QIS3 FAQ: K. Purchased Receivables
Answer: Banks are not obliged to apply the 'top-down' approach for receivables when they can and choose to apply 'bottom-up' approach. However, even under 'bottom-up' approach, banks are required to include capital charges for both default risk and dilution risk. Dilution risk may be excluded if banks can demonstrate to its supervisor that it is immaterial.
Answer: The pools of receivables treatment is a top-down approach that makes it possible to calculate capital requirements without having to look at the properties of the individual items in a pool of receivables. The Committee is of the opinion that generally speaking good risk management requires banks to look at the properties of individual exposures, but also realises that in some cases this may be impossible or prohibitively expensive and consequently introduced this top-down treatment. The Committee, however, wants to ensure that application of this treatment will not undermine good risk management practice. For this reason national supervisors must set concentration limits above which banks should look at the individual items in a pool. Such concentration limits may refer to the granularity of the pool (e.g. no item in the pool should be larger than x% of the total pool), to the size of pools of receivables as a percentage of regulatory capital, to the maximum size of an individual item in the pool or a combination of such criteria.
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