make scheduled payments on time;
      (b) credits that are 30 to 90 days in arrears;
      (c) credits showing weakness arising from the customer's financial position;
      (d) credits affected by market circumstances or any other industry-related concerns; and
      (e) credits that have been restructured and are not classified into a higher risk category.
      3 substandard This category comprises:
      (a) credits that show definite deterioration in credit quality and impaired repayment ability of the counterparty; and
      (b) credits that are 91 to 180 days in arrears.
      4 doubtful This category comprises:
      (a) credits that show significant credit quality deterioration, worse than those in the substandard category, to the extent that the prospect of full recovery of all the outstanding amounts is questionable and the probability of a credit loss is high (though the exact amount of loss cannot be determined yet); and
      (b) credits that are 181 to 270 days in arrears.
      5 loss This category comprises:
      (a) credits that are assessed as uncollectable;
      (b) credits where the probability of recovering the amount due is very low; and
      (c) credits that are more than 270 days in arrears.

      Derived from QFCRA RM/2014-2 (as from 1st January 2015).

    • BANK 4.3.4 Policies — problem assets

      A banking business firm’s credit risk management policy must facilitate the firm’s collection of past-due obligations, and its management of problem assets through:

      (a) monitoring of their credit quality;
      (b) early identification and ongoing oversight; and
      (c) review of their classification, provisioning and write-offs.
      Derived from QFCRA RM/2014-2 (as from 1st January 2015).

    • BANK 4.3.5 Impaired credits

      (1) Impaired credit means a credit that is categorised as substandard, doubtful or loss. For the purpose of applying risk-weights, interest is suspended on an impaired credit.
      (2) A large exposure that is an impaired credit must be managed individually in terms of its valuation, categorisation and provisioning.

      Note For large exposures — see rule 5.3.1. For the provisioning of impaired credits — see rule 4.7.3.
      (3) The review of impaired credits and other problem assets may be done individually, or by class, but must be done at least once a month.
      Derived from QFCRA RM/2014-2 (as from 1st January 2015).

    • BANK 4.3.6 Restructuring, refinancing and re-provisioning of credits

      (1) A credit is a restructured credit if it has been re-aged, extended, deferred, renewed, rewritten or placed in a workout program. Unless there is good reason to do so, a restructured credit can never be classified as performing.
      (2) A restructured credit may be reclassified to a more favourable category, but only by 1 rating up from its category before the restructure. The credit may be reclassified 1 further category up after 180 days of satisfactory performance under the terms of the new contract.
      (3) The refinancing of a special mention or impaired credit must not be used to reclassify the credit to a more favourable category.

      Note A banking business firm must not restructure, refinance or reclassify assets with a view to circumventing the requirements on provisioning — see rule 4.7.5.
      (4) The Regulatory Authority may require a special mention credit to be managed individually, and may set a higher level of provision for the credit, if the authority is of the view that market circumstances or any other industry-related concerns require such action.

      Note For the provisioning of special mention credits — see rule 4.7.3.
      Amended by QFCRA RM/2015-1 (as from 1st July 2015).

    • BANK 4.3.7 Using external credit rating agencies

      (1) A banking business firm must use only a solicited credit risk rating determined by an ECRA in determining the risk-weights for the firm's exposures.
      (2) A rating is a solicited rating if the rating was initiated and paid for by the issuer of the instrument, the rated counterparty or any other entity in the same corporate group as the issuer or rated counterparty.
      (3) The firm must use the ratings determined by an ECRA consistently and in accordance with these rules and its credit risk management policy.

      Example

      A firm that chooses to use ratings determined by an ECRA for exposures belonging to a class must consistently use those ratings for all the exposures belonging to that class. The firm must not selectively pick between ECRAs or ratings in determining risk-weights.
      (4) Unsolicited ratings must not be used except with the written approval of the Regulatory Authority or in accordance with a direction of the authority. The authority may give a written direction setting out conditions that must be satisfied before a firm may use an unsolicited rating.
      (5) The firm must ensure that the relevant rating takes into account the total amount of the exposure (that is, the principal and any interest due).
      Amended by QFCRA RM/2015-3 (as from 1st January 2016).

    • BANK 4.3.7A Multiple assessments

      (1) If there is only 1 assessment by an ECRA for a particular claim or asset, that assessment must be used to determine the risk-weight of the claim or asset.
      (2) If there are 2 assessments by ECRAs and the assessments map into different risk weights, the higher risk-weight must be applied.
      (3) If there are 3 or more assessments with different risk weights, the assessments corresponding to the 2 lowest risk-weights should be referred to, and the higher of those 2 risk-weights must be applied.
      Inserted by QFCRA RM/2015-3 (as from 1st January 2016).

    • BANK 4.3.8 Choosing between issuer and issue ratings

      (1) If a banking business firm invests in an instrument with an issue-specific rating, the risk-weight to be applied to the instrument must be based on that rating.
      (2) If the firm invests in an unrated instrument and the issuer of the instrument is assigned a rating that results in a lower risk-weight than the risk-weight normally applied to an unrated position, the firm may apply the lower risk-weight to the instrument but only if the claim for the instrument has the same priority as, or is senior to, the claims to which the issuer rating relates. If the instrument is junior to the claims to which the issuer rating relates, the firm must apply the risk-weight normally applied to an unrated position.
      (3) If the firm invests in an unrated instrument and the issuer of the instrument is assigned a rating that results in a higher risk-weight than the risk-weight normally applied to an unrated position, the firm must apply the higher risk-weight to the instrument if the claim for that instrument has the same priority as, or is junior to, the claims to which the issuer rating relates.
      Derived from QFCRA RM/2014-2 (as from 1st January 2015).

    • BANK 4.3.9 Ratings within financial group

      A banking business firm must not use a credit risk rating for 1 entity in a financial group to determine the risk-weight for an unrated entity in the same group. If the rated entity has guaranteed the unrated entity's exposure to the firm, the guarantee may be recognised for risk-weighting purposes if it satisfies the criteria in Division 4.5.C.

      Derived from QFCRA RM/2014-2 (as from 1st January 2015).

    • BANK 4.3.10 Using foreign currency and domestic currency ratings

      If an issuer rating is assigned to a counterparty and a banking business firm applies a risk-weight to an unrated position based on the rating of an equivalent exposure to the same counterparty:

      (a) the firm must use that counterparty’s domestic-currency rating for any exposure denominated in the currency of the counterparty’s place of residence or incorporation; and
      (b) the firm must use that counterparty’s foreign-currency rating for any exposure denominated in a foreign currency.
      Derived from QFCRA RM/2014-2 (as from 1st January 2015).

    • BANK 4.3.11 Using short-term ratings

      (1) A short-term credit risk rating must be used only for short-term claims relating to banks and corporations (such as those arising from the issuance of commercial paper). The rating is taken to be issue-specific and must be used only to assign risk-weights for claims arising from a rated facility.
      (2) If a short-term rated exposure is assigned a risk-weight of 50%, an unrated short-term exposure to the same counterparty cannot be assigned a risk-weight lower than 100%.
      (3) If a short-term facility of an issuer is assigned a risk-weight of 150% based on the facility’s credit risk rating, all unrated claims of the issuer (whether long-term or short-term) must be assigned a risk-weight of 150%.
      Derived from QFCRA RM/2014-2 (as from 1st January 2015).