Risk Components for Corporate, Sovereign and Bank Exposures

On-balance sheet netting of loans and deposits of a bank to or from a retail customer will be permitted subject to the same conditions outlined in paragraphs 9.67 and 9.68 of the standardized approach. The definition of commitment is the same as in the standardized approach, as set out in paragraph 7.86 . Banks must use their own estimates of EAD for undrawn revolving commitments to extend credit, purchase assets or issue credit substitutes provided the exposure is not subject to a CCF of 100% in the standardized approach (see paragraph 7.84 ) and the minimum requirements in paragraphs 16.88 to 16.98 are satisfied. Foundation approach CCFs must be used for all other off-balance sheet items (for example, undrawn non- revolving commitments), and must be used where the minimum requirements for own estimates of EAD are not met. 12.64 Regarding own estimates of EAD, the EAD for each exposure that is used as input into the risk weight formula and the calculation of expected loss is subject to a floor that is the sum of: (i) the on balance sheet amount; and (ii) 50% of the off balance sheet exposure using the applicable CCF in the standardized approach. 12.65 For retail exposures with uncertain future drawdown such as credit cards, banks must take into account their history and/or expectation of additional drawings prior to default in their overall calibration of loss estimates. In particular, where a bank does not reflect conversion factors for undrawn lines in its EAD estimates, it must reflect in its LGD estimates the likelihood of additional drawings prior to default. Conversely, if the bank does not incorporate the possibility of additional drawings in its LGD estimates, it must do so in its EAD estimates. 12.66 When only the drawn balances of revolving retail facilities have been securitized, banks must ensure that they continue to hold required capital against the undrawn balances associated with the securitized exposures using the IRB approach to credit risk for commitments. 12.67 To the extent that foreign exchange and interest rate commitments exist within a bank’s retail portfolio for IRB purposes, banks are not permitted to provide their internal assessments of credit equivalent amounts. Instead, the rules for the standardized approach continue to apply. 57 When credit derivatives do not cover the restructuring of the underlying obligation, the partial recognition set out in paragraph 9.74 of the standardized approach applies. 58 A revolving loan facility is one that lets a borrower obtain a loan where the borrower has the flexibility to decide how often to withdraw from the loan and at what time intervals. A revolving facility allows the borrower to drawdown, repay and re-draw loans advanced to it. Facilities that allow prepayments and subsequent redraws of those prepayments are considered as revolving. 59 The intention is to include both parties of a transaction meeting these conditions where neither of the parties is systematically under- collateralized.