"millions trapped by property slump" , page-66

Jantimot

It applies differently to different instruments. As an example if CBA provide a guarantee of $100 to my landlord that I will pay the rent, then CBA has nothing on its balance sheet for this guarantee unlike a loan. The reason is that a loan is funded and is an on balance sheet asset. The guarantee is an off balance sheet asset as it is not funded. You will not see it on cBAs balance sheet. APRA then convert this guarantee to an on balance sheet equivalent using a 100% credit conversion factor. This is then risk weighted at say 100% and forms part of the banks risk weighted assets for capital purposes. APRA then requires capital to be held for that guarantee at say 8% of the risk weighted amount or $8.

For derivatives eg buy $100 for A$100 in 18 months time, the amount on the bank's balance sheet is the fair value by reference to market rates, so if they have moved in CBA' favor by 5% that would be about $5 shown as an asset in the balance sheet.

APRA then calculates the capital to be held against the derivative which is 8% of the total of the risk assets for that contract. The risk assets are 50% of the total of the current credit exposure (the $5) an the potential credit exposure. For a FX deal, this is 5% of the face value of $100 or $5 so a total of $10 risk assets.