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ICSNEWLevel 1 and Level 2 texts7. Capital requirement – Other Methods7. Capital requirement – Other Methods

7. Capital requirement – Other Methods

7.1 General principles

  • L1-150. The scope of Other Methods is limited to the capital requirement. When Other Methods are used, the valuation and capital resources elements of the ICS remain subject to the provisions set in sections 5 and 6 respectively. Other Methods provide the same level of protection as the standard method, with target criteria of 99.5% VaR over a one-year time horizon.
  • L1-151. Other Methods permitted are:
    • • Supervisor-owned and controlled credit assessment processes; and
    • • Internal models.

7.2 Supervisory Owned and Controlled Credit Assessments (SOCCA)

  • L1-152. A SOCCA process is an independent and objective process for assessing Credit risk, owned and controlled by a financial supervisory authority, and that relies upon credit assessment methodologies deemed suitable by the supervisory authority in determining the regulatory capital requirement for Credit risk of supervised entities. An example of a SOCCA is NAIC Designations. The criteria for a SOCCA process to be recognised in the ICS are specified in the Level 2 text.
  • L2-354. A SOCCA process may be used for the calculation of the Credit risk charge for unrated exposures if all the following criteria are met:
    • a. Objectivity: The SOCCA’s methodology for assigning credit assessments is rigorous, systematic, and subject to some form of validation. Moreover, assessments are subject to ongoing review and responsive to changes in financial condition.
    • b. Independence: The SOCCA process is aligned with the regulatory objectives of the supervisor, evidenced by the supervisor’s approval of the credit assessment process. Any outsourcing arrangement of the credit assessment is held to the same standards of competency and independence as the in-house credit assessment processes.
    • c. International access/transparency: an IAIG with operations outside the jurisdiction of the SOCCA process can request designations/ratings be assigned to securities they own. Public access to the credit assessment is available through third-party platforms.
    • d. Disclosure: Default statistics over time are developed for each designation/rating so that three-year cumulative default rates (CDRs) can be derived from published statistics.
    • e. Resources: Staff has appropriate qualifications and experience to undertake the credit assessment process. The SOCCA process relies on adequate resources to carry out the credit assessments required by the supervisor.
    • f. Credibility: The SOCCA process relies on internal procedures to prevent the misuse of confidential information. The SOCCA process has at least 10 years of demonstrable business history in assessing the Credit risk of a large number of securities such that statistical performance data can be derived. All designations/ratings are updated at least on a yearly basis; in addition, the designations/ratings are reviewed as soon as a significant event occurs that may affect them.
    • g. Alignment of interests with the purposes of prudential supervision: The entity performing the credit assessment is fully owned and controlled by a supervisory authority. There are policies approved by the supervisory authority as to how the credit assessment process is applied.

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6. Tax7.3 Internal models