Minimum Capital Requirements for Credit Risk

In the case where a bank has obtained multiple types of collateral it may apply the formula set out in paragraph 12.10 sequentially for each individual type of collateral. In doing so, after each step of recognizing one individual type of collateral, the remaining value of the unsecured exposure (E U ) will be reduced by the adjusted value of the collateral (E S ) recognized in that step. In line with paragraph 12.10, the total of E S across all collateral types is capped at the value of E ∙ (1+H E ). This results in the formula that follows, where for each collateral type i: (1) LGD Si is the LGD applicable to that form of collateral (as specified in paragraph 0). (2) E Si is the current value of the collateral received after the application of the haircut applicable for the type of collateral (H C ) (as specified in paragraph 0). LGD under the advanced approach 12.15 Subject to certain additional minimum requirements specified below (and the conditions set out in paragraph 10.32 ), SAMA may permit banks to use their own internal estimates of LGD for corporate and sovereign exposures. LGD must be measured as the loss given default as a percentage of the EAD. Banks eligible for the IRB approach that are unable to meet these additional minimum requirements must utilize the foundation LGD treatment described above. 12.16 The LGD for each corporate exposure that is used as input into the risk weight formula and the calculation of expected loss must not be less than the parameter floors indicated in table 17 below (the floors do not apply to the LGD for exposures in the sovereign asset class): LGD parameter floors for corporate exposures Table 17 Unsecured Secured 25% Varying by collateral type: • 0% financial • 10% receivables • 10% commercial or residential real • estate 15% other physical 12.17 The LGD floors for secured exposures in the table above apply when the exposure is fully secured (i.e. the value of collateral after the application of haircuts exceeds the value of the exposure). The LGD floor for a partially secured exposure is calculated as a weighted average of the unsecured LGD floor for the unsecured portion and the secured LGD floor for the secured portion. That is, the following formula should be used to determine the LGD floor, where: (1) LGD U floor and LGD S floor are the floor values for fully unsecured and fully secured exposures respectively, as specified in the table in paragraph 12.10. (2) The other terms are defined as set out in paragraphs 12.10 and 0. 12.18 In cases where a bank has met the conditions to use their own internal estimates of LGD for a pool of unsecured exposures, and takes collateral against one of these exposures, it may not be able to model the effects of the collateral (i.e. it may not have enough data to model the effect of the collateral on recoveries). In such cases, the bank is permitted to apply the formula set out in paragraphs 12.10 or 12.14, with the exception that the LGD U term would be the bank’s own internal estimate of the unsecured LGD. To adopt this treatment the collateral must be eligible under the F-IRB and the bank’s estimate of LGD U must not take account of any effects of collateral recoveries. 12.19 The minimum requirements for the derivation of LGD estimates are outlined in paragraphs 16.82 to 16.87 . Treatment of certain repo-style transactions