QIS 3 FAQ: A. General
1. The QIS Instructions and Technical Guidance documents frequently refer to various qualifying criteria of one kind or another. For example, under the IRB approach banks' PD, LGD and/or EAD estimates must meet certain minimum data requirements, including minimum observation periods. Similarly, banks must demonstrate that the exposures they treat as qualifying revolving facilities show a high ratio of future margin income to expected losses. What is the relevance of such criteria for purposes of the QIS?
Answer: QIS3 aims to ascertain a realistic assessment of banks' capital requirements after implementation of the new Accord. We realise that not all banks will currently be able to satisfy all of the qualifying criteria or will have the necessary data available to make all of the required estimates. Best-efforts estimates are therefore acceptable for the QIS; however, bilateral consultation with your supervisor should be used to determine an approach that leads to the most realistic approximation of the proposed capital requirements. Where estimates are used, this should also be reported in the 'Notes' worksheet of the QIS electronic workbook.
2. We plan to use total principal balances owed excluding accrued fees and interest. Is this acceptable?
Answer: Yes, for QIS purposes this would be an acceptable approximation; however, the exclusion of accrued fees and interest should be reported in the 'Notes' worksheet of the QIS electronic workbook.
3. Should we use spot or average balances for the QIS?
Answer: We anticipate that most banks will use spot balances (i.e. balances as at a particular date); however, as an exception, it might be appropriate for some banks with highly volatile credit portfolios to use monthly or quarterly averages of daily balances. This should be discussed with your supervisor and the use of average balances reported in the 'Notes' worksheet of the QIS electronic workbook.
4. What is the appropriate treatment of residual items such as fixed assets and other debtors. In the FIRB and AIRB approaches we found no mention of a capital requirement for tangible fixed assets. Is this correct? If yes, it seems incongruent that tangible fixed assets in the standardised approach have a 100% risk weight (since they are included in other assets) but in the FIRB and AIRB there is no capital requirement at all?
Answer: Section A5 of the 'Data' worksheet requests information on 'Other Assets', which includes fixed assets and other 'residual' items. Also, information relating to the risk weighted assets of these items, calculated under current national capital rules (typically using a 100% risk weight), should be included in the data entered in cells E129 and E130 of the 'Capital' worksheet. This information enters the calculation of required capital under all of the proposed approaches, including the IRB approaches.
5. Why does the QIS-template contain an item for 'assets not included'? What is the definition of this asset type?
Answer: Ideally banks should include all their assets in QIS. Due to data limitations, inclusion of some assets (e.g. the portfolio of a minor subsidiary) may turn out to be an unsurpassable hurdle. For some banks exclusion of such assets is acceptable, as long as the remaining assets are representative of the bank as a whole, and at least 80% of assets is included in QIS. In order to ensure that your QIS submission can still be reconciled with your published accounts and supervisory returns a separate item for such omitted assets has been included in the template.
6. The technical guidance (paragraph 23) mentions a floor of 90% respectively 80% of current capital requirements for IRB banks. How should we include this into the QIS templates?
Answer: You should not. QIS calculations are carried out as if the floor were non-existent.
7. Who should fill in the dark grey cells in the templates?
Answer: No one, they should remain empty.
8. Should QIS data be reported in thousands or millions of Euro?
Answer: As long as they use the same currency throughout the QIS-templates, banks are free to report in any currency they want. Generally we expect banks to report in millions of local currency, if you use another convention (e.g. reporting in thousands of Euro), you should indicate so in the notes section, in order to allow you supervisor to insert the correct conversion rate in cell E6 of the data worksheet.1
9. If a bank intends to adopt the foundation IRB approach and completes the QIS templates following this approach, is it also necessary to fill out the standardised approach?
Answer: Yes, all banks should complete the standardised approach templates. One of the purposes of QIS is to ensure that the 'incentive structure' of capital requirements is correct, i.e. the Committee wants to ensure that foundation IRB requirements are slightly lower than standardised approach requirements. In order to facilitate this calibration we do not only need information on foundation IRB, but also on standardised approach capital requirements, even if you do not intend to adopt the standardised approach.
10. In some cases the definition of portfolios is not 100% identical under IRB and under the standardised approach. How should banks proceed in such cases?
Answer: For QIS purposes, banks should including the same exposures in the same portfolio under all approaches. Thus, banks that are able to provide IRB data should use the IRB definition when calculating risk weighted assets under the current, standardised and IRB approaches. Banks providing data only for the standardised approach should use the standardised approach definition.
11. Should uncommitted lines also be included in the data worksheet?
Answer: Yes, they should be included, but since they have a credit conversion factor of 0% the resulting risk weighted assets will equal zero in the current, the standardised, and the foundation IRB approach. Under advanced IRB, where banks have to estimate their own credit conversion factors (or EAD), banks' historical experience may suggest that part of these lines tends to be used upon default. In this case such exposures should also be included in part b) of the advanced IRB templates and a capital charge will result.
12. After inserting new columns/rows in the templates, my formulae are no longer functioning correctly. Can you explain how this could happen?
Answer: There are some caveats when enlarging the number of PD-grades (rows) or the number of LGD, EAD or maturity bands (columns). Firstly, always ensure that you insert rows/columns in the middle of the matrix, e.g. between the third and fourth row (or column). The first and the last row (column) may contain different formulae, so inserting new rows (columns) between e.g. the first and second row may corrupt the formulae surrounding the matrix or elsewhere in the template. Secondly, you must ensure that after inserting a row (or column) you copy the formulae immediately, before inserting elements elsewhere in the matrices. For example. if you inserted both columns and rows and then copied the formulae only after that empty spots could turn up in places that should contain formulae or other cell contents.
