Indonesia Certificate in Banking Risk and Regulation Training Instructor Course - Level 3

Indonesia Certificate in
Banking Risk and Regulation

Training Instructor Course
Level 3
Part B: Manajemen dan regulasi
risiko kredit dan risiko operasional
Global Association of Risk Professionals, Inc.

5. Collateral and securitization
Market risk and treasury risk Part A

management and regulation
1. An introduction to the use of 2. The Internal Models

3. Capital management and
statistics in the measurement Approach to measuring and
treasury risk
of financial risk managing market risk
Credit risk and operational risk Part B

management and regulation
4. Internal Ratings-Based 6. Advanced Measurement

5. Collateral and 7. Managing
approaches to measuring Approach to measuring
securitization operational risk
credit risk operational risk
Supervision and regulation

Part C
8. The supervisory 9. Supervision of operational 10. Basel II disclosure 11. The BI

review process risk and other risks requirements supervisory regime

5.1 Collateral
5.1.1 Agunan yang diperbolahkan dalam Basel I
Collateral (agunan) merupakan aktiva yang dijaminkan oleh

seorang debitur untuk menjamin suatu kredit, dan agunan
tersebut dapat disita jika terjadi gagal bayar (default).
Basel II memperbolehkan macam agunan (kadang disebut
security) yang lebih luas dibanding Basel I. Basel II
memperbolehkan jaminan baik aset finansial maupun fisik,
selain juga piutang dagang (receivables) sebagai agunan
Agunan itu sendiri nilainya dapat berfluktuasi. Sebagai contoh,
garansi finansial dipengaruhi oleh kualitas kredit dari penjamin
(guarantor), dan agunan non-finansial seperti real estate nilainya
mungkin berfluktuasi. Untuk menyesuaikan nilai agunan finansial
Basel II mengusulkan menggunakan haircuts.

5.1 Collateral
5.1.1 Agunan yang diperbolehkan dalam Basel I
Suatu pengurangan nilai agunan dari nilai pasarnya

disebut haircut.
Alasan atas haircut adalah haircut diperlukan untuk
mempertimbangkan perubahan potensial nilai dari
agunan dari waktu ke waktu. Jadi haitcut tergantung pada
bebarapa faktor seperti jenin agunan, term of the
transaction dan likuiditasnya, selain juga seberapa
agunan dinilai kembali. (lihak seksi 5.1.6).
There are different regimes for collateral use and
valuation, and these are related to the approach the bank
takes in calculating its credit risk.

5.1 Collateral
5.1.1 Eligible collateral under Basel I
Candidates will recall that the Basel II Accord allows three

approaches for calculating credit risk capital. These are:
the Standardised Approach

the Foundation IRB Approach
the Advanced IRB Approach.
There are also three techniques for reducing credit risk

capital due to the presence of collateral. They are:
the Simple Approach

the Comprehensive Approach
the Advanced Comprehensive Approach.

5.1 Collateral
The Simple Approach is similar to the 1988 Basel I Accord

approach to collateral. For the collateralized portion of the
exposure, the Approach substitutes the risk weighting of the
collateral for the risk weight of the counterparty. Haircuts are not
used under the Simple Approach.
The Comprehensive Approach allows a further offset of collateral

against exposures by reducing the exposure amount by the value
ascribed to the collateral, after the application of haircuts.

5.1 Collateral
The Advanced Comprehensive Approach also reduces the

exposure amount by the value ascribed to the collateral and allows
banks to:
justify a very wide range of collateral usage, and

produce their own estimates of haircuts.
A bank can use any of the three approaches for collateral if it uses
either the Standardised or the IRB Foundation Approach to
calculate its credit risk capital.
If the bank adopts the Advanced IRB Approach then it must use
one of the two Comprehensive approaches for the valuation and
use of collateral.

5.1 Collateral
5.1.2 General issues
Legal certainty
All documentation in support of credit risk management must be

legally enforceable in all relevant jurisdictions. All documentation in
support of the collateral offered must also comply with this rule.
Quality of counterparty and collateral values
The credit quality of the counterparty and the value of the collateral
must not be closely related to one another, e.g. an oil refinery
borrower should not use the refinery plant and equipment as
collateral.

