On Balance Sheet Netting

[Amit Patel]

Hi All,

I have a very simple query/confusion. ..

Is OBSN mitigation method only applicable to Standardized approach?? OR applicable to IRB as well?

Regards,
Amit

 

[Alex_1]

Hi Amit,

I am not (yet ) a "Basel expert", but I would asume that the "on balance sheet netting mitigation" is relevant only for the standardized approach, as per the Basel reading "International Convergence of Capital Measurement and Capital Standards" http://www.bis.org/publ/bcbs128.pdf

Relevant quotes from there
Page 87 in the pdf:
"Exposure measurement for on-balance sheet items

309. On-balance sheet netting of loans and deposits will be recognised subject to the same conditions as under the standardised approach (see paragraph 188). Where currency or maturity mismatched on-balance sheet netting exists, the treatment follows the standardised approach, as set out in paragraphs 200 and 202 to 205."

Page 92 in the pdf:

"[...]
(iii) Exposure at default (EAD)
[...]

335. On-balance sheet netting of loans and deposits of a bank to or from a retail customer will be permitted subject to the same conditions outlined in paragraph 188 of the standardised approach. For retail off-balance sheet items, banks must use their own estimates of CCFs provided the minimum requirements in paragraphs 474 to 477 and 479 are satisfied."

But then again I am not 100% sure, it is just my assumption...

 

[Amit Patel]

Hi Alex,

Thanks for your reply.

I have just gone through those pages and what I infer is OBSN is used under IRB approach to reflect the mitigation effect in EAD and then PD/LGD for respective obligor would be used for RW calculation.

Same is the case with STDA as well except in this case RW is a standard number based on obligors external rating.

So effectively in both approaches OBSN looks to be valid mitigation method to derive EAD.

Thanks
Amit