13. In which portfolio(s) should exposures to public sector entities (PSEs) be included? Can we treat certain international PSEs that qualify as per the definition (revenue generation capability) as sovereign. In other words, is the definition of PSE equivalent to sovereign applicable only for domestic entities and all international PSEs are treated as claims on banks?
Answer: For the standardised approach, guidance on the appropriate classification of exposures to PSEs is set out in paragraphs 31 and 32 of the Technical Guidance and paragraph 2.2 of the QIS 3 Instructions document.
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Where the national discretion in the second dot point is exercised in a particular jurisdiction, other national supervisors may allow their banks to risk weight claims on such PSEs in the same manner. In order to lessen the burden for respondent banks, however, for QIS purposes it will be acceptable for banks to risk weight their exposures to such PSEs as for claims on banks (i.e. as described in the second paragraph to this answer). That said, the aim of the QIS is to produce good quality estimates of banks' capital requirements. Therefore, where a bank considers that this simplification could lead to a sizeable misstatement, this should be raised with the bank's national supervisor and an alternative methodology agreed.
¿ your supervisor may advise that claims on certain PSEs (ie those that function as corporates in competitive markets) should be treated as corporate exposures; and
¿ claims on certain domestic PSEs (e.g. those with revenue raising powers) may be treated as claims on the sovereign in whose jurisdiction the PSEs are established. Such PSEs in your country should be treated as advised by your national supervisor.
The Technical Guidance specifies no particular treatment for PSEs under the IRB approaches. Therefore, for QIS purposes banks should allocate their PSE exposures to particular portfolios according to the treatment described above for the standardised approach. This is in keeping with the QIS principle that exposures should not be shifted between portfolios under the different calculation approaches in order to facilitate analysis of the survey data.
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Accordingly, claims on domestic (and foreign) PSEs should generally be risk weighted according to either option 1 or option 2 for claims on banks as advised by your national supervisor. (This is regardless of the option chosen by your supervisor for claims on banks in your country.) Option 2, should also be applied to PSEs without the preferential treatment that is available, at national discretion, for short-term claims on banks.
There are two exceptions:
14. Does a bank that is completing the IRB-templates still have the opportunity of using the simple approach to CRM for completion of the standardised approach templates?
Answer: It is important that all banks that apply foundation or advanced IRB use the comprehensive approach to CRM for completion of the standardised approach templates. Since under IRB the simple approach to CRM is not available, banks by definition have to apply the comprehensive approach to their IRB templates. Using the same method for the standardised approach improves the comparability of capital requirement, under the IRB and standardised approaches.
15. Under the standardised approach not all portfolios include the full set of possible risk weights. When applying the substitution treatment for guarantees this sometimes makes it impossible to insert an appropriate risk weight for the exposures before credit risk mitigation. If I, for instance, had a retail exposure (original risk weight 75%) guaranteed by a sovereign, how should I input the risk weight before credit risk mitigation in templates?
Answer: In such cases you should distribute the exposures over the available risk weight categories in order to ensure that the exposure is weighted appropriately. In the example you provided, you should put 50% of the exposure in the 50% risk weight category and 50% in the 100% risk weight category to create an average risk weight of 75%. Of course, you should only do this in the 'all exposures' column, in column G and beyond you should be able to allocate the exposure to a single category.
16. When I enter a PD of 0% or 100% the templates generate an error message. How can I correct this?
Answer: The functions used to calculate risk weights assume the existence of some uncertainty and consequently cannot deal with values equal to 0% or 100%. Using a PD of 0.000001%, respectively 99.999999%, solves this problem. The minor round off error introduced will not materially affect the results.
17. The Technical Guidance (paragraphs 50 and 273) describes that certain commitments can be converted to credit equivalent amounts using a credit conversion factor of 0%. Effectively this means that there is no capital requirement for such commitments. Shouldn't banks use a higher credit conversion factor in cases were there is reason to assume that a 0% credit conversion factor is too low?
Answer: No, for QIS purposes banks should use the 0% credit conversion factor, even if they or their supervisors think this is too low. Foundation IRB relies on round numbers for some of the parameters that drive capital requirements. Overestimates and underestimates in such numbers offset each other. Consequently, using another than the 0% credit conversion factor would bias QIS results.
18. Under the current Accord, foreign exchange contracts with an original maturity of 14 calendar days or less may be excluded from the capital calculations. How should these exposures be treated under the QIS?
Answer: For QIS purposes, assume that the existing treatment continues, i.e. if your national supervisor currently excludes such exposures from regulatory capital, the exposures should be excluded from the standardised and IRB calculations.
19. On the Data Sheet, Panel A5, there seems to be two different lines (87 and 90-92) to place fixed assets. Is there any difference between these two lines, and if so, what are they?
Answer: Fixed assets that are specifically "fixed assets (own use)" and "fixed assets acquired through credit defaults" should be reported in cells 91 and 92, respectively. Put any other fixed assets in cell 87 unless there is a desire to specify them separately in the other assets section. The categories are not treated differently. The distinction is for information only.
1 When a bank completes the templates using thousands, rather than millions of Euro the supervisor will simply enter 0.001 (i.e. 1,000/1,000,000) in this cell.