Minimum Capital Requirements for Credit Risk

The risk weight under the foundation IRB treatment is determined as follows: (1) If the purchasing bank is unable to decompose EL into its PD and LGD components in a reliable manner, the risk weight is determined from the corporate risk-weight function using the following specifications: (a) If the bank can demonstrate that the exposures are exclusively senior claims to corporate borrowers: (i) An LGD of 40% can be used. (ii) PD will be calculated by dividing the EL using this LGD. (iii) EAD will be calculated as the outstanding amount minus the capital charge for dilution prior to credit risk mitigation (K Dilution ). (iv) EAD for a revolving purchase facility is the sum of the current amount of receivables purchased plus 40% of any undrawn purchase commitments minus K Dilution . (b) If the bank cannot demonstrate that the exposures are exclusively senior claims to corporate borrowers: (i) PD is the bank’s estimate of EL. (ii) LGD will be 100%. (iii) EAD is the amount outstanding minus K Dilution . (iv) EAD for a revolving purchase facility is the sum of the current amount of receivables purchased plus 40% of any undrawn purchase commitments minus K Dilution . (2) If the purchasing bank is able to estimate PD in a reliable manner, the risk weight is determined from the corporate risk-weight functions according to the specifications for LGD, effective maturity (M) and the treatment of guarantees under the foundation approach as given in paragraphs 12.6 to 12.14 , 12.20 to 12.26 and 12.44 . Advanced IRB treatment 14.6 Under the advanced IRB approach, if the purchasing bank can estimate either the pool’s default-weighted average loss rates given default (as defined in paragraph 16.82 ) or average PD in a reliable manner, the bank may estimate the other parameter based on an estimate of the expected long-run loss rate. The bank may: (i) use an appropriate PD estimate to infer the long-run default- weighted average loss rate given default; or (ii) use a long-run default-weighted average loss rate given default to infer the appropriate PD. In either case, the LGD used for the IRB capital calculation for purchased receivables cannot be less than the long-run default-weighted average loss rate given default and must be consistent with the concepts defined in paragraph 16.82 . The risk weight for the purchased receivables will be determined using the bank’s estimated PD and LGD as inputs to the corporate risk-weight function. Similar to the foundation IRB treatment, EAD will be the amount outstanding minus K Dilution . EAD for a revolving purchase facility will be the sum of the current amount of receivables purchased plus 40% of any undrawn purchase commitments minus K Dilution (thus, banks using the advanced IRB approach will not be permitted to use their internal EAD estimates for undrawn purchase commitments). 14.7 For drawn amounts, M will equal the pool’s exposure-weighted average effective maturity (as defined in paragraphs 12.44 to 12.55 ). This same value of M will also be used for undrawn amounts under a committed purchase facility provided the facility contains effective covenants, early amortization triggers, or other features that protect the purchasing bank against a significant deterioration in the quality of the future receivables it is required to purchase over the facility’s term. Absent such effective protections, the M for undrawn amounts will be calculated as the sum of: (a) the longest-dated potential receivable under the purchase agreement;and (b) the remaining maturity of the purchase facility. 60 The firm-size adjustment for small or medium-sized entities, as defined in paragraph 11.8 , will be the weighted average by individual exposure of the pool of purchased corporate receivables. If the bank does not have the information to calculate the average size of the pool, the firm-size adjustment will not apply. Risk-Weighted Assets for Dilution Risk