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SOVEREIGN, BANK, AND EQUITY EXPOSURES

We provide the Basel 2 definitions hereafter, in indented paragraphs. All excerpts are from the comprehensive document issued by the Basel Committee on Banking Supervision, or BCBS (June 2006)

[1].

Bank Exposures

This asset class covers exposures to banks and those to securities firms. The definition is self-explanatory. Note that insurance companies are subject to the regulatory treatment of the "corporate" asset class, and there is no "financial institution" category.

Sovereign Exposures

§229. This asset class covers all exposures to counterparties treated as sovereigns under the standardized approach. This includes sovereigns (and their central banks), certain PSEs identified as sovereigns in the standardized approach ("MDB").

Public sector entities (PSEs) are considered "sovereign" if they comply with certain criteria. "MDB" designates Multilateral Development Banks. The "standardized approach" is the simplest of the three Basel 2 approaches[2].

Equity Exposures

The equity asset class refers to equity stakes in other corporations, held by the bank. It does not refer to equity instruments held for trading purposes in the banking portfolio.

§235. In general, equity exposures are defined on the basis of the economic substance of the instrument. They include both direct and indirect ownership interests, whether voting or non-voting, in the assets and income of a commercial enterprise or of a financial institution ....

Note that equity-linked instruments, such as an obligation that can be settled by issuance of issuer's equity shares, are categorized as equity.

  • [1] Paragraphs numbering the BCBS document [7] are included for convenience.
  • [2] Basel 2 regulations are detailed in Chapter 20, from Section 6 dedicated to regulations.
 
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