Minimum Capital Requirements for Credit Risk

In addition to the eligible financial collateral recognized in the standardized approach, under the F-IRB approach some other forms of collateral, known as eligible IRB collateral, are also recognized. These include receivables, specified commercial and residential real estate, and other physical collateral, where they meet the minimum requirements set out in paragraphs 16.130 to 16.146 . For eligible financial collateral, the requirements are identical to the operational standards as set out in the credit risk mitigation section of the standardized approach (see chapter 9 ). 12.9 The simple approach to collateral presented in the standardized approach is not available to banks applying the IRB approach. 12.10 The LGD applicable to a collateralized transaction (LGD*) must be calculated as the exposure weighted average of the LGD applicable to the unsecured part of an exposure (LGD U ) and the LGD applicable to the collateralized part of an exposure (LGD S ). Specifically, the formula that follows must be used, where: (1) E is the current value of the exposure (i.e. cash lent or securities lent or posted). In the case of securities lent or posted the exposure value has to be increased by applying the appropriate haircuts (H E ) according to the comprehensive approach for financial collateral. (2) E S is the current value of the collateral received after the application of the haircut applicable for the type of collateral (H C ) and for any currency mismatches between the exposure and the collateral, as specified in paragraphs 12.11 to 12.12. E S is capped at the value of E ∙ (1+H E ). (3) E U = E ∙ (1+H E ) – E S . The terms E U and E S are only used to calculate LGD*. Banks must continue to calculate EAD without taking into account the presence of any collateral, unless otherwise specified. (4) LGDU is the LGD applicable for an unsecured exposure, as set out in paragraphs 12.6 and 12.7. (5) LGD S is the LGD applicable to exposures secured by the type of Collateral used in the transaction, as specified in paragraph 12.11. 12.11 Table 16 below specifies the LGDS and haircuts applicable in the formula setout in paragraph 12.10: Table 16 Type of collateral LGDS Haircut Eligible financial collateral 0% As determined by the haircuts that apply in the comprehensive formula of the standardized approach for credit risk ( paragraph 9.49 ). The haircuts have to be adjusted for different holding periods and non-daily re-margining or revaluation according to paragraphs 9.55 to 9.58 of the standardized approach. Eligible receivables 20% 40% Eligible residential real estate / commercial real estate 20% 40% Other eligible physical collateral 25% 40% Ineligible collateral Not applicable 100% 12.12 When eligible collateral is denominated in a different currency to that of the exposure, the haircut for currency risk is the same haircut that applies in the comprehensive approach ( paragraph 9.51 of the standardized approach). 12.13 Banks that lend securities or post collateral must calculate capital requirements for both of the following: (i) the credit risk or market risk of the securities, if this remains with the bank; and (ii) the counterparty credit risk arising from the risk that the borrower of the securities may default. Paragraphs 12.37 to 12.43 set out the calculation the EAD arising from transactions that give rise to counterparty credit risk. For such transactions the LGD of the counterparty must be determined using the LGD specified for unsecured exposures, as set out in paragraphs 12.6 and 12.7. LGD under the F-IRB approach: methodology for the treatment of pools of collateral