CONSULTATION PAPER
Chart of Accounts
Manual
ATTACHMENTS
(April, 2013)
TABLE OF CONTENTS
Page
List of acronyms ii
List of definitions iv
1. Introduction 1
2. attachments
2.1 A Perpetual Non-Cumulative Preference Shares
2.2 B Credit Rating Grades and Eligibility criteria ECAI
2.3 C National Discretion
2.4 D Highly rated Multinational Development Banks
2.5 E-1 Residential Mortgage Loans (Qualification criteria)
2.6 E-2 Qualifying mortgage insurer
2.7 F Categories of Off-balance Sheet Instruments and Credit Conversion Factors
2.8 G Derivatives Contracts (calculation of the CEA)
2.9 H-1 Credit Risk Mitigation Techniques
2.10 H-2 Eligible Instruments, Compensation and Guarantors for Credit Risk Mitigation
2.11 H-3 Detail explanation of columns 1 and 2 of SS1 C
2.12 H-4 Examples Credit Risk Mitigation Techniques (Simple Approach)
2.13 H-5 Examples Credit Mitigation techniques (Comprehensive Approach)
2.14 I-1 Operational Risk
2.15 I-2 Mapping of Business Lines
2.16 I-3 Guidelines for Business Line Mapping for the Standardized and Alternative Standardized Approach
2.17 J Market Risk Measurement Framework
2.18 K International Standard Industrial Classifications codes
LIST OF ACRONYMS
ADB Asian Development Bank
AfDB African Development Bank
AML Anti-Money Laundering
ASA Alternative Standardized Approach
ATM Automated Teller Machine
Basel II The International Convergence of Capital Measurement and
Capital Standards
BES Bonaire, St. Eustatius and Saba
BIA Basic Indicator Approach
BIS Bank for International Settlements
CBCS (the Bank) The Centrale Bank van Curaçao en Sint Maarten
CCF Credit Conversion Factor
CDB Caribbean Development Bank
CEA Credit Equivalent Amount
CEDB Council of Europe Development Bank
CoA Chart of Accounts
CRM Credit Risk Mitigation
DBRS Dominion Bond Rating Services
EBRD European Bank for Reconstruction and Development
ECA Export Credit Agency
ECAI External Credit Assessment Institution
EIB European Investment Bank
EIF European Investment Fund
Fitch Fitch Rating Services
IADB Inter-American Development Bank
IBRD International Bank for Reconstruction and Development
IDB Islamic Development Bank
ISIC code The International Standard of Industrial Classification of All Economic Activities
LTV Loan-to-value
MDBs Multilateral Development Banks
Moody’s Moody’s Investor Services
NIF Note Issuance Facilities
NIB Nordic Investment Bank
ODCs Other Depository Corporations
OECD Organization for Economic Co-operation and Development
OFCs Other Financial Corporations
ONCs Other Nonfinancial Corporations
PSE Public Sector Entity
RUF Revolving Underwriting Facility
RWA Risk Weighted Assets
SA Standardized Approach
SR Supervisory Regulation
SSs Supporting Schedule/ Supporting Schedules
S&P Standards & Poor’s Corporation
UCITS Undertakings for Collective Investments in Transferable Securities
DEFINITIONS
“Counterparty” means a person, whether natural, legal entity or proprietorship.
“Group of connected counterparties” means with respect to the supporting schedules 11A, 11B, 20 and 23:
a) two or more persons, whether natural, legal entities or proprietorships, who constitute a single risk because one of them directly or indirectly exercises control over the other(s); or
b) two or more persons, whether natural, legal entities or proprietorships , between which entities no such above-mentioned relationship of control exists, but who are regarded as constituting a single risk because they are interconnected to such an extent that, if one of them encounters financial problems, the other(s) are likely to encounter repayment difficulties.
Applicable specifics on the interconnectedness are set out further in the instructions of the relevant supporting schedules 11A, 11B, 20 and 23.
1 INTRODUCTION
This document forms an integral part of the Chart of Accounts (CoA) Manual (CoA manual) together with the CoA manual (Main document) and the CoA Reports and Examples document.
In order to complete the sub-reports and supporting schedule (SS), the relevant attachment(s), the instructions in the CoA manual main document and the relevant Supervisory Regulations (SRs)[1] should be read.
The attachments contain:
a) additional information on and explanation of certain SSs;
b) examples on completing certain SSs;
c) a listing of the Bank’s choices made under National Discretion; other relevant information with respect to the application of Basel I; and
d) examples of different CoA reports.