5.1 Collateral
Double counting
If the capital allocation has been calculated using a credit grade of

the borrower that reflects the collateral pledged against the loan,
then the collateral cannot also be used to mitigate the credit risk of
the borrowing.

5.1 Collateral
On-balance sheet netting
For banks that have legally enforceable netting arrangements for

loans and deposits, capital requirements are based on the net
exposure.
For example, in some jurisdictions a loan made to a counterparty,

and a deposit taken from the same counterparty, can be offset in
the event of the liquidation (bankruptcy) of the borrower, subject to
the counterparty signing a netting agreement.
On default the counterpartys loan and deposit can be netted by the

bank, which then claims only for the net amount owed to it by the
bankruptcy of the borrower.

5.1 Collateral
A guarantee is a legal contract by which one party (party

A) assumes responsibility for specific debts or obligations
of another party (party B) in the event they are not
discharged by that party (B).
Under Basel II when guarantees are taken as collateral they are

treated in the same way as in Basel I. The risk weight of the
guarantor is substituted for the risk weight of the original borrower.

5.1 Collateral
In Basel II, however, the range of guarantors has been extended to

include:
all sovereigns with a lower risk weight than that of the borrower
banks with a lower risk weight than that of the borrower, and
non-banks with a lower risk weight than that of the borrower.
Non-banks must have a minimum credit grade of A-, or the

equivalent probability of default (if the Foundation IRB Approach is
being used see Section 4.2).

5.1 Collateral
There are a series of operational requirements for guarantees:
a guarantee must represent a direct claim on a guarantor

the guarantee must be referenced to a specific exposure
payment under the guarantee must not require legal action
the guarantee must be explicitly documented
if the guarantee covers principal only, other amounts must be
treated as unsecured.
There are also additional requirements for credit derivative

instruments that can effectively be used as guarantees.

5.1 Collateral
5.1.3 Maturity mismatches of collateral
Under Basel I the maturity of collateral was required to match or

exceed the maturity of the underlying exposure to which it related.
However, under Basel II all collateral maturity mismatches are
allowed, i.e. the maturity of the collateral may be less than that of
the underlying exposure provided:
the collateral and the underlying exposure must cover an original

period of at least one year, and
the collateral and the underlying exposure must both have a
residual maturity of at least three months.
Once these conditions are met, the collateral treatment of the

exposure can continue for the period that the collateral is available.
It is important to note that the maturity mismatch of collateral is only
allowed under the Comprehensive approaches.

5.1 Collateral
5.1.4 Use of the approaches for collateral recognition
Banks may use the Simple or either of the

Comprehensive approaches to collateral in their banking
book (but not both).
The trading book must be subject to a Comprehensive
approach.
Local supervisors may require banks adopting the Advanced IRB

Approach and a VaR approach for market risk to use the Advanced
Comprehensive Approach (as the Board of Governors of the
Federal Reserve System in the United States does).

5.1 Collateral
5.1.5 The Simple Approach
Under the Simple Approach, the risk weight of the

instrument which is collateralizing or partly collateralizing
the exposure is substituted for the risk weight of the
counterparty.
Eligible financial collateral includes:
cash, plus Certificates of Deposit (CDs) and deposits in the name

of leading banks
gold
publicly rated debt securities issued by sovereign banks and other

entities, subject to minimum rating grades
5.1 Collateral
Eligible financial collateral includes:
unrated bank debt securities, (e.g. bonds) issued on a recognized

stock exchange
equities and convertible bonds included in a main market index,

(e.g. the Jakarta Composite, the FTSE 100 or Dow Jones Industrial
Average)
mutual fund shares and Undertakings for Collective Investment of

Transferable Securities (UCITS), subject to daily quotes being
available and certain constraints.

5.1 Collateral
For collateral to be recognized in the Simple Approach it must be

pledged for the life of the exposure and must be revalued every six
months.
The collateralized portion of the exposure has a minimum risk

weight of 20% with the following exceptions:
certain wholesale market collateralized transactions
transactions collateralized by cash and certain government

securities.

5.1 Collateral
5.1.6 The Comprehensive Approach
Financial collateral
Under the Comprehensive Approach financial collateral includes, in

addition to that in the Simple Approach, the following:
equities and convertible bonds which are not included in a main

index, but which are listed on a recognized stock exchange
mutual funds and UCITS which include equities or convertible

bonds as above.

