Hong Kong Regulations

BANKING (CAPITAL) RULES - SECT 14

Transitional arrangements

(1) Subject to subsection (2), an authorized institution which uses the
IRB approach to calculate its credit risk for non-securitization  exposures
during the period from 1 January 2007 to 31 December 2011, both days
inclusive, may comply with this section instead of Part 6 to the extent that
this section is inconsistent with the provisions of that Part.

(2) Subject to subsection (3), for the purposes of subsection (1), an
authorized institution may, in the case of an IRB class specified in column 1
of Table 1, replace the minimum data requirement specified in column 2 of that
Table opposite that class with the transitional data requirement specified in
column 3 of that Table opposite that minimum data requirement.

TABLE 1

TRANSITIONAL DATA REQUIREMENTS

IRB class
Minimum data
requirement
Transitional data
requirement

Observation period for the PD under—

   (a)  the foundation IRB approach of corporate, sovereign and bank
        exposures; and

   (b)  the PD/LGD approach of equity exposures Not less than 5 years as set
        out in section 159(1)(d )(ii) for corporate, sovereign and bank
        exposures and as set out in section 194(1) for equity exposures 2
        years during the transitional  period; 3 years for 2010; 4 years for
        2011 Observation period for the PD, LGD and EAD of retail exposures
        Not less than 5 years as set out in section 177(1)(e)(ii) for PD, as
        set out in section  178 (1)(g)(ii) for LGD and as set out in
        section 180(3)(b)(ii) for EAD 2 years during the transitional period;
        3 years for 2010; 4 years for 2011

(3) An authorized institution which applies subsection (2) shall demonstrate
to the satisfaction of the Monetary Authority that—

   (a)  the institution is prudent in assigning exposures to obligor grades,
        facility grades, or pools of exposures, as the case requires;

   (b)  the institution is prudent in its default and loss estimates; and

   (c)  the rating system used by the institution fully enables it to comply
        with paragraphs (a) and (b).

(4) Subject to subsection (5), an authorized institution may, with the
prior consent of the Monetary Authority, during the transitional period use
the IRB approach to calculate its credit risk for non-securitization
exposures in phases (referred to in this section as "phased rollout").

(5) The Monetary Authority shall not consent to a phased rollout by an
authorized institution unless the institution demonstrates to the satisfaction
of the Monetary Authority that the institution has, and will implement, a plan
for the phased rollout—

   (a)  which is realistically achievable having regard to the nature of the
        institution's business; and

   (b)  which has been developed in good faith for the purposes of introducing
        a method of calculating the institution's regulatory capital and not
        for the purposes of regulatory capital arbitrage.