Minimum Capital Requirements for Credit Risk

For transactions falling within the scope of paragraph 12.51 subject to a master netting agreement, the effective maturity is defined as the weighted average maturity of the transactions. A floor equal to the minimum holding period for the transaction type set out in paragraph 9.56 of the standardized approach will apply to the average. Where more than one transaction type is contained in the master netting agreement a floor equal to the highest holding period will apply to the average. Further, the notional amount of each transaction should be used for weighting maturity. 12.55 Where there is no explicit definition, the effective maturity (M) assigned to all exposures is set at 2.5 years unless otherwise specified in paragraph 12.44. Treatment of maturity mismatches 12.56 The treatment of maturity mismatches under IRB is identical to that in the standardized approach (see paragraphs 9.10 to 0). Risk components for retail exposures 12.57 Paragraphs 12.57 to 12.67 set out the calculation of the risk components for retail 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) and loss given default (LGD) 12.58 For each identified pool of retail exposures, banks are expected to provide an estimate of the PD and LGD associated with the pool, subject to the minimum requirements as set out in chapter 16 . Additionally, the PD for retail exposures is the greater of: (i) the one-year PD associated with the internal borrower grade to which the pool of retail exposures is assigned; and (ii) 0.1% for qualifying revolving retail exposure (QRRE) revolvers (see paragraph 10.22 for the definition of QRRE revolvers) and 0.05% for all other exposures. The LGD for each 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 18 below: LGD parameter floors for retail exposures Table 18 Type of exposure Unsecured Secured Mortgages Not applicable 5% QRRE (transactors and revolvers) 50% Not applicable Other retail 30% Varying by collateral type: • 0% financial • 10% receivables • 10% commercial or residential real estate • 15% other physical 12.59 Regarding the LGD parameter floors set out in the table above, the LGD floors forpartially secured exposures in the “other retail” category should be calculated according to the formula set out in paragraph 12.17. The LGD floor for residential mortgages is fixed at 5%, irrespective of the level of collateral provided by the property. Recognition of guarantees and credit derivatives 12.60 Banks may reflect the risk-reducing effects of guarantees and credit derivatives, either in support of an individual obligation or a pool of exposures, through an adjustment of either the PD or LGD estimate, subject to the minimum requirements in paragraphs 16.99 to 16.110 . Whether adjustments are done through PD or LGD, they must be done in a consistent manner for a given guarantee or credit derivative type. In case the bank applies the standardized approach to direct exposures to the guarantor it may only recognize the guarantee by applying the standardized approach risk weight to the covered portion of the exposure. 12.61 Consistent with the requirements outlined above for corporate and bank exposures, banks must not include the effect of double default in such adjustments. The adjusted risk weight must not be less than that of a comparable direct exposure to the protection provider. Consistent with the standardized approach, banks may choose not to recognize credit protection if doing so would result in a higher capital requirement. Exposure at default (EAD)