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Basel ii Accord
Sections 270 to 284 |
C. Rules for
corporate, sovereign, and bank
exposures
270.
Section III.C presents the method of calculating
the unexpected loss (UL)
capital
requirements
for corporate, sovereign and bank exposures. As
discussed in Section C.1, one
risk-weight
function is provided for determining the capital
requirement for all three asset
classes
with one exception.
Supervisory
risk weights are provided for each of the
specialised lending sub-classes of corporates,
and a separate risk-weight function is also
provided for HVCRE. Section C.2 discusses the
risk components.
The
method of calculating expected losses, and for
determining the difference between that measure
and provisions is described in Section
III.G.
1.
Risk-weighted assets for corporate, sovereign,
and bank
exposures
(i)
Formula for derivation of risk-weighted
assets
271.
The derivation of risk-weighted assets is
dependent on estimates of the PD,
LGD,
EAD
and, in some cases, effective maturity (M), for
a given exposure. Paragraphs 318 to
324
discuss
the circumstances in which the maturity
adjustment applies.
272.
Throughout this section, PD and LGD are measured
as decimals, and EAD is
measured
as currency (e.g. euros), except where
explicitly noted otherwise. For
exposures
not in default, the
formula for calculating risk-weighted assets
is:
(70), ( 71)
Correlation
(R) = 0.12 ื (1 EXP(-50 ื PD)) / (1
EXP(-50)) +
0.24
ื [1 (1 EXP(-50 ื PD)) / (1
EXP(-50))]
Maturity
adjustment (b) = (0.11852 0.05478 ื
ln(PD))^2
Capital
requirement
(72) (K) =
[LGD ื N[(1 R)^-0.5 ื G(PD) + (R / (1
R))^0.5 ื G(0.999)]
PD x LGD] x (1 1.5 x b)^-1 ื (1 + (M 2.5) ื
b)
Risk-weighted
assets (RWA) = K x 12.5 x EAD
The
capital requirement (K) for a defaulted exposure
is equal to the greater of zero and
the
difference
between its LGD (described in paragraph 468) and
the banks best estimate of
expected
loss (described in paragraph 471).
The
risk-weighted asset amount for the defaulted
exposure is the product of K, 12.5, and the EAD.
Illustrative risk weights are shown in Annex
5.
(ii)
Firm-size adjustment for small- and medium-sized
entities (SME)
273.
Under the IRB approach for corporate credits,
banks will be permitted to
separately
distinguish
exposures to SME 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)
from
those
to large firms.
A
firm-size adjustment (i.e. 0.04 x (1 (S 5) /
45)) is made to the corporate risk weight
formula for exposures to SME borrowers. S is
expressed as total annual sales in millions of
euros with values of S falling in the range of
equal to or less than 50 million or greater
than or equal to 5 million. Reported sales of
less than 5 million will be treated as if they
were equivalent to 5 million for the purposes
of the firm-size adjustment for SME
borrowers.
Correlation
(R) = 0.12 ื (1 EXP(-50 ื PD)) / (1
EXP(-50)) +
0.24
ื [1 (1 EXP(-50 ื PD)) / (1 EXP(-50))]
0.04 ื (1 (S5) / 45)
274.
Subject to national discretion, supervisors may
allow banks, as a failsafe, to
substitute
total assets of the consolidated group for total
sales in calculating the SME
threshold
and the firm-size adjustment. However, total
assets should be used only when
total
sales
are not a meaningful indicator of firm
size.
(iii)
Risk weights for specialised
lending
Risk
weights for PF, OF, CF, and
IPRE
275.
Banks that do not meet the requirements for the
estimation of PD under the
corporate
IRB approach will be required to map their
internal grades to five
supervisory
categories,
each of which is associated with a specific risk
weight. The slotting criteria
on
which
this mapping must be based are provided in Annex
6. The risk weights for unexpected losses
associated with each supervisory category
are:
(70)
Ln denotes the natural
logarithm.
(71)
N(x) denotes the cumulative distribution
function for a standard normal random variable
(i.e. the probability that a normal random
variable with mean zero and variance of one is
less than or equal to x).
G(z)
denotes the inverse cumulative distribution
function for a standard normal random variable
(i.e. the value of x such that N(x) = z).
The
normal cumulative distribution function and the
inverse of the normal cumulative distribution
function are, for example, available in Excel as
the functions NORMSDIST and
NORMSINV.
