Where banks have legally enforceable netting arrangements for loans and deposits they may calculate capital

requirem
following conditions:
Wherehasa bank
a well-founded legal basis for concluding that the netting or offsetting agreement is enforceable in each rel
is insolvent or bankrupt
is able at any time to determine those assets and liabilities with the same counterparty that are subject to the
monitors and controls its roll-off risks; and
monitors and controls the relevant exposures on a net basis
It may use the net exposure of loans and deposits as the basis for its capital adequacy calculation. Assets (loans) are
The haircuts will be zero except when a currency mismatch exists. The guidelines state that - Where the credit protec
which the exposure is denominated — i.e. there is a currency mismatch — the amount of the exposure deemed to b
haircut. If a bank uses the supervisory haircuts it will be 8% else it will be as determined by its own estimates.

When there is a maturity mismatch with recognised credit risk mitigants (collateral, on-balance sheet netting, guaran
be applied:
Pa = P x (t – 0.25) / (T – 0.25)
Pa = value of the credit protection adjusted for maturity mismatch
P = credit protection (e.g. collateral amount, guarantee amount) adjusted for any haircuts
T = min (5, residual maturity of the exposure) expressed in years
t = min (T, residual maturity of the credit protection arrangement) expressed in years

Legal certainty
All documentation used in collateralised transactions and for documenting onbalance sheet netting, guarantees and cre
In order for banks
enforceable to obtainjurisdictions.
in all relevant capital reliefBanks
for any use have
must of CRM techniques,
conducted the following
sufficient minimum
legal review standards
to verify this andfor legala docum
have well fo
such further review as necessary to ensure continuing enforceability
y calculate capital requirements on the basis of net credit exposures subject to the

ent is enforceable in each relevant jurisdiction regardless of whether the counterparty

party that are subject to the netting agreement

lculation. Assets (loans) are treated as exposure and liabilities (deposits) as collateral.
hat - Where the credit protection is denominated in a currency different from that in
f the exposure deemed to be protected will be reduced by the application of a
by its own estimates.

alance sheet netting, guarantees and credit derivatives) the following adjustment will

aircuts

ars

netting, guarantees and credit derivatives must be binding on all parties and legally
m standards
verify this andfor legala documentation
have must
well founded legal be met:
basis to reach this conclusion, and undertake
On-balance sheet netting of loans and deposits will be recognised subject to the same conditions as under the standardised ap

Where currency or maturity mismatched on-balance sheet netting exists, the treatment follows the standardised approach
ons as under the standardised approach

s the standardised approach