Document ID: chunk:federal_register_of_legislation:F2024L01073:front:0:p5
Version: federal_register_of_legislation:F2024L01073
Segment Type: other
Provision Reference: 
Character Range: 11496–14590

multiplied by a percentage factor, as calculated in accordance with paragraphs 19 to 21 of this Prudential Standard;
         6.        securities financing transaction (SFT) – means a transaction such as a repurchase agreement, reverse repurchase agreement or a securities lending and borrowing transaction where the value of the transaction depends on the market valuation of securities and the transaction is typically subject to margin agreements;
(ab)  small- and medium-sized enterprise (SME) – has the meaning given in paragraph 22 of Attachment B to this Prudential Standard;
(ac)   sovereign – has the meaning given in paragraph 3 of Attachment B to this Prudential Standard; and
(ad)   specialised lending – has the meaning given in paragraph 26 of Attachment B to this Prudential Standard.

Key principles
 1.          An ADI must hold Regulatory Capital commensurate with its exposure to credit risk, based on the application of specified risk weights and CCFs (where applicable) as set out in this Prudential Standard. Where appropriate, an ADI must use the ratings of external credit assessment institutions (ECAIs) to determine the credit rating grade and risk weight of an exposure, as set out in Attachments B and F to this Prudential Standard.
 2.          An ADI must establish and implement effective internal policies, processes, systems and controls to ensure that appropriate risk weights are assigned to its credit exposures.
 3.          An ADI may reduce its credit risk Regulatory Capital requirement through the use of LMI or eligible CRM techniques.
 4.          If an ADI seeks to use LMI or eligible CRM techniques to reduce its Regulatory Capital requirements, it must have established and implemented effective policies, procedures and systems that meet the requirements set out in this Prudential Standard. An ADI's policies and procedures must also address any residual risks such as legal, operational, liquidity and market risks that result from its use of CRM.

Risk-weighting approach

Risk-weighted on-balance sheet assets
 1.          An ADI must calculate the RWA of an on-balance sheet exposure by multiplying the current book value of the exposure (including accrued interest or revaluations, and net of any provisions for defaulted exposures, partial write-off or associated depreciation) by the relevant risk weight.

Risk-weighted off-balance sheet exposures
 1.          The RWA of a non-SFT off-balance sheet exposure must be calculated by applying the following two-step process:
         1.           first, the exposure amount or exposure at default (EAD), representing the on-balance sheet equivalent amount, must be determined according to:
                 1.             Attachment C to this Prudential Standard for any commitments; and
                 2.          where the ADI is a significant financial institution, APS 180 for OTC and exchange-traded derivative transactions or long-settlement transactions. Where an ADI uses the adjusted current exposure method (CEM) under APS 180 and the transaction is collateralised, the ADI may