Version 2.0 START HERE S&P GLOBAL RATINGS EXTERNAL RISK ADJUSTED CAPITAL FRAMEWORK MODEL 2017 This model guide describes the functionality of the external Risk Adjusted Capital (RAC) Model that S&P Global uses in conjunction with other material to review a bank s capital and earnings score. This quick reference guide explains the inputs that are required to run the model Version 2. The user is advised to read this guide in full before using the model. Prior to use, the user should go to this website under the Banks section to download the most recent version of the model available. For further guidance please contact: elina.constantinou@spglobal.com vera.boots@spglobal.com
QUICK REFERENCE GUIDE Using the Model The model is written in Microsoft Office Excel 2010 and valid only for use by banks compliant with Basel II, 2.5 and III. The model incorporates one input worksheet ( Input ), two output worksheets ( S&P RAC Ratio Result and RAC Sensitivity Analysis ), and three additional worksheets to review the calculation details ( Calculus ) and the parameter values ( Parameters ) and to override the Ratings and BICRA scores inputs ( Sov Rating, BICRA, Eco Risk ). A schematic structure of the model is set out in Diagram 1. Diagram 1 Calculations Generic Inputs Validation Parameters Calculus S&P RAC Ratio Result Inputs RAC Sensitivity Analysis Generic Inputs The model requires the user to input mandatory data into the input page in order for the model to calculate the RAC ratio in the Input worksheet. Mandatory Input Cells B10 B11 Column C A13 and below A95 and below A103 and below A114 and below A164 and below A183 and below Description Total Adjusted Capital (TAC) - the numerator to the RAC calculation, mandatory to the calculation used in the computation of bank capital ratios in accordance with our published criteria titled "Risk-Adjusted Capital Framework Methodology", dated July 20, 2017 (the Criteria ). Country Bank s Country of domicile (and where it is primarily regulated). Exposure at Default (EAD) If inputs are made into this column, the exposure needs to be split by geography (Column G CN). Credit Risk section (wherever applicable). Credit Valuation Adjustment (CVA) section (wherever applicable). Financial Collateral Under the AIRB Approach (wherever applicable). Market Risk section (wherever applicable). Operational Risk section (wherever applicable): Gross operating revenue figures must be entered into at least one of the three years in the Operational Risk section after row 164. A total value must be inputted for Maximum over Last Three Years in cell C176. Insurance Risk section (wherever applicable). Confirmation text boxes: Throughout the model Input worksheet confirmation text boxes are used to describe each cell and/or the data to be entered in each cell. The confirmation box for a cell will appear when the cell is selected. 2
QUICK REFERENCE GUIDE Validations The model runs optimally when the Validation button turns green. To check this, when the model is open and all data has been inputted, the user should click on the validation button at the top of the Input sheet. If validation errors occur, the model provides assistance on how to resolve the errors. Once all errors have been resolved, the button should turn green. It is important to make sure all validation checks are resolved. Macros: The validation button is macro-driven and will not function properly if macros are disabled. Therefore, when opening the model, the user should select Enable Macros when prompted. Input worksheet This worksheet is used by the user to input all the necessary data to compute the RAC ratio result. The input data include the entity details, validation input checks and exposures to credit risk, credit valuation adjustment, financial collateral under the AIRB approach, market risk, operational risk and insurance risk. Sov Rating, BICRA, Eco Risk worksheet This model includes embedded Ratings and BICRA scores effective as of August 28, 2017. The user can override these inputs in this worksheet by entering alternative values to simulate different model results based on the user s preferred Sovereign Rating, BICRA and Economic Risk scenarios. Parameters worksheet This worksheet contains only public information used to compute the RAC ratio. Within the Parameters sheet, the model enables the user to simulate certain scenarios based on the following inputs: Sovereign Rating, BICRA score, Economic Risk score and Equity class (see rows 308 to 454, column E to Q). Calculus worksheet This worksheet enables the user to view the intermediate results based on the data input in the Input worksheet. RAC Sensitivity worksheet This worksheet contains the implied capital and earnings score based on the data inputs provided by the user from the Input worksheet. The RAC model used by S&P Global rating analysts includes confidential and publically available information. The model here only references public information. In addition, rating analysts may make certain adjustments to inputs to the RAC model to reflect analytical judgment as per the Criteria. Accordingly, the capital and earnings score produced by this model may differ from those used by S&P Global rating analysts. The relevant metrics are combined in scoring capital and earnings on a sixpoint scale ( Very strong Very weak ). The sheet reflects the implied capital and earnings score and two further scenarios to reflect an increase/decrease in the implied capital and earnings score category. The sensitivity of RAC ratio under a one notch adjustment of domestic BICRA/Economic risk is plotted. 3