5.1 Collateral
Standard collateral haircuts
Standard collateral haircuts reduce the value of the collateral that

can then be offset against the underlying exposure, and thus
potentially reduce the loss given default to zero (see Section 4.2).
Table 5.1 below shows the standard haircuts for financial collateral
with the following public credit ratings.

5.1 Collateral
Table 5.1 Residual maturity Sovereigns % Other issuers %

AAA to AA- < or = 1 yr 0.5 1
> 1yr, < or = 5 yrs 2 4
> 5 yrs 4 8
A+ to BBB- and < or = 1 yr 1 2
unrated bank
> 1yr, < or = 5 yrs 3 6
Securities
> 5 yrs 6 12
BB+ to BB- All 15 As min grade reqd
Main index equities (inc. convertible bonds) and gold 15
Other equities (inc. convertible bonds) listed on a 25
recognized exchange
UCITS / Mutual funds Highest haircut applicable to any
security in which the find can invest
Cash in the same currency 0

5.1 Collateral
The (additional) standard supervisory haircut for currency risk,

where exposure and collateral are denominated in different
currencies, is 8%.
Data and required calculations
All of the above standard haircuts are based on the following

conditions being met:
a ten-business day holding period, and

daily mark-to-market (as it may take up to ten days to liquidate the
position).
If these conditions are not met, then larger haircuts may be used.

5.1 Collateral
5.1.6 The Comprehensive Approach - example
Bank U lends EUR 1 million to a corporate customer who wishes to

use US dollars as collateral. Bank Us customer will need to pledge
approximately USD 1.4 million of cash as collateral, assuming a
EUR/USD exchange rate of 1.28.
Loan = EUR 1,000,000

Standard haircut = 1,000,000 x 8% = EUR 80,000
USD cash collateral = (1,000,000 + 80,000 ) x 1.28 =

USD 1,382,400

5.1 Collateral
Non-financial collateral
Non-financial collateral includes:
real estate
receivables (commercial debts owed to a company)
other collateral at the local supervisors discretion.
Under the Comprehensive Approach, a bank taking non-financial

collateral is required to adjust both the amount of the exposure and
the value of the collateral.

5.1 Collateral
Non-financial collateral does not operate in the same way as

financial collateral. For financial collateral a haircut to value can,
after adjustment for the haircut, fully substitute for the underlying
exposure. This reduces the LGD to zero for whatever part of the
underlying exposure is collateralized.
For non-financial collateral LGD can only be reduced to:
Collateral Loss given default

Real estate 35% of the original amount
Receivables 35% of the original amount
Other 40% of the original amount

5.1 Collateral
In addition, an over-collateralization factor is required:
Collateral Over-collateralization factor %

Real estate 140
Receivables 125
Other 140
In this way the value of the collateral received in support of the

counterparty is adjusted to take into account future fluctuations in
the value of the security, thus achieving the same result as a
haircut.

5.1 Collateral
5.1.6 The Comprehensive Approach - example
Bank M lends USD 100,000 to a customer who wishes to

collateralize the loan fully with a pledge of receivables. In order to
cover a loan of USD 100,000 the receivables would need to be for
a value of USD 125,000 (the original loan multiplied by the over-
collateralization factor of 125%).
The customer pledges USD 125,000 worth of receivables, which

fully collateralizes the loan. For this loan, Bank M is now able to
reduce the loss given default to 35% of the underlying exposure.
Therefore Bank M will use a LGD of USD 35,000 as input into its
IRB Approach (either Foundation or Advanced) to calculate the
capital allocation for this exposure.

5.1 Collateral
5.1.7 The Advanced Comprehensive Approach
Under Basel II banks using the Advanced Comprehensive

Approach can produce their own estimate of haircuts.
There is also no restriction on the types of collateral,
although banks must provide evidence of its value.
Banks value all investment grade financial collateral (grade BBB

and above) by estimating the volatility of the value of the collateral
instruments and the volatility of any foreign exchange mismatches
applicable on a case-by-case basis.
The Advanced Comprehensive Approach mirrors the Advanced IRB

Approach for credit risk in that both quantitative and qualitative
criteria must be met before it can be implemented.

