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PIB 4 Guidance

1. PIB chapter 4 deals with the prudential requirements relating to the management of Credit Risk by an Authorised Firm. Credit Risk refers to risk of incurring losses due to failure on the part of a borrower or a counterparty to fulfil their obligations in respect of a financial transaction.
2. This chapter aims to ensure that an Authorised Firm holds sufficient regulatory capital of acceptable quality so that it can absorb unexpected losses arising out of its Credit Risk exposures, should the need arise and that it continues to operate in a sustainable manner.
3. This chapter requires an Authorised Firm to:
a. appropriately apply a risk-weight to all on-balance sheet assets and off-balance sheet exposures for capital adequacy purposes. A risk-weight is based on a Credit Quality Grade aligned with the likelihood of counterparty default;
b. calculate the Credit Risk Capital Requirement for its on-balance sheet assets and off-balance sheet exposures; and
c. reduce the Credit Risk Capital Requirement for its on-balance sheet assets and off-balance sheet exposures where the exposure is covered fully or partly by some form of eligible Credit Risk mitigant.
4. PIB Appendix 4 provides detailed requirements, parameters, calculation methodologies and formulae in respect of the primary requirements outlined in PIB chapter 4.
Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]