The South African Reserve Bank’s Prudential Authority issued a Guidance Note under the Banks Act on the internal ratings-based (IRB) approach for credit risk, setting out supervisory expectations for banks and controlling companies that use IRB models to calculate minimum required capital and reserve funds. It also provides implementation guidance on Basel III post-crisis reforms to the IRB framework, including the removal of the advanced IRB (AIRB) approach for certain regulatory asset classes and the resulting requirement to use the foundation IRB (FIRB) approach. The note clarifies practical treatment of credit risk mitigation across FIRB, AIRB and the standardised approach, including limits on the use of bank-estimated risk parameters under FIRB, a prohibition on recognising guarantee benefits via simultaneous probability of default and loss given default adjustments, and an expectation that CRM recognition must not be used to switch the credit risk approach applied to an exposure. It further addresses reporting and default identification for guaranteed exposures, expectations where a guarantor is not a bank client and risk parameters are unavailable, minimum requirements for recognising credit-related insurance as eligible CRM, and the principle that regulatory asset class reporting should remain based on the underlying obligor rather than the protection provider. Separate guidance covers classification and modelling of exposures to local government and public sector entities under IRB, including their treatment within the bank asset class for risk-weighted asset purposes and constraints on the use of sovereign models, as well as expectations on rating assignment over a 12-month horizon and the through-the-cycle design of probability of default models. The Guidance Note is to be read together with Guidance Note 9 of 2022. Institutions are requested to provide it to their independent auditors and return an acknowledgement of receipt signed by the institution’s Chief Executive Officer and the auditors to the Prudential Authority.
South African Reserve Bank 2025-07-01
South African Reserve Bank’s Prudential Authority issues guidance for IRB banks on revised Basel III credit risk models and credit risk mitigation treatment
The South African Reserve Bank's Prudential Authority issued a Guidance Note under the Banks Act on the internal ratings-based (IRB) approach for credit risk, detailing supervisory expectations for banks using IRB models to calculate capital and reserve funds. It includes guidance on Basel III reforms, removal of the advanced IRB approach for certain asset classes, and clarifications on credit risk mitigation and reporting. The note also addresses modelling of exposures to local government and public sector entities under IRB.