5.1 Collateral
Quantitative criteria
The quantitative criteria for collateral are:

calculation of collateral haircut values must be at the 99%
confidence level
minimum holding periods must be set for collateral, (i.e. collateral
cannot be withdrawn on demand)
illiquidity of markets for collateral assets must be reflected in
haircut values
banks must use at least one-year historical price data of collateral
for haircut estimation
haircuts should be recalculated every three months and price data
must be updated accordingly
models of value must capture all material risk factors, (e.g.
interest rates, commodity prices, etc.).

5.1 Collateral
Qualitative criteria
The qualitative criteria for collateral are:
the minimum holding period for collateral must be reflected in

credit decisions
operating policies and processes for establishing collateral
valuation and taking collateral must be documented
risk measurement methods and internal exposure limits must
reflect collateral taken.
The collateral risk measurement system should be independently

reviewed at least annually (by internal audit).

5.1 Collateral
5.1.8 Use of VaR models
Basel II permits banks to use a VaR model as an alternative to the

Comprehensive approaches discussed above in valuing collateral.
The quantitative and qualitative criteria for this VaR approach are
the same as under the 1998 Market Risk Amendment.

5.2 Securitization
5.2.1 Originating a securitization of assets
Securitization is defined as the process by which a bank

can protect itself against economic shocks by packaging
and then selling, as securities, parts of its lending portfolio
to investors.
In a traditional securitization, the cash flow from an underlying

group (known as a pool) of transactions held on the banks balance
sheet (typically loans) is used to pay interest and principal on at
least two different tranches of a bond issue.

5.2 Securitization
A tranche of a bond issue is effectively a separate bond in that

each tranche will be subject to different terms for the payment of
interest and principal.
Consequently each tranche may have a different credit rating. They

will however both appear in the same documentation and will be
secured by recourse to one underlying pool of assets.
A typical securitization may have a large nominal value of high

quality tranches, for example with AA ratings, and a number of
smaller nominal value tranches some with potentially very low
grades, (e.g. with a B rating), or which may be unrated.

5.2 Securitization
Each tranche should bear a different credit rating. The

lower rated tranche (known as the junior tranche) will
absorb losses prior to that of the higher rated tranche
(known as the senior tranche).
These tranches are sold to investors and payment of
interest and principal depends on the performance of the
underlying transactions, as well as the claim on their
performance set out in the terms and conditions of the
different tranches.
The Basel II Framework creates a specific set of rules for the

supervision of securitization. These rules apply to both the
originator of the assets that are securitized and to the bank holding
the securitized assets as investments.

5.2 Securitization
One of the major concerns of supervisors with respect to

securitization is that the risk inherent in the securitized
assets is not fully transferred to the bondholders, but is
effectively retained by the originating bank. This is known
as implicit support. For example in the past supervisors
believed it was common for banks originating
securitizations to retain the high risk tranches of the
securitized bond issue (typically rated B and below).
Originating banks have also provided first loss
subsidization through such mechanisms as reducing
their charges for servicing the securitized assets (which
are paid by the investors) should defaults occur above a
specified level. This effectively offsets (in part) any losses
the investors would suffer when defaults occur.

5.2 Securitization
Requirement for significant risk transfer
For a bank that originates a securitization, capital relief under Basel

II is contingent on the bank creating an effective and significant
transfer of risk to the bondholders.
Basel II does not specifically lay down parameters to quantify the

significant risk transfer. Consequently the supervisory approach to
securitization is likely to be flexible.
The intention is that supervisors can react to innovations (in what is

a rapidly developing market) more rapidly with principles-based
regulation rather than regulation which is too prescriptive.

5.2 Securitization
5.2.2 Investing in a securitization
The origination requirements for supervisors to recognize a risk

transfer by an originating bank are the same for both the
Standardised and IRB approaches.
However, the risk weighting of the same tranche of a securitized

bond could differ depending on the type of investor and/or banks
that retain part of the securitization.
The Basel Committee believes that individual institutions have very

different levels of knowledge and risk management experience, and
that therefore different institutions run different levels of risk when
investing in such securities.

5.2 Securitization
The Standardised Approach
Under the Standardised Approach an investment in a tranche of a

securitization is given the same risk weighting as the loan asset of
an issuer with the same public bond credit grade.
However, higher risk weights are applied for a tranche with an

external rating below investment grade (Baa 3/ BBB-). Any unrated
tranche held must be deducted directly from the capital of the bank;
the deduction being split 50-50 between core and additional capital
(basically Tier 1 and Tier 2). This contrasts with unrated lending
which is weighted at 100%.

