Basel Capital Accord: the treatment of the credit risk associated with certain off-balance-sheet items

July 1994

This document amends the Basle Capital Accord of July 1988 by broadening the recognition of bilateral netting for capital adequacy purposes. The amendment allows the bilateral netting of certain transactions provided the stated legal conditions are met and that the contract governing the netting contains no "walkaway" clauses. The document also issues for consultation a proposal to recognise netting effects in the so-called "add-ons" for potential future exposure and to expand the matrix of add-on factors (subsequently finalised in April 1995: "Treatment of potential exposure for off-balance-sheet items").

A temporary arrangement is laid down for the treatment of transactions subject to netting agreements by banks using the original exposure method with the proviso that banks will no longer be able to use the original exposure method once market-risk related capital requirements are implemented (i.e. at end-1997).