SARB published supervisory guidelines for the advanced measurement approach to operational risk as well as discussion paper on the proposed valuation requirements for resolution planning purposes. The Prudential Authority of the South African Reserve Bank (SARB) also published Directive 6/2021 requiring the internal ratings-based (IRB) banks to apply specified probability of default (PD) and loss given default (LGD) floors to calculate the minimum required capital and reserve funds in respect of the project finance class of assets.
Under Directive 6/2021, IRB banks have been defined as banks that have obtained the prior written approval from the Prudential Authority to adopt the IRB approach for specialized lending exposures to project finance portfolios. The Directive highlights that unsecured transactions (that is, transactions with no eligible credit risk mitigation held against it) apply a PD floor of 0.246% and a LGD floor of 20%, respectively. To ensure compliance with the Directive, IRB banks are required to furnish the Prudential Authority with the deal-level information related to the project finance portfolio bi-annually on March 31 (consisting of December data for the previous year) and September 30 (consisting of June data for the current year). The Directive contains a template that will be used to collect such information is enclosed with this directive.
The discussion paper on the proposed valuation requirements for resolution planning purposes proposes requirements for compliance, by designated institutions, including elements that will have to be complied with by the independent valuator as well as the resolution authority. Designated institutions will be responsible for providing the valuator and/or the resolution authority with the required information and for having the necessary valuation model capabilities to enable the designated institution, valuator, and resolution authority to fulfil its responsibilities. SARB is inviting comments on the discussion paper until October 31, 2021. SARB will also publish a series of discussion papers, focusing on the key aspects that will affect and facilitate the implementation of a resolution framework in South Africa. These discussion papers will be adapted into a regulatory instrument on conclusion of the consultative process and after promulgation of the Financial Sector Laws Amendment Bill (FSLAB). The FSLAB requires certain valuations to be done by an independent valuator to inform the SARB of the assets that would be realized, or the amount that, in the valuator's opinion, would be the amount payable on the liability, in a winding up of the designated institution. Valuation will be a key part of the resolution process, as it will help with developing the designated institution’s resolution plan, identifying the resolution trigger and implementing the appropriate resolution option.
The supervisory guidelines for the advanced measurement approach (AMA) highlight to banks the specific international best practices related to operational risk and clarify certain definitions and principles. To calculate their exposure to operational risk and the relevant amount of capital and reserve funds required for operational risk, banks may only apply the advanced measurement approach in respect of the legal entities as described to the Prudential Authority during the bank's application process and for which the bank subsequently obtained the required approval from the Prudential Authority. Once banks have adopted one of the more sophisticated approaches for the measurement of operational risk exposures, they shall not revert to a simpler approach without the prior written approval of the Prudential Authority. To remove any potential misunderstandings related to the partial use and hybrid advanced measurement approach for operational risk, the Prudential Authority has provided following clarifications:
- Partial use of advanced measurement approach indicates that a bank uses the approach for some part of its operations, and either the basic indicator approach (BIA) or the standardized approach (TSA) for the remainder of its operations
- Hybrid advanced measurement approach entails the attribution of group operational risk capital to legal entities by means of an allocation mechanism. Under a hybrid advanced measurement approach, one advanced measurement approach model is used at, for example, a controlling company consolidated level with advanced measurement approach capital being allocated to legal entities, thus meaning that the legal entities do not have standalone advanced measurement approach models.
- Directive 6/2021 (PDF)
- Project Finance Data Template (XLSX)
- Discussion Paper on Valuation Requirements (PDF)
- Statement on Discussion Paper (PDF)
- Guidelines on AMA (PDF)
Comment Due Date: October 31, 2021
Keywords: Middle East and Africa, South Africa, Banking, Credit Risk, Probability of Default, Loss Given Default, IRB Approach, Reporting, Resolution Framework, Resolution Planning, Operational Risk, Advanced Measurement Approach, Basel, Regulatory Capital, SARB
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