Following the CRR Regulation, the Solvability ratio is derived by attributing risk weights in accordance with the credit quality of the issuer/issue and by computing credit risk for both on- and off-balance sheet exposures. This ratio is then used by credit institutions to derive their capital requirements for the credit risk associated with the respective investment fund.
Two main computation methods are used in practice: the Credit Risk Standardized Approach (KSA) based on pre-defined risk weights and external credit risk assessments, and the Internal Rating-Based Approach (IRBA) based on internal credit risk assessment.
From this Solva reporting, two additional pieces of information are derived:
- The currency exposure (FX position ratio or Kreditrisiko-Standardansatz KSA), which indicates the credit institutions’ currency exposure through its investments.
- The country credit risk exposure (or KSA Risikogewichte nach Ländern zur Ermittlung des antizyklischen Puffers), which indicates the credit institutions’ credit exposure per country. This additional report allows the credit institution to calculate their own fund requirement related to the counter-cyclical capital buffer.
Deloitte offers assistance in the provision of required data related to the calculation of the Basel III capital requirement, based on the CAR Directive and on the French regulation. Under the French approach, the risk weights applied in the computation of capital requirements depends on the type of transaction, type of issuer, and credit qualities of the issuers. The French reporting does not require to calculate the solvency ratio (like German or Austrian reporting) but only to map each exposure according to the mapping provided by clients.
ECD-CVA (Equity Capital Deductions and Counterparty Valuation Adjustments) reporting allows credit institutions to estimate two additional capital adequacy requirements introduced by the EU Capital Requirements Regulation for:
- Direct and indirect exposures to financial sector entities: ECD
- Exposure to OTC counterparty valuation risk: CVA-risk
The ECD computes the percentage of the assets of an investment fund invested directly or indirectly in equity or equity-like securities issued by financial sector entities. The objective is to limit and control cross-investments between credit institutions and decrease systemic risk.
The CVA risk charge seeks to capitalize against the volatility of the credit risk component of unilateral CVA (i.e., changes in the CVA due to changes in the counterparty’s credit quality).
Credit institutions investing in investment funds need to ensure that aggregated underlying exposures (at entity and group levels) do not reach a certain threshold for the fund to be considered “granular”; i.e., the fund should not be taken into account when assessing large exposures. If exposures are above threshold, then they need to be combined with all other assets of the credit institutions to calculate related capital requirements.
The GroMiKV (Großkredit und Millionenkreditverordnung) reporting supplements the German Banking Act (Kreditwesengesetz or KWG) and discloses investment funds’ large exposures in order for credit institutions to comply with their additional capital requirements and reporting for large exposures.
Credit institutions are required to calculate the Liquidity Coverage Ratio and to assess the liquidity of their assets. Institutional investors may rely on the asset management company to report a breakdown of assets based on liquidity.