Banks Act, 1990 (Act No. 94 of 1990)

Regulations

Regulations relating to Banks

Chapter II : Financial, Risk-based and other related Returns and Instructions, Directives and Interpretations relating to the completion thereof

23. Credit risk: monthly return

Directives and interpretations for completion of monthly return concerning credit risk (Form BA 200)

Subregulation (12) Credit risk mitigation: foundation IRB approach

Subregulation (12)(d) Guarantees
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(d)Guarantees

 

(i)Minimum requirements

 

As a minimum, a bank that adopted the foundation IRB approach for the recognition of risk mitigation in respect of guarantees—

 

(A)shall continuously comply with the relevant requirements specified in subregulation (7)(c)(iv) above;

 

(B)shall, except in the case of retail exposures and purchased retail receivables, use the LGD ratios specified in writing by the Registrar in respect of the bank's various exposures;

 

(C)shall not in the calculation of the bank’s risk-weighted exposure reflect the effect of double default, that is, the adjusted risk weight relating to a particular exposure shall not be less than a comparable direct exposure to the relevant guarantor,

[Regulation 23(12)(d)(i)(C) substituted by section 2(yyyyy) of Notice 6342, GG52907, dated 26 June 2025, shall come into operation on 1 July 2025]

provided that whenever a guarantee obtained in respect of an exposure results in a higher capital requirement for the reporting bank than before the recognition of such guarantee, the reporting bank may ignore the effect of the said guarantee.

 

(ii)        Eligible guarantors

 

In addition to the eligible guarantors specified in the standardised approach in subregulation (9)(c)(ii), a bank that adopted the foundation IRB approach for the recognition of risk mitigation relating to guarantees obtained in respect of its exposures to corporate institutions, sovereigns, banks or purchased receivables may also recognise the effect of a guarantee obtained from a guarantor rated internally by the bank, provided that—

[Words preceding Regulation 23(12)(d)(ii)(A) substituted by section 2(zzzzz) of Notice 6342, GG52907, dated 26 June 2025, shall come into operation on 1 July 2025]

 

(A)the said guarantee shall comply with the relevant minimum requirements specified in subregulation (7)(c) above;

 

(B)for purposes of calculating the minimum required amount of capital and reserve funds of a branch in terms of the provisions of the Banks Act, 1990, read with these Regulations, no guarantee received from the parent foreign institution or any other branch of the parent foreign institution in respect of an exposure incurred by the branch in the Republic shall be regarded as an eligible guarantee.

 

(C) when the bank applies the standardised approach to any direct exposure to any relevant guarantor, the bank shall also apply the relevant standardised approach risk weight to the relevant portion of the exposure covered by the guarantee received from the relevant guarantor.

[Regulation 23(12)(d)(ii)(C) inserted by section 2(aaaaaa) of Notice 6342, GG52907, dated 26 June 2025, shall come into operation on 1 July 2025]

 

(iii)        Risk weighting

 

When a bank that adopted the foundation IRB approach for the measurement of the bank's risk-weighted credit exposure obtains—

 

(A)protection from an eligible guarantor in respect of the bank's credit exposure to a corporate institution, sovereign or bank the bank—
(i)shall divide the relevant exposure into a protected portion and an unprotected portion;
(ii)shall in respect of the protected portion apply—

(aa)        the risk-weight function related to the relevant guarantor; and

(bb)the PD ratio related to the relevant guarantor,

provided that, based upon its seniority or any collateralisation of a guaranteed commitment, the bank may replace the LGD ratio of the underlying transaction with the relevant LGD ratio related to the said guaranteed position;

[Regulation 23(12)(d)(iii)(A)(ii) substituted by section 2(bbbbbb) of Notice 6342, GG52907, dated 26 June 2025, shall come into operation on 1 July 2025]

(iii)shall in respect of the unprotected portion, apply the risk weight relating to the underlying obligor;
(iv)shall in the case of—
(aa)proportional protection comply with the relevant requirements specified in subregulation (9)(c)(v) above;
(bb)a currency mismatch between the underlying obligation and the protection obtained comply with the relevant requirements specified in subregulation (9)(c)(vi) above.

 

(B)protection in the form of a guarantee in respect of a retail exposure or pool of retail exposures, the bank may reflect the risk reducing effect of the guarantee through an adjustment to the relevant PD ratio or LGD ratio, provided that the bank—
(i)shall comply with the relevant minimum requirements specified in subregulation (14)(c)(i) below;
(ii)shall apply the relevant adjustment to the PD ratio or LGD ratio in a consistent manner in respect of a given type of guarantee, and over time.

 

(C)protection in the form of a guarantee in respect of purchased receivables, the bank shall in the case of a guarantee—
(i)that covers both default risk and dilution risk, substitute the risk weight relating to default risk and dilution risk for the risk weight of the guarantor;
(ii)that covers only default risk or dilution risk, but not both, substitute the relevant risk weight relating to default risk or dilution risk for the risk weight of the guarantor, and add the relevant capital requirement for the other component;
(iii)that covers only a portion of the default risk and/or dilution risk, substitute the risk weight in respect of the protected exposure in accordance with the relevant directives specified above, and add the relevant risk weights relating to the unprotected exposure.

 

(D)[Regulation 23(12)(d)(iii)(D) deleted by section 2(cccccc) of Notice 6342, GG52907, dated 26 June 2025, shall come into operation on 1 July 2025]