Total Eligibile Provisions
Definition
Total Eligible Provisions (TEP) in the context of the Basel II/III regulatory framework are defined as the sum of all provisions (e.g. Specific Provisions, partial write-offs, portfolio-specific general provisions such as country risk provisions or General Provisions) that are attributed to exposures treated under the IRB approach. In addition, total eligible provisions may include any discounts on defaulted assets.[1]
Specific provisions set aside against equity and securitisation exposures must not be included in total eligible provisions.
Capital Treatment under Basel II/III
The IRB approaches under Basel II avoid the need to define which portions of provisions can be considered general or specific. Banks using the IRB approach for non-securitization asset classes must simply compare
- the amount of total eligible provisions with
- the total expected losses amount as calculated within the IRB approach.
Where the total expected loss amount exceeds total eligible provisions, banks must deduct the difference from capital. Deduction must be on the basis of 50% from Tier 1 Capital and 50% from Tier 2 Capital.
Where the total expected loss amount is less than total eligible provisions banks may recognise the difference in Tier 2 capital up to a maximum of 0.6% of credit risk-weighted assets. At national discretion, a limit lower than 0.6% may be applied
References
- ↑ BCBS, International Convergence of Capital Measurement and Capital Standards, 2006
