Risk Components for Corporate, Sovereign and Bank Exposures

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 12.14 In the case where a bank has obtained multiple types of collateral it may apply the formula set out in paragraph 12.10 sequentially for each individual type of collateral. In doing so, after each step of recognizing one individual type of collateral, the remaining value of the unsecured exposure (E U ) will be reduced by the adjusted value of the collateral (E S ) recognized in that step. In line with paragraph 12.10, the total of E S across all collateral types is capped at the value of E ∙ (1+H E ). This results in the formula that follows, where for each collateral type i: (1) LGD Si is the LGD applicable to that form of collateral (as specified in paragraph 0). (2) E Si is the current value of the collateral received after the application of the haircut applicable for the type of collateral (H C ) (as specified in paragraph 0). LGD under the advanced approach