5.2 Securitization
A deduction from capital, at the minimum 8% capital

requirement, is effectively a risk weight of 1250%, the
same effective cost (in capital terms) of a loan funded
entirely by equity.
The capital requirement is equal to lending 12.5 (100/8)
times a normal 100% weighted (and thus 8% minimum
capital consuming) loan.
This gives 1250% (12.5 x 100%) as the effective risk
weight (this will be even higher if the banks capital
requirement is above the 8% minimum).
Students may also find it helpful to refer to Table 5.2
column 2.

5.2 Securitization
The IRB Approaches
Banks that use either the Foundation or the Advanced IRB

Approach for calculating their credit risk capital requirement for the
underlying assets must use the same approach for an investment
in a securitization.
In cases where the IRB Approach is not used for that underlying
asset class, the IRB approaches are replaced by three ways of
calculating the capital requirement against the holding of an
investment in a securitization exposure. These are:
the Ratings-Based Approach (RBA)

the Supervisory Formula Approach (SF)
the Internal Assessment Approach (IAA).

5.2 Securitization
5.2.3 The Ratings-Based Approach
The Ratings-Based Approach must be used if the securitization

exposures are rated, or where a rating can be inferred from another
similar securitization issue.
The RBA mirrors the Standardised Approach for calculating

regulatory capital for loan assets. External public ratings (where
they exist) of any securitization tranche must be used as the basis
for calculating regulatory capital.
However the RBA uses a specific set of risk weights that calibrate
the rating class more finely than the Standardised Approach does
(see Table 5.2, column 4). This creates a greater number of risk-
weight classes.

5.2 Securitization
The RBA rating scale also takes into account the security of a
tranche for payments (see Table 5.2, column 3) and the number of
assets covered by the securitization (known as granularity) of the
underlying assets.
The scale gives preference, through the lower risk weights, to

securitizations based on several assets, but penalizes
concentration effects (see Table 5.2, column 5).

5.2 Securitization
Importantly the RBA does not make any distinction in risk weighting
between an arms length investor and an originator of the security
when the originator continues to hold the tranche in securitized
form as an investment.
This latter way of holding securitizations is common in the US

banking industry where the ability to sell securitized tranches at
short notice allows for the flexible management of a banks credit
portfolio as well as its liquidity.
Where an external or inferred rating cannot be used, either the

Supervisory Formula or the Internal Assessment Approach must be
applied.

5.2 Securitization
5.2.4 The Supervisory Formula
The Supervisory Formula (and the Internal Assessment

Approach) may be applied to unrated tranches just as in
the IRB approaches to loan assets.
The SF seeks to establish the equivalent IRB capital

charge of a tranche had the exposure not been
securitized.
This capital charge at tranche level is known as the Kirb.

5.2 Securitization
5.2.4 The Supervisory Formula
The sum of all the Kirbs of every tranche of a securitization should

add up to the same capital charge as the exposures would have if
they remained on the balance sheet.
The Kirb however may be calculated on an aggregate portfolio

basis for the assets subject to the securitization.
In this respect it differs from the IRB Approach to underlying loan

assets where the assets must be assessed individually for their
capital charge.

5.2 Securitization
5.2.5 Internal Assessment Approach
The Internal Assessment Approach has very limited application and

can only be used with the approval of the appropriate local
supervisor. It is primarily designed to deal with asset-backed
commercial paper programs, which are commonly used in the US
market to securitize such assets as credit card receivables.
To use the IAA a bank must employ the same methodology as a

recognized rating agency to create each internal assessment of the
risk grading of a tranche of a securitization. The bank can then
map its ratings to the rating scale published by the rating agency.
The risk weight of its exposures is generated in the same way as

under the RBA as shown in column 3 of the table below.

