Risk Components for Corporate, Sovereign and Bank Exposures

Subject to certain additional minimum requirements specified below (and the conditions set out in paragraph 10.32 ), SAMA may permit banks to use their own internal estimates of LGD for corporate and sovereign exposures. LGD must be measured as the loss given default as a percentage of the EAD. Banks eligible for the IRB approach that are unable to meet these additional minimum requirements must utilize the foundation LGD treatment described above. 12.16 The LGD for each corporate exposure that is used as input into the risk weight formula and the calculation of expected loss must not be less than the parameter floors indicated in table 17 below (the floors do not apply to the LGD for exposures in the sovereign asset class): LGD parameter floors for corporate exposures Table 17 Unsecured Secured 25% Varying by collateral type: • 0% financial • 10% receivables • 10% commercial or residential real • estate 15% other physical 12.17 The LGD floors for secured exposures in the table above apply when the exposure is fully secured (i.e. the value of collateral after the application of haircuts exceeds the value of the exposure). The LGD floor for a partially secured exposure is calculated as a weighted average of the unsecured LGD floor for the unsecured portion and the secured LGD floor for the secured portion. That is, the following formula should be used to determine the LGD floor, where: (1) LGD U floor and LGD S floor are the floor values for fully unsecured and fully secured exposures respectively, as specified in the table in paragraph 12.10. (2) The other terms are defined as set out in paragraphs 12.10 and 0. 12.18 In cases where a bank has met the conditions to use their own internal estimates of LGD for a pool of unsecured exposures, and takes collateral against one of these exposures, it may not be able to model the effects of the collateral (i.e. it may not have enough data to model the effect of the collateral on recoveries). In such cases, the bank is permitted to apply the formula set out in paragraphs 12.10 or 12.14, with the exception that the LGD U term would be the bank’s own internal estimate of the unsecured LGD. To adopt this treatment the collateral must be eligible under the F-IRB and the bank’s estimate of LGD U must not take account of any effects of collateral recoveries. 12.19 The minimum requirements for the derivation of LGD estimates are outlined in paragraphs 16.82 to 16.87 . Treatment of certain repo-style transactions 12.20 Banks that want to recognize the effects of master netting agreements on repo style transactions for capital purposes must apply the methodology outlined in paragraph 12.38 for determining E* for use as the EAD in the calculation of counterparty credit risk. For banks using the advanced approach, own LGD estimates would be permitted for the unsecured equivalent amount (E*) used to calculate counterparty credit risk. In both cases banks, in addition to counterparty credit risk, must also calculate the capital requirements relating to any credit or market risk to which they remain exposed arising from the underlying securities in the master netting agreement. Treatment of guarantees and credit derivatives 12.21 There are two approaches for recognition of credit risk mitigation (CRM) in the form of guarantees and credit derivatives in the IRB approach: a foundation approach for banks using supervisory values of LGD, and an advanced approach for those banks using their own internal estimates of LGD.