Each corporate Member contributes to the Corporate Funding Association the regulatory capital required to grant its credit facility on a fully drawn down basis. This equity contribution is based on:
• the capital adequacy ratio applicable to CFA, determined by the banking authority
• the amount of the credit facility
• the credit rating (public or private) of the corporate Member
In addition to these items, the funding leverage offered to corporate Members depends on:
• the rules applicable to counterparty risk concentration limits (no counterparty risk shall exceed 10% of CFA’s regulatory capital)
• the regulatory environment applicable to CFA: as long as its internal risk model has not been authorised by the banking authority, CFA follows the Basel II Standardised framework; once it is authorised, CFA will be entitled to switch to the Internal Rating Based Foundation approach, offering a higher funding leverage to its corporate Members
When a Member’s credit rating is downgraded, it is requested to contribute additional capital in accordance with its new rating; alternatively, it can reduce its credit facility. When its rating is upgraded, it can elect to increase its committed credit facility or to be partially repaid its equity investment in order to maintain the amount of its credit facility. Along with CFA’s pricing policy, this adjustment mechanism is a groundbreaking feature of the project. Whereas “regular” banks’ capital adequacy ratios suffer from pro-cyclical effects of banking regulation, this mechanisms enables CFA to monitor its regulatory capital in accordance with the changes in the average quality of its credit portfolio.