72
If this calculation results in a negative
capital charge for any individual sovereign
exposure, banks should apply a zero capital
charge for that
exposure.
276.
Although banks are expected to map their
internal ratings to the
supervisory
categories
for specialised lending using the slotting
criteria provided in Annex 6,
each
supervisory
category broadly corresponds to a range of
external credit assessments as
outlined
below.
277.
At national discretion, supervisors may allow
banks to assign preferential
risk
weights
of 50% to strong exposures, and 70% to good
exposures, provided they have a
remaining
maturity of less than 2.5 years or the
supervisor determines that
banks
underwriting
and other risk characteristics are substantially
stronger than specified in the
slotting
criteria for the relevant supervisory risk
category.
278.
Banks that meet the requirements for the
estimation of PD will be able to use
the
general
foundation approach for the corporate asset
class to derive risk weights for SL
subclasses.
279.
Banks that meet the requirements for the
estimation of PD and LGD and/or EAD
will
be
able to use the general advanced approach for
the corporate asset class to derive
risk
weights
for SL sub-classes.
Risk
weights for HVCRE
280.
Banks that do not meet the requirements for
estimation of PD, or whose
supervisor
has
chosen not to implement the foundation or
advanced approaches to HVCRE, must
map
their
internal grades to five supervisory categories,
each of which is associated with
a
specific
risk weight. The slotting criteria on which this
mapping must be based are the
same
as
those for IPRE, as provided in Annex 6. The risk
weights associated with each
category
are:
281. As indicated
in paragraph 276, each supervisory category
broadly corresponds to a
range of external
credit assessments.
282. At national
discretion, supervisors may allow banks to
assign preferential risk
weights of 70% to
strong exposures, and 95% to good exposures,
provided they have a
remaining maturity
of less than 2.5 years or the supervisor
determines that banks
underwriting and
other risk characteristics are substantially
stronger than specified in
the
slotting criteria
for the relevant supervisory risk
category.
283. Banks that
meet the requirements for the estimation of PD
and whose supervisor
has chosen to
implement a foundation or advanced approach to
HVCRE exposures will use
the same formula
for the derivation of risk weights that is used
for other SL exposures,
except that they
will apply the following asset correlation
formula:
Correlation (R) =
0.12 x (1 EXP(-50 x PD)) / (1 EXP(-50))
+
0.30 x [1 (1
EXP(-50 x PD)) / (1
EXP(-50))]
284. Banks that do
not meet the requirements for estimation of LGD
and EAD for HVCRE
exposures must use
the supervisory parameters for LGD and EAD for
corporate exposures.
(iv) Calculation
of risk-weighted assets for exposures subject to
the double default
framework
284 (i). For
hedged exposures to be treated within the scope
of the double default
framework, capital
requirements may be calculated according to
paragraphs 284 (ii) and
284
(iii).
284 (ii). The
capital requirement for a hedged exposure
subject to the double
default
treatment
(KDD) is calculated by multiplying
K0
as
defined below by a multiplier depending on the
PD of the protection provider
(PDg):
PDo and PDg
are
the probabilities of default of the obligor and
guarantor, respectively,
both
subject to the PD
floor set out in paragraph 285.
The correlation
ρos is calculated
according to the formula for correlation (R) in
paragraph 272 (or, if applicable, paragraph
273), with PD being equal to
PDo, and LGDg
is
the LGD of a comparable direct exposure to the
guarantor (i.e. consistent with paragraph 301,
the LGD associated with an unhedged facility to
the guarantor or the unhedged facility to the
obligor, depending upon whether in the event
both the guarantor and the obligor default
during the life of the hedged transaction
available evidence and the structure of the
guarantee indicate that the amount recovered
would depend on the financial condition of the
guarantor or obligor, respectively; in
estimating either of these LGDs, a bank may
recognise collateral posted exclusively against
the exposure or credit protection, respectively,
in a manner consistent with paragraphs 303 or
279 and 468 to 473, as applicable).
There
may be no consideration of double recovery in
the LGD estimate. The maturity adjustment
coefficient b is calculated according to the
formula for maturity adjustment (b) in paragraph
272, with PD being the minimum of
PDo
and
PDg. M is the
effective maturity of the credit protection,
which may under no circumstances be below the
one-year floor if the double default framework
is to be applied. 284 (iii). The risk-weighted
asset amount is calculated in the same way as
for unhedged exposures,
i.e.
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