Should the values reported in template C 08.03 be based on original obligor (immediate counterparty to whom the original exposure amount is assigned) or resultant obligor (counterparty guaranteeing the original exposure and whose PD or LGD is used for RWA calculation as result of PD/LGD substitution approach)?
Consistently, as template C 34.07 has a similar structure as template C 08.03, can the logic applied for reporting values on original/resultant obligor basis in template C 08.03 also be applied to template C 34.07?
The instructions for template C 08.03 in Annex 2 in Regulation (EU) 2021/451 are not explicit on whether the values to be reported in the different columns of this template should be based on resultant obligors or original obligors. The instructions for template C 08.03 use the phrase “in order to provide information on the main parameters used for the calculation of capital requirements for IRB approach” for the purpose of explaining the scope of this template.
Additionally, the instructions for “column 0050 – exposure weighted average PD” and “column 0070 – exposure weighted average LGD” of C 08.03 explicitly require the use of exposure value post-CCF and post CRM for the calculation of the weighted average PD and LGD. For the calculation of weighted average LGD, it is clearly mentioned in the instructions that the final LGD used in the calculation of RWA should be used in the weighted average LGD calculation. We understand from this that the LGD of the resultant obligor should be weighted by the resultant exposure amount for this calculation. Similarly, the instructions for weighted average PD calculation require the use of exposure value post-CCF and post-CRM. Although it is not explicitly mentioned that the PD of the resultant obligor should be used in the instructions for the weighted average PD calculation, our understanding is to weigh the PD of the resultant obligor by the resultant exposure amount for this calculation. The same logic also applies to “column 0080 – exposure weighted average maturity”. The instructions for this column require the use of exposure value after-CCF and CRM for the calculation of the average maturity to be reported in this column.
Based on the above, our understanding is that the values to be reported in this template should be on a resultant obligor basis. In addition to the above, given the purpose of template C08.03, (“in order to provide information on the main parameters used for the calculation of capital requirements for IRB approach”) our understanding is that we should present exposures in the exposure classes where they are really included for RWA/capital requirement calculations.
On the other side, for column 0060 (number of obligors), the instructions refer to the instructions for column 0300 of template C 08.01. We understand that this reference is rather to the method that is explained in the instructions for column 0300 of template C 08.01 to count the obligors than to the number of original obligors.
If the exposure values, number of obligors and the allocation of exposures to the exposure classes should not be based on resultant obligors, then additional clarification/guidance is sought how they should be reported in C08.03. Consistently, additional clarification on whether the same logic in terms of resultant/original obligor basis to be used in template C 08.03 should be used in template C 34.07 will also help in credit institutions applying the same interpretations.
In Annex II to Regulation (EU) 2021/451, par. 77 referring to template C 08.03, based on Pillar 3 of the Basel III framework, it is stated that “Institutions shall report the information included in this template in application of points (i) to (v) of Article 452(g) CRR, in order to provide information on the main parameters used for the calculation of capital requirements for IRB approach”. Point (iii) of Article 452(g) CRR states that it is the exposure after applying the relevant conversion factor and credit risk mitigation that shall be reported.
Therefore, reporting has to be based on the resultant obligor in template C 08.03. This is due to the fact that reporting based on resultant obligor is made after the substitution effect has been taken into consideration, as it should be done in template C 08.03 according to the previously cited article.
To illustrate this with an example, let us think about an institution that has only one exposure of 1000 EUR to a corporate client, to which it has assigned a 20% PD. Half of this exposure (500 EUR) is guaranteed by a central government, to which the institution has assigned a 0% PD. In this case, the following should be reported:
1) Under the “Central governments and central banks” sheet, the exposure value post conversion factors and post CRM (column 0040) would be reported under the PD range of 0.00 to 0.15 (row 0010). The institution should report here 500 EUR due to the substitution effects since Central governments and central banks is the resultant obligor. The average PD (column 0050) would be calculated as follows: (500*0)/500=0%.
2) Under one of the “Corporates” sheets, the institution should report the remaining 500 EUR under column 0040. This exposure value would also be reported under PD range 20 to 30 (row 0150) and the average PD would be calculated as follows: (500*0.2)/500=20%.
It should be acknowledged that the purpose of reporting parameters is to enhance the transparency of banks’ RWA calculations. Consequently, the PD/LGD substitution approach should be used for RWA calculation. Credit institutions should report exposure class according to substitution effect, therefore, values reported in template C 08.03 should be based on resultant obligor, since these values are to be reported after substitution effects have been considered.
Consistently, the same logic will be applied to template C 34.07 as it has a similar structure as template C 08.03 and values reported under template C 34.07 should also be based on resultant obligors.