5.2 Securitization
5.2.6 Risk weights for banks investing in securitization

tranches Table 5.2
Table 5.2 Standardised RBA: senior RBA: base risk RBA: non-
External rating Approach tranches & IAA weight granular pool
(e.g. Moodys) % % % %
Aaa 7 12 20
20
Aa 8 12 25
A1 (CP rating) 10 18
A2 (CP rating) 50 12 20 35
A3 (CP rating) 20 35
Baa1 35 50 50
Baa2 100 60 75 75
Baa3 100 100 100
Ba1 250 250 250
Ba2 350 425 425 425
Ba3 650
Below Ba3 Deducted

5.3 BI regulation on asset securitization
5.3.1 BI prudential principles in asset securitization
In January 2005 Bank Indonesia released regulation PBI No.

7/4/PBI/2005 Prudential principles in asset securitization for
commercial banks. This regulation defines the principles banks
follow when participating in asset securitizations. It sets out:
the role of banks

the quality of the underlying assets
the impact on a banks legal lending limit; and
how securitization affects minimum capital requirements.
The regulation only applies to commercial banks as defined by the

Banking Acts. A commercial bank is one that offers a full range of
financial services including foreign exchange services. It has
access to the payment system and provides general banking
services.

5.3.1 BI prudential principles in asset securitization
The regulation defines an asset securitization as the

issuance of asset-backed securities by an issuer on the
basis of the transfer of financial assets from the originator.
The originator receives payment for the transferred assets

from the proceeds of the sale of asset-backed securities
to investors.
Only financial assets in the form of credit, (e.g. mortgages

and loans), claims arising from securities, (e.g. cash flow
from the holding of bonds), future receivables, and other
equivalent assets may be used.

5.3.2 The role of banks in asset securitization
Under Bank Indonesia regulations a commercial bank may carry

out the following functions in connection with a securitization
transaction:
originator
credit enhancer
provider of liquidity facility
servicer
custodian bank
investor.
Each of these services is explained below.

It is unusual, in any country, for banks to act as the issuer of a

securitization.
Securitizations are issued through a separate legal entity to the

bank, sometimes called a special purpose vehicle company
(SPV).
The SPV ensures that the risk is transferred from the bank and it is
bankruptcy remote. Under BI regulations banks effectively must
transfer securitized assets to a domestic issuer SPV.

5.3.2 The role of banks in asset securitization -

example
Bank JJ originates a tranche of securitized assets based on its

residential mortgage portfolio.
This securitization is issued through the issuer JJ Securities, a

special purpose vehicle company set up by Bank JJ. If any of the
residential mortgages securitized defaulted, Bank JJ would not be
liable for the debt; hence removing the risk in these loans from the
bank.
Likewise if Bank JJ became bankrupt then the purchasers of the

securities from JJ Securities would not be affected.

To undertake any of the approved functions in a securitized

transaction a bank must ensure that the activity does not cause its
capital adequacy ratio to fall below the level stipulated.
In addition to this general rule each bank must meet certain criteria
for each specific function.

Originator
The originator of a securitization is the party providing
the underlying financial assets for the securitization to the
issuer.
A bank can only act as originator if the underlying assets of the

securitization:
have cash flow

are owned by and under the control of the originator
can be freely transferred to the issuer.

Originator
Banks can only transfer the assets to the issuer if:
the issuer is domestic

the issuer is independent of the originator
all cash flows and benefits from the underlying assets are
transferred
the credit risk of the underlying assets is transferred
control of the underlying assets, either directly or indirectly, is
transferred.
If all the above conditions are met the originating bank can remove
the underlying assets from both its balance sheet and any capital
calculations.

Credit enhancer
Credit enhancement occurs when a bank agrees to

retain or assume part or all of a securitization, providing
some degree of added protection to the other parties in
the transaction. The bank extends a facility to the issuer
to enhance the quality of the underlying assets within the
payment framework.
The credit enhancer protects other parties involved in the

transaction, (e.g. investors) by agreeing to cover losses arising
from any deterioration in the pool of securitized assets. Typically it
does this by using such products as a cash pool, letters of credit or
guarantees that can be exercised if the performance deteriorates.
Securitization transactions can be supported by more than one
credit enhancer.

Credit enhancer
If the credit enhancer is also the originator of the securitization it

may choose to support the transaction by retaining a junior tranche
of assets. However, if a problem were to occur, then investors
owning the senior tranches (see Section 5.2.1), would receive
payments before the credit enhancer.
It is also possible for an originator to support a securitization by

over-collateralization. This means the originator can choose to
transfer to the issuer more assets than those pooled to form the
securities. These extra assets can be used to replace non-
performing ones in the original securitization.

