Banks Act, 1990 (Act No. 94 of 1990) Regulations Regulations relating to Banks Chapter II : Financial, Risk-based and other related Returns and Instructions, Directives and Interpretations relating to the completion thereof 31. Equity risk in the banking book Directives and interpretations for completion of monthly return concerning equity risk in the banking book (Form BA 340)

 

 

 

 

Based on the economic substance and not the legal form of an instrument, and irrespective of whether or not the said instrument makes provision for a voting right, for the purposes of these Regulations equity exposures held in a bank’s banking book—

[Heading and words preceding regulation 31(3)(a) substituted by section 6(a) of Notice No. 1427, GG44048, dated 31 December 2020 - effective 1 January 2021]

[Regulation 31(3)(a)(iii)(D) substituted by regulation 14(a) of Notice No. 297, GG 40002, dated 20 May 2016]

(b)        shall exclude any instrument—

[Regulation 31(3)(b)(ii) substituted by regulation 14(b) of Notice No. 297, GG 40002, dated 20 May 2016]

 

(4)        Based on—

a bank shall calculate and report, among other things, its relevant specified exposure amounts, risk weighted exposure amounts and/or required amount of capital and reserve funds.

 

 

 

(A) within a specific risk category; or

(B) in respect of the same type of risk, across different risk centres;

[Regulation 31(6)(a)(ix) substituted by regulation 14(c) of Notice No. 297, GG 40002, dated 20 May 2016]

[Regulation 31(6)(a)(xi) substituted by section 6(b) of Notice No. 1427, GG44048, dated 31 December 2020 - effective 1 January 2021]

[Regulation 31(6)(a)(xii) substituted by regulation 14(d) of Notice No. 297, GG 40002, dated 20 May 2016]

 

 

A bank that adopted the market based approach for the calculation of its capital requirements relating to equity positions held in the bank's banking book shall apply one or both of the methods specified below in respect of the bank's various equity portfolios provided that the method selected by the bank shall be consistent with the complexity of the bank's equity holdings and shall be applied in a consistent manner.

 

 

A bank that adopted the simple risk weight method—

 

Table 1

 

 

 

A bank that adopted or has been directed by the Registrar to apply the internal models approach shall calculate its risk-weighted exposure relating to its equity positions through the application of the formula specified below:

 

RWA = K x 12,5

 

where:

 

 

 

provided that the said capital requirement—

 

 

A bank that adopted the PD/LGD approach shall calculate its risk-weighted exposure amount in respect of equity positions held in the bank's banking book in accordance with the relevant requirements relating to corporate exposure specified in regulation 23(11)(d)(ii), provided that—

 

When the bank has no debt exposure in respect of a corporate institution in which the bank holds an equity instrument and the bank has insufficient information in respect of the said corporate institution to adhere to the definition of default, but the bank complies with the other relevant standards, the bank shall apply a scaling factor of 1.5 to the relevant risk weight derived from the relevant corporate risk-weight function;

 

[Regulation 31(6)(c)(vii) substituted by regulation 14(e) of Notice No. 297, GG 40002, dated 20 May 2016]

 

 

subject to the prior written approval of and such conditions as may be specified in writing by the Authority, a combination of the aforementioned three approaches, to determine the bank’s capital requirement for an equity investment in an individual fund:

Provided that—

as if the bank was directly exposed to such risk, provided that, instead of determining a credit valuation adjustment (CVA) requirement associated with the fund’s relevant derivatives exposures, the bank shall multiply the relevant exposure amount for counterparty credit risk with a factor of 1.5, before applying the risk weight associated with the relevant counterparty;

 

 

When a bank is able to obtain sufficient and frequent information in respect of the underlying exposures of the relevant fund, and the said information is verified by a relevant independent third party, the bank shall adopt the look-through approach for the calculation of the bank’s relevant risk weighted exposure amount in respect of its equity investments in all types of funds held in the bank’s banking book, in terms of which approach the bank shall risk weight the fund’s underlying exposures as if the exposures were held directly by the bank, provided that—

For example, an exposure that is subject to a risk weight of 20 per cent in terms of the Standardised Approach shall be risk weighted at 24 per cent (1.2 * 20 per cent) when the bank wishes to rely on the look through performed by a third party;

 

RWAinvestment = Avg RWfund * Lvg * equity investment

 

Provided that the ultimate effective risk weight of the bank’s investment in the fund, that is, Avg RWfund * Lvg, shall be subject to a limit of 1250 per cent.

 

 

When a bank is unable to comply with the relevant requirements specified in paragraph (b) above in relation to the look-through approach, the bank may adopt the mandate-based approach for the calculation of the bank’s relevant risk weighted exposure amount in respect of equity investments in all types of funds held in the bank’s banking book, in terms of which approach the bank shall, as a minimum, use the information contained in a fund’s mandate or in the relevant national regulations governing such investment funds, provided that—

For example, in the case of investments in corporate bonds with no ratings restrictions, the bank shall apply a risk weight of 150 per cent;

1.4 * (sum of relevant notional amounts in the relevant netting set + 0.15*sum of relevant notional amounts in the relevant netting set);

 

RWAinvestment = Avg RWfund * Lvg * equity investment

 

Provided that the ultimate effective risk weight of the bank’s investment in the fund, that is, Avg RWfund * Lvg, shall be subject to a limit of 1250 per cent;

 

 

When neither of the aforementioned two approaches is feasible for the bank, the bank shall apply to its relevant equity investment in the fund a risk weight of 1250 per cent.

[Regulation 31(7) substituted by section 6(c) of Notice No. 1427, GG44048, dated 31 December 2020 - effective 1 January 2021 - subsequent paragraphs have been renumbered]

 

 

Line item:

 

 

Based on the relevant requirements specified in regulations 23(6)(j) and 23(8)(j), this item shall reflect the relevant aggregate amount of the reporting bank's equity investments other than private equity investments or investment in venture capital.

 

 

 

This item shall reflect the aggregate amount of publicly traded equity instruments, which instruments are included in items 27 and 35 of the form BA 100.

 

 

This item shall reflect the aggregate amount of equity instruments other than publicly traded equity instruments, including any unlisted equity instrument and investments in subsidiaries and associates, which instruments are included in items 28, 36 and 39 to 41 of the form BA 100.

 

 

This item shall reflect the aggregate amount of investments in subsidiaries and associates other than subsidiaries and associates reported in items 43 to 45, which subsidiaries and associates are included in the consolidation of the banking group’s accounts.

[Regulation 31(8)(line item 46 (previously 43)) substituted by section 6(e) of Notice No. 1427, GG44048, dated 31 December 2020 - effective 1 January 2021]