In addition to financial collateral, non-financial collateral may, under Foundation IRB, also be used to reduce solvency requirements, provided certain conditions are met. To the extent that such collateral is also eligible under the Standardised Approach, it is treated not within the CRM Framework but under the Standardised Approach.
On certain conditions, the use of real estate as collateral may serve to reduce solvency requirements. Both residential and commercial real estate are eligible. Important conditions are that the value of the real estate does not depend materially on the obligor’s credit quality and that the obligor’s credit quality does not depend materially on the revenue generated by the collateralised real estate.
Collateral in the form of receivables in respect of commercial transactions or transactions with a maturity of up to one year are eligible to reduce solvency requirements. This does not apply to receivables in respect of securitisation, sub-holdings or credit derivatives, nor to receivables from affiliated parties. The eligibility of receivables under the CRM Framework is subject to specific legal certainty, risk control and valuation conditions.
Other physical collateral
Other physical collateral disposable on a liquid market where well-established market prices are created is eligible under the CRM Framework, provided specific legal certainty and risk control requirements are satisfied.
Exposures arising from transactions whereby a financial undertaking leases property to a third party, are treated in the same manner as loans collateralised by property of the same type as the property leased. That is, they are subject to the same conditions as collateral in the form of real estate and other physical collateral. In addition, specific conditions apply with respect to legal certainty, risk control and the ratio between the residual economic value of the object leased and the prospective payments under the lease contract.
Calculation of LGD*
In the case of additional eligible collateral, LGD is adjusted to LGD*. Calculation of LGD* requires the determination of R, as the ratio of the collateral value to the total value of the claim secured by the collateral. LGD* depends on the value of R relative to the variables C* and C**. These variables, C* and C**, depend on the type of collateral as set out in the table below. LGD* is then calculated as follows:
- If R < C*, then LGD* = LGD.
- If R > C**, then LGD* is as presented in the table below.
- If C* ≤ R ≤ C** then the exposure is split into a secured and an unsecured part. For the unsecured part, LGD* = LGD; for the secured part, LGD* is as presented in the table.
|LGD* for senior claims or contingent claims||Required mininum collateralisation level of the exposure|
|Residential / commercial real estate||35%||65%||30%||140%|
The calculation of risk-weighted items should take any maturity mismatch into account.