Credit enhancer
If the bank acting as credit enhancer is also the originator of the

securitization it may provide loss facilities up to a maximum of 10%
of the value of the underlying assets.
A bank that acts as a credit enhancer must include the

enhancement within its minimum capital calculations.

Provider of liquidity facility
A liquidity facility provides funds to an issuer of a

securitization to resolve any problems with the payment of
liabilities to investors. It covers short-term problems with
cash flows such as time differences between payments
from the obligors of the underlying assets and payments
to the investors.
Each liquidity facility provided by a bank has to meet the following

requirements:
the maximum term is 90 days

it can only be drawn down if the underlying assets are of good
quality with a value at least equal to the liquidity facility; or the
issuer has obtained credit enhancement for all underlying assets
that are not of good quality
Provider of liquidity facility
the maximum amount that may be drawn down by the issuer is

based on the quality of the pool of underlying assets
if the bank is also the originator the maximum amount that may be
provided is 10% of the value of the underlying assets
it may only be used to meet payment obligations to investors
any credit enhancement facility must be fully utilized prior to the
liquidity facility being drawn down.
When calculating its minimum capital requirement a bank treats

funds provided under the liquidity facility as risk-weighted assets.

Servicer
The servicer of a securitization is defined as any party
that administers, processes, supervises, or otherwise
assists the issuer with the cash flow of the underlying
assets.
A bank must agree to act as a servicer at the beginning of the

securitization, and it must also be supported by an adequate
administration system.

Custodian bank
A custodian bank is one that provides custodian services
for the underlying assets of a securitization, or other
assets and services pertaining to a securitization.
Banks are prohibited from acting as the custodian if they are the
originator or servicer of the securitization.

Investor
The investor in a securitization is defined as any party
purchasing the securitization issue.
Banks may invest in either domestic or overseas issued

securitizations provided they are within the banks legal lending
limit.
If the bank is also acting as the originator of the securitization it

may only purchase a maximum of 10% of the value of the
underlying assets.

Investor
The securitizations purchased by a bank are included in its

minimum capital requirement, subject to the following provisions:
investments in senior tranche securitizations (see Section 5.2.1)

are treated as risk-weighted assets
junior tranche securitizations may be deducted from capital

depending on any credit enhancement.

5.3.3 Legal lending limit and asset quality
Banks acting as an investor, credit enhancer, or provider of liquidity

facility have exposure not just to the issuer but also possibly to
obligors of the underlying assets themselves.
In the example given in Section 5.3.2 the purchaser of the

securitization has an exposure to the residential mortgages
defaulting. Thus whenever a bank takes on an exposure from a
securitization transaction it must consider not only the quality of the
security itself, but the quality of the underlying assets as well.
Banks must also consider the effect on their legal lending limit.

Legal lending limit
The legal lending limit for commercial banks is defined in BI

regulation PBI No. 7/3/PBI/2005, The legal lending limit for
commercial banks.
This regulation sets the overall limits for a banks lending and
outlines principles for managing concentration risk.
The legal lending limit is defined as the maximum

permitted provision of funds stated as a percentage of a
banks capital (Tier 1 and 2 for domestic banks).

The legal lending limit is dependent on the type of borrower as

follows:
10% if the recipient of the funds has direct or indirect control over
the bank, (e.g. owner, investor or senior manager)
20% for any single borrower
25% for any interrelated group of borrowers, (e.g. subsidiary

companies of a controlling group).

Whenever a bank enters into a securitization transaction as an

investor, credit enhancer or provider of liquidity facility, it is deemed
to be providing funds to the obligor of the underlying assets.
A bank is required to include these funds in its legal lending limit

calculations. Where the pool of assets consists of a number of
obligors the funds are allocated on a proportional basis.
If the bank is also acting as originator it must limit its combined

exposure to the transaction (investment, credit enhancement and
liquidity facility) to 20% of the underlying asset value, in addition to
complying with its legal lending limit.
If the bank fails to do this it must reinstate the underlying assets on

its balance sheet and include them in its capital requirement
calculations.
Asset quality
The rules for rating the quality of securitizations and their

underlying assets are determined by BI regulation PBI No.
7/2/PBI/2005, Asset quality for commercial banks.
Credit enhancement and liquidity facility quality ratings are also

based on the quality of the underlying assets of the securitization.

