Minimum Capital Requirements for Credit Risk

There are three separate risk-weight functions for retail exposures, as defined in paragraphs 11.14 to 11.16. Risk weights for retail exposures are based on separate assessments of PD and LGD as inputs to the risk-weight functions. None of the three retail risk-weight functions contain the full maturity adjustment component that is present in the risk-weight function for exposures to banks, sovereigns and corporates. Retail residential mortgage exposures 11.14 For exposures defined in paragraph 10.18 that are not in default and are secured or partly secured 56 by residential mortgages, risk weights will be assigned based on the following formula: Qualifying revolving retail exposures 11.15 For qualifying revolving retail exposures as defined in paragraphs 10.21 and 10.22 that are not in default, risk weights are defined based on the following formula: Other retail exposures 11.16 For all other retail exposures that are not in default, risk weights are assigned based on the following function, which allows correlation to vary with PD: 56 This means that risk weights for residential mortgages also apply to the unsecured portion of such residential mortgages. 12. IRB Approach: Risk Components 12.1 This chapter presents the calculation of the risk components (PD, LGD, EAD, M) that are used in the formulas set out in chapter 11 . In calculating these components, the legal certainty standards for recognizing credit risk mitigation under the standardized approach to credit risk ( chapter 9 ) apply for both the foundation and advanced internal ratings-based (IRB) approaches. Risk Components for Corporate, Sovereign and Bank Exposures 12.2 Paragraphs 12.2 to 12.56, sets out the calculation of the risk components for corporate, sovereign and bank exposures. In the case of an exposure that is guaranteed by a sovereign, the floors that apply to the risk components do not apply to that part of the exposure covered by the sovereign guarantee (i.e. any part of the exposure that is not covered by the guarantee is subject to the relevant floors). Probability of default (PD) 12.3 For corporate, sovereign and bank exposures, the PD is the one-year PD associated with the internal borrower grade to which that exposure is assigned. The PD of borrowers assigned to a default grade(s), consistent with the reference definition of default, is 100%. The minimum requirements for the derivation of the PD estimates associated with each internal borrower grade are outlined in paragraphs 16.76 to 16.78 . 12.4 With the exception of exposures in the sovereign asset class, the PD for each exposure that is used as input into the risk weight formula and the calculation of expected loss must not be less than 0.05%. Loss given default (LGD) 12.5 A bank must provide an estimate of the LGD for each corporate, sovereign and bank exposure. There are two approaches for deriving this estimate: a foundation approach and an advanced approach. As noted in paragraph 10.32 , the advanced approach is not permitted for exposures to certain entities. LGD under the foundation internal ratings-based (F-IRB) approach: treatment of unsecured claims and non-recognized collateral 12.6 Under the foundation approach, senior claims on sovereigns, banks, securities firms and other financial institutions (including insurance companies and any financial institutions in the corporate asset class) that are not secured by recognized collateral will be assigned a 45% LGD. Senior claims on other corporates that are not secured by recognized collateral will be assigned a 40% LGD. 12.7 All subordinated claims on corporates, sovereigns and banks will be assigned a 75% LGD. A subordinated loan is a facility that is expressly subordinated to another facility. LGD under the F-IRB approach: collateral recognition