Minimum Capital Requirements for Credit Risk

(1). (a) Pool parameters: (i) KIRB,Pool = KIRB,Default = 6.69% (ii) LGDPool = LGDDefault = 45% (b) Tranche parameters: (i) MT = 2.5 years (ii) Attachment point = €50,000 / €1,000,000 = 5% (iii) Detachment point = €1,000,000 / €1,000,000 = 100% (c) Resulting risk-weighted exposure amounts: (i) SEC-IRBA risk weight = 51.67% (ii) RWA = €490,865 (2) Step 2: calculate RWA for 27.15(2). (a) Pool parameters: (i) KIRB,Pool = KIRB,Dilution = 13.47% (ii) LGDPool = LGDDilution = 100% (b) Tranche parameters: (i) MT = 2.5 years (ii) Attachment and detachment points shown in Table 4 Attachment and detachment points for each tranche Table 4 Attachment point Detachment point Tranche A* 30% 100% Tranche C 0% 5% (c) Resulting risk-weighted exposure amounts shown in Table 5 Risk-weighted exposure amounts for each tranche Table 5 SEC-IRBA risk weight Tranche A* 11.16% €78,120 Tranche C 1250% €625,000 (3) Step 3: Sum up the RWA of 27.16 (1) and 27.16 (2) 133 (a) Final RWA amount for investor in Tranche A = €490,865 + €78,120 + €625,000 = €1,193,985 (b) Implicit risk weight for Tranche A = max (15%, €1,193,985 / €950,000) = 125.68% 126 For the sake of simplicity, the possibility described in paragraph 14.8 of Minimum Capital Requirements for Credit Risk to set M Dilution = 1 is not used in this example. 127 The rounding of the maturity calculation is shown for example purposes 128 As described in paragraph 14.5 of Minimum Capital Requirements for Credit Risk, when calculating the default risk of exposures with non-immaterial dilution risk “EAD will be calculated as the outstanding amount minus the capital requirement for dilution prior to credit risk mitigation”. 129 For the sake of simplicity, it is assumed that the second-loss guarantee is cash-collateralised 130 Subject to the condition that it is not already being used for realised dilution losses. 131 Subject to the condition that it is not already being used for realised default losses. 132 In this example, the purchase price discount was recognised in the default risk calculation, but banks could also choose to use it for the dilution risk calculation. It is also assumed that the second-loss dilution guarantee explicitly covers dilution losses above €50,000 up to €300,000. If the guarantee instead covered €250,000 dilution losses after the purchase discount has been depleted (irrespective of whether the purchase discount has been used for dilution or default losses), then the senior note holder should assume that he is exposed to dilution losses from €250,000 up to €1,000,000 (instead of €0 to €50,000 + €300,000 to €1,000,000). 133 The correct application of the overall risk weight floor is such that the intermediate results (in this case the risk weight for Tranche A*) are calculated without the floor and the floor is only enforced in the last step (ie Step 3(b)). 28. Equity Investments in Funds: Illustrative Example of the Calculation of Risk-Weighted Assets (RWA) Under the Look-Through Approach (LTA) 28.1 Consider a fund that replicates an equity index. Moreover, assume the following: (1) The bank uses the standardised approach (SA) for credit risk when calculating its capital requirements for credit risk and for determining counterparty credit risk exposures it uses the SA-CCR. (2) The bank owns 20% of the shares of the fund. (3) The fund holds forward contracts on listed equities that are cleared through a qualifying central counterparty (with a notional amount of USD 100); and (4) The fund presents the following balance sheet: Assets Cash USD 20 Government bonds (AAA-rated) USD 30 Variation margin receivable (ie collateral posted by the bank to the CCP in respect of the forward contracts) USD 50 Liabilities Notes payable USD 5 Equity Shares, retained earnings and other reserves USD 95