5.3.4 Reporting and sanctions
Reporting
Banks that act as originator, credit enhancer, provider of liquidity

credit, servicer or custodian are required to submit reports to Bank
Indonesia.
Originating banks need to submit reports detailing the planned

securitization no later than 30 days prior to the date of transfer to
the issuer.
They must also report completed transactions no later than seven

working days after transfer.

Reporting
If a bank acts as credit enhancer, provider of liquidity facility,

servicer or custodian, but is not the originator of the transaction, it
must submit an activity report no later than seven working days
after the start of the activity.
Banks that act in more than one capacity can combine individual
reports.

Sanctions
Bank Indonesia can impose sanctions on a bank if it fails to meet

the reporting requirements of regulation PBI No. 7/4/PBI/2005.
It can also impose sanctions if a commercial bank fails to comply

with the regulations other provisions.
Each type of report has a late submission period. Those banks

that submit a report during this late period will be fined Rp
1,000,000 for each day past the original submission date.
Banks that fail to submit the required reports within the late period
will be fined an additional Rp 50,000,000.

Sanctions
A bank that fails to comply with the asset securitization regulations

is first given a formal warning by Bank Indonesia.
If non-compliance continues Bank Indonesia can freeze the banks

non-compliant business activity.

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Indonesia Certificate in

Banking Risk and Regulation

Global Association of Risk Professionals, Inc.

Market risk and treasury risk Part A

1. An introduction to the use of 2. The Internal Models

Credit risk and operational risk Part B

4. Internal Ratings-Based 6. Advanced Measurement

Supervision and regulation

8. The supervisory 9. Supervision of operational 10. Basel II disclosure 11. The BI

Global Association of Risk Professionals, Inc.

5.1.1 Agunan yang diperbolahkan dalam Basel I

Collateral (agunan) merupakan aktiva yang dijaminkan oleh

Global Association of Risk Professionals, Inc.

5.1.1 Agunan yang diperbolehkan dalam Basel I

Suatu pengurangan nilai agunan dari nilai pasarnya

Global Association of Risk Professionals, Inc.

5.1.1 Eligible collateral under Basel I

Candidates will recall that the Basel II Accord allows three

the Standardised Approach

There are also three techniques for reducing credit risk

the Simple Approach

Global Association of Risk Professionals, Inc.

5.1.1 Eligible collateral under Basel I

The Simple Approach is similar to the 1988 Basel I Accord

The Comprehensive Approach allows a further offset of collateral

Global Association of Risk Professionals, Inc.

5.1.1 Eligible collateral under Basel I

The Advanced Comprehensive Approach also reduces the

justify a very wide range of collateral usage, and

Global Association of Risk Professionals, Inc.

5.1.2 General issues

All documentation in support of credit risk management must be

Quality of counterparty and collateral values

Global Association of Risk Professionals, Inc.

5.1.2 General issues

If the capital allocation has been calculated using a credit grade of

Global Association of Risk Professionals, Inc.

5.1.2 General issues

On-balance sheet netting

For banks that have legally enforceable netting arrangements for

For example, in some jurisdictions a loan made to a counterparty,

On default the counterpartys loan and deposit can be netted by the

Global Association of Risk Professionals, Inc.

5.1.2 General issues

A guarantee is a legal contract by which one party (party

Under Basel II when guarantees are taken as collateral they are

Global Association of Risk Professionals, Inc.

5.1.2 General issues

In Basel II, however, the range of guarantors has been extended to

Non-banks must have a minimum credit grade of A-, or the

Global Association of Risk Professionals, Inc.

5.1.2 General issues

There are a series of operational requirements for guarantees:

a guarantee must represent a direct claim on a guarantor

There are also additional requirements for credit derivative

Global Association of Risk Professionals, Inc.

5.1.3 Maturity mismatches of collateral

Under Basel I the maturity of collateral was required to match or

the collateral and the underlying exposure must cover an original

Once these conditions are met, the collateral treatment of the

Global Association of Risk Professionals, Inc.

5.1.4 Use of the approaches for collateral recognition

Banks may use the Simple or either of the