Minimum Capital Requirements for Credit Risk

A firm-size adjustment applies to exposures made to small or medium-sized entity borrowers (defined as corporate exposures where the reported sales for the consolidated group of which the firm is a part is less than €50 million). Accordingly, the firm-size adjustment was made in determining the second set of risk weights provided in column two for corporate exposures given that the turnover of the firm receiving the exposure is assumed to be €5 million. Illustrative IRB risk weights for UL Table 1 Asset class Corporate Exposures Residential Mortgages Other Retail Exposures Qualifying Revolving Retail Exposures LGD: 40% 40% 45% 25% 45% 85% 50% 85% Turnover (millions of €): 50 5 Maturity: 2.5 years 2.5 years PD: 0.05% 17.47% 13.69% 6.23% 3.46% 6.63% 12.52% 1.68% 2.86% 0.10% 26.36% 20.71% 10.69% 5.94% 11.16% 21.08% 3.01% 5.12% 0.25% 43.97% 34.68% 21.30% 11.83% 21.15% 39.96% 6.40% 10.88% 0.40% 55.75% 43.99% 29.94% 16.64% 28.42% 53.69% 9.34% 15.88% 0.50% 61.88% 48.81% 35.08% 19.49% 32.36% 61.13% 11.16% 18.97% 0.75% 73.58% 57.91% 46.46% 25.81% 40.10% 75.74% 15.33% 26.06% 1.00% 82.06% 64.35% 56.40% 31.33% 45.77% 86.46% 19.14% 32.53% 1.30% 89.73% 70.02% 67.00% 37.22% 50.80% 95.95% 23.35% 39.70% 1.50% 93.86% 72.99% 73.45% 40.80% 53.37% 100.81% 25.99% 44.19% 2.00% 102.09% 78.71% 87.94% 48.85% 57.99% 109.53% 32.14% 54.63% 2.50% 108.58% 83.05% 100.64% 55.91% 60.90% 115.03% 37.75% 64.18% 3.00% 114.17% 86.74% 111.99% 62.22% 62.79% 118.61% 42.96% 73.03% 4.00% 124.07% 93.37% 131.63% 73.13% 65.01% 122.80% 52.40% 89.08% 5.00% 133.20% 99.79% 148.22% 82.35% 66.42% 125.45% 60.83% 103.41% 6.00% 141.88% 106.21% 162.52% 90.29% 67.73% 127.94% 68.45% 116.37% 10.00% 171.63% 130.23% 204.41% 113.56% 75.54% 142.69% 93.21% 158.47% 15.00% 196.92% 152.81% 235.72% 130.96% 88.60% 167.36% 115.43% 196.23% 20.00% 211.76% 167.48% 253.12% 140.62% 100.28% 189.41% 131.09% 222.86% 27. Illustrative Examples for Recognition of Dilution Risk When Applying the Securitization Internal Ratings-Based Approach (SEC-IRBA) to Securitization Exposures 27.1. The following two examples are provided to illustrate the recognition of dilution risk according to Paragraph 22.12 of Minimum Capital Requirements for Credit Risk and Paragraph 22.13 of Minimum Capital Requirements for Credit Risk . The first example in 27.2 to 27.5 assumes a common waterfall for default and dilution losses. The second example in 27.6 to 27.16 assumes a non-common waterfall for default and dilution losses. 27.2. Common waterfall for default and dilution losses: in the first example, it is assumed that losses resulting from either defaults or dilution within the securitised pool will be subject to a common waterfall, ie the loss allocation process does not distinguish between different sources of losses within the pool. 27.3. The pool is characterised as follows. For the sake of simplicity, it is assumed that all exposures have the same size, same PD, same LGD and same maturity. (1) Pool of €1,000,000 of corporate receivables (2) N = 100 (3) M = 2.5 years 126 (4) PDDilution = 0.55% (5) LGDDilution =100% (6) PDDefault = 0.95% (7) LGDDefault = 45% 27.4. The capital structure is characterised as follows: (1) Tranche A is a senior note of €700,000 (2) Tranche B is a second-loss guarantee of €250,000 (3) Tranche C is a purchase discount of €50,000 (4) Final legal maturity of transaction / all tranches = 2.875 years, ie MT = 2.5 years 127 27.5. RWA calculation: (1) Step 1: calculate KIRB, Dilution and KIRB, Default for the underlying portfolio: (a) KIRB, Dilution = €1,000,000 x (161.44% x 8% + 0.55% x 100%) / €1,000,000 = 13.47% (b) KIRB, Default = (€1,000,000 – €129,200) 128 x (90.62% x 8% + 0.95% x 45%) / €1,000,000 = 6.69% (2) Step 2: calculate KIRB, Pool = KIRB, Dilution + KIRB, Default = 13.47% + 6.69% = 20.16% (3) Step 3: apply the SEC-IRBA to the three tranches (a) Pool parameters: (i) N = 100 (ii) LGDPool = (LGDDefault x KIRB, Default + LGDDilution x KIRB, Dilution) / KIRB, Pool = (45% x 6.69% + 100% x 13.47