QUICK REFERENCE GUIDE S&P RAC Ratio Result worksheet This worksheet reflects the S&P RAC Ratio based on the input data provided by the user from the Input worksheet. This model is an external version of the model used internally within S&P Global for rating analysis on capital and earnings. The RAC model used by S&P Global rating analysts includes confidential and publically available information. The model here only references public information. In addition, rating analysts may make adjustments to the inputs to the RAC model to reflect analytical judgment as per the Criteria. Accordingly, the RAC ratios produced by this model may differ from those used by S&P Global rating analysts. Figure 1 below is an example of the S&P RAC Ratio Result sheet using mock input data. Figure 1 4
APPENDIX Exposure at Default (EAD): Enter the Exposure At Default (EAD) before credit risk mitigation. For banks under Basel, enter both the on-balance sheet and off-balance sheet exposures, after application of regulatory Credit Conversion Factors. For banks not under Basel, the EAD is the sum of a bank s: (1) outstanding loans, plus (2) 50% of off balance sheet commitments, plus (3) securities holdings and other types of exposures. Use the Basel definition of asset classes to allocate assets whenever possible. Residual value exposure should contain the residual value of leases. Examples of other non-credit-obligation assets are property, plant, and equipment, other real estate, and any exposure that would not have been included in the other asset classes. Split of Exposure by Geography: The Input worksheet requires that the sum of the countries/regions equals the total EAD, so residual exposure should be assigned to the region World. EAD Covered and Financial Collateral under the AIRB Approach: For banks under Basel: Enter under the column EAD the exposure amount covered by eligible financial collateral only after applying regulatory haircuts. (Standardized and Foundation IRB approaches). For collateral under the Advanced IRB approach, fill instead the specific table at the end of the credit risk section. For banks not under Basel, fill in financial collateral amounts in the table "Financial Collateral under the AIRB Approach" at the end of the credit risk section. Securitization exposures: For banks under Basel in the Credit Risk section, input any securitization exposures in the banking book, including exposures deducted from capital. As for the "Split of EAD by external rating (or regulatory risk-weight bands)", use rating agencies' ratings or regulatory risk-weight bands and input the non-rated securitization exposure in the column "Not Rated". For banks under Basel 2.5 in the Market risk section, input any securitization exposures in the trading book (including the exposures deducted from regulatory capital) and capital requirements. As for the "Split of EAD by external rating (or regulatory risk-weight bands)", use rating agencies' ratings or regulatory risk-weight bands and input the non-rated securitization exposure in the column "Not Rated". Credit Valuation Adjustment (CVA): For banks under Basel, input the regulatory capital requirement to determine the RAC CVA charge. When a bank is domiciled in a jurisdiction that exempts sovereign and corporate exposures from the regulatory CVA charge, input the regulatory capital requirement, percentage (%) of OTC (Over-The-Counter) counterparties exposures and the derivatives receivables information. Market Risk in the Trading Book For banks under Basel with a trading book, enter the regulatory capital requirement split by approach, i.e. Internal Model Approach (VaR) and Standardized approach. Operational Risk The Gross Operating Revenue figures must be entered into at least one of the three years in the Operational Risk section in the Input worksheet. A total value must also be inputted for Maximum over Last Three Years. 5
DISCLAIMER The Risk Adjusted Capital (RAC) Model from S&P Global Ratings is designed to provide insight into the range of inputs and calculation parameters used in the computation of bank capital ratios in accordance with our published criteria titled "Risk- Adjusted Capital Framework Methodology", dated July 20, 2017 (the Criteria ). This tool includes a static range of Sovereign Ratings and BICRA scores as reference parameters in the capital ratio calculations as of the date set out in the Parameters worksheet. Changes to these Sovereign ratings and BICRA scores will be input into the model through a monthly update to this file. In light of the lagged adjustment, ratings and scores used in the model may not reflect current ratings and/or scores, which may have changed since the last update. Prior to use, the user go to http://www.spratings.com/en_us/products/-/product-detail/financial-services-credit-tools (under the Banks section) to download the most recent version of the model available. The RAC model used by S&P Global rating analysts includes confidential and publically available information. The model here only references public information. In addition, rating analysts may make adjustments to the inputs to the RAC model to reflect analytical judgment as per the Criteria. Accordingly, RAC ratios produced by this model may differ from those used by S&P Global rating analysts. Copyright 2017 by S&P Global Financial Services LLC. All rights reserved. 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