2 ATTACHMENTS
In the CoA manual (Main document), reference is made to attachments. These attachments relate to the CoA reports and are further set out below.
2.1 Attachment A Perpetual NON-CUMULATIVE preferEnce
shares
(Criteria for inclusion as share capital)
1. The inclusion of perpetual non-cumulative preference shares in Tier 1 capital components (as share capital) requires the Bank’s prior written approval. Therefore, all related documentation and a request for such inclusion should be submitted in hard copy to the Bank. In addition, the issued perpetual non-cumulative preference shares (hereinafter “preference shares”) should be paid up, and in form and substance meet all the following criteria to qualify for their inclusion:
a) Subordinated;
b) permanent; and,
c) free of mandatory fixed charges.
The Bank reserves the right to modify these criteria and/ or impose additional criteria.
2. Subordination
Preference shares must be subordinated to depositors and unsecured creditors of the reporting institution. If preference shares are issued by a subsidiary or intermediate holding company for the funding of the reporting institution and are to qualify for capital at the consolidated entity (non-controlling interest), the terms and conditions of the issue, as well as the intercompany transfer, must ensure that investors are placed in the same position as if the instruments were issued by the reporting institution.
3. Permanence
To ensure that preference shares are permanent in nature, the following features are not permitted:
a) Retraction by the holder;
b) obligation for the issuer to redeem shares;
c) redemption within the first five years of issuance; and
d) any step-up[2] representing a pre-set increase at a future date in the dividend (or
distribution) rate.
Any conversion other than to common shares of the issuer or redemption is subject to the Bank’s prior written approval and:
a) redemption can only be for cash or the equivalent; and,
b) conversion privileges cannot be structured to effectively provide either a redemption
of or return on the original investment.
Example: An issue would not be considered non-cumulative if it has a conversion feature that compensates for undeclared dividends or provides a return of capital.
4. Free of mandatory fixed charges
Preference shares should not include the following features:
a) cumulative dividends;
b) dividends influenced by the credit standing of the reporting institution;
c) compensation to preference shareholders other than a dividend; and
d) sinking or purchase funds.
In addition, the non-declaration of a dividend shall not trigger restrictions on the issuer other than the need to seek approval of the holders of the preference shares before paying dividends on other shares or before retiring other shares. Non-declaration of a dividend would not preclude the issuer from making the preference shares voting or, with the prior approval of the Bank, making payment in common shares.
To conform to accepted practice, in the event of non-declaration of a dividend, reporting institutions may seek the approval of the holders of preference shares before:
a) paying dividends on any shares ranking junior to the preference shares (other than
stock dividends in any shares ranking junior to the preference shares);
b) redeeming, purchasing, or otherwise retiring any share ranking junior to the preference shares (except out of the net cash proceeds of a substantially concurrent issue of shares ranking junior to the preference shares); and
c) redeeming, purchasing or otherwise retiring less than all such preference shares except pursuant to any purchase obligation, sinking fund, retraction privilege or mandatory redemption provisions attached to any series of preference shares, redeeming, purchasing or otherwise retiring any shares ranking on a parity with such preference shares.
5. Examples of acceptable features
Examples of preference share features that may be acceptable in Tier 1 capital instruments:
a) a simple call feature that allows the issuer to call the instrument, provided the issue cannot be redeemed in the first five years and, after that, only with the Bank’s prior written approval;
b) a dividend that floats at some fixed relationship to an index or the highest of several indices, as long as the index or indices are linked to general market rates and not to the financial condition of the borrower;
c) a dividend rate that is fixed for a period of years and then shifts to a rate that floats over an index, plus an additional amount tied to the increase in common share dividends if the index is not based on the reporting institution's financial condition and the increase is not automatic, not a step-up, nor of an exploding rate nature; and
d) conversion of preference shares to common shares where the minimum conversion value or the way it is to be calculated is established at the date of issue. Examples of conversion prices are:
i. a specific dollar price;
ii. a ratio of common to preference share prices; and
iii. a value related to the common share price at time of conversion.
6. Examples of unacceptable features
Examples of preference share features that will not be acceptable in Tier 1 capital components are:
a) an exploding rate preference share, where the dividend rate is fixed or floating for a period and then sharply increases to an uneconomically high level; an exploding rate preference share, where the dividend rate is fixed or floating for a period and then sharply increases to an uneconomically high level;
b) an auction rate preference share or other dividend reset mechanism in which the dividend is reset periodically based, in whole or part, on the issuer's credit rating or financial condition; and a dividend-reset mechanism that does not specify a cap, consistent with the reporting institution's credit quality at the original date of issue.
2.2 Attachment B CREDIT RATINGS AND ELIGIBILITY
CRITERIA ECAI
1. Recognized ECAIs
For CoA reporting purposes the Bank will permit reporting institutions to recognize credit ratings from the following external credit assessment institutions (ECAIs) for capital adequacy purposes:
a) Standards & Poor’s Corporation (S&P);
b) Moody’s Investor Services (Moody’s);
c) Fitch Rating Services (Fitch); and
d) Dominion Bond Rating Services (DBRS).
The Bank reserves the right to update the above listing of ECAIs which the Bank recognizes (recognized ECAIs) subject to the ECAIs satisfying the eligibility criteria set out in paragraph 3 of this Attachment.
The Bank may revoke its recognition of an ECAI if the Bank becomes aware that the ECAI no longer meets the criteria set out in paragraph 3.
2. Risk Grades
Recognized long-term ratings and equivalent risk grades
Risk Grade / S&P / Moody's / Fitch / DBRS1 / AAA / Aaa / AAA / AAA
AA+ / Aa1 / AA+ / AA (high)
AA / Aa2 / AA / AA
AA- / Aa3 / AA- / AA (low)
2 / A+ / A1 / A+ / A (high)
A / A2 / A / A
A- / A3 / A- / A (low)
3 / BBB+ / Baa1 / BBB+ / BBB (high)
BBB / Baa2 / BBB / BBB
BBB- / Baa3 / BBB- / BBB (low)
4 / BB+ / Ba1 / BB+ / BB (high)
BB / Ba2 / BB / BB
BB- / Ba3 / BB- / BB (low)
B+ / B1 / B+ / B (high)
B / B2 / B / B
B- / B3 / B- / B (low)
5 / CCC+ / Caa1 / CCC+ / CCC (high)
CCC- / Caa2 / CCC- / CCC (low)
CC / Caa3 / CC / CC
C / Ca / C / C
D / C / D / D
In case a claim has no ECAI rating, that claim falls in risk grade 6 “unrated”, for determining the risk weighted assets (RWA) and subsequent minimum capital requirement for credit risk in supporting schedule 1C “Risk Weighted Assets Standardized Credit Risk” (SS 1C).
Recognized short-term ratings and equivalent risk grades
Short-term ratings
Risk Grade / S&P / Moody's / Fitch / DBRS1 / A-1+, A-1 / P-1 / F1+, F1 / R-1(high) to R-1 (low)
2 / A-2 / P-2 / F2 / R-2(high) to R-2 (low)
3 / A-3 / P-3 / F3 / R-3
4 / All short term ratings below A-3 / NP / Below F3 / Below R-3
3. Eligibility criteria
(Basel II paragraph 91)
The above-mentioned ECAI’s have been selected based on the following criteria:
a) Objectivity: The methodology for assigning credit assessments must be rigorous, systematic, and subject to some form of validation based on historical experience. Moreover, assessments must be subject to ongoing review and responsive to changes in financial condition. Before being recognized by the Bank, an assessment methodology for each market segment, including rigorous back testing, must have been established for at least one year and preferably three years.
b) Independence: An ECAI should be independent and should not be subject to political or economic pressures that may influence the rating. The assessment process should be as free as possible from any constraints that could arise in situations where the composition of the board of directors or the shareholder structure of the assessment institution may be seen as creating a conflict of interest.
c) International access/Transparency: the individual assessment should be available to both domestic and foreign institutions with legitimate interests and at equivalent terms. In addition, the general methodology used by the ECAI should be publicly available.
d) Disclosure: An ECAI should disclose the following information: its assessment methodologies, including the definition of default, the time horizon, and the meaning of each rating; the actual default rates experienced in each assessment category; and the transitions of the assessments, e.g. the likelihood of AA ratings becoming A over time.
e) Resources: An ECAI should have sufficient resources to carry out high quality credit assessments. These resources should allow for substantial ongoing contact with senior and operational levels within the entities assessed in order to add value to the credit assessments. Such assessments should be based on methodologies combining qualitative and quantitative approaches.
f) Credibility: To some extent, credibility is derived from the criteria above. In addition, the reliance on ECAIs external credit assessments by independent parties (investors, insurers, trading partners) is evidence of the credibility of the assessments of an ECAI. The credibility of an ECAI is also underpinned by the existence of internal procedures to prevent the misuse of confidential information. In order to be eligible for recognition, an ECAI does not have to assess firms in more than one country.