Allocating Multiple Credit Risk Mitigants in F-IRB RWA Calculations
Summary
The document considers how to divide a loan exposure across collateral, a guarantee, and an uncovered portion when calculating risk-weighted assets under the Foundation IRB approach. Its example assigns different loss-given-default assumptions to real estate collateral and an unsecured portion, and uses the guarantor’s probability of default for the guaranteed portion. The response suggests applying the more favorable mitigation first, then using another available mitigation for the remaining balance; it also says that collateral need not be fully allocated.
The answer is an informal opinion rather than a sourced regulatory interpretation, and it does not work through the calculation or resolve how the proposed allocation should be validated under the applicable rules. Its example also leaves an arithmetic inconsistency: the stated uncovered balance does not match the other listed portions. Readers should treat the allocation suggestion as tentative and consult the governing Basel text and supervisory guidance before applying it.
Key ideas
- The question concerns splitting one credit exposure among collateralized, guaranteed, and uncovered portions.
- The response proposes allocating the more favorable credit risk mitigation to the exposure first.
- It suggests using collateral for some of the remaining exposure without requiring all available collateral to be assigned.
- The answer is informal and does not establish a binding regulatory method.
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# Multiple credit risk mitigation (CRM) treatment in RWA calculation in F-IRB approach Basel II # Multiple credit risk mitigation (CRM) treatment in RWA calculation in F-IRB approach Basel II I have a confusion about how to calculate RWA for a exposure with many types of CRM (says, collaterals and guarantee) in IRB approach. - In BCBS128, point 206, "In the case where a bank has multiple CRM techniques covering a single exposure (e.g. a bank has both collateral and guarantee partially covering an exposure), the bank will be required to subdivide the exposure into portions covered by each type of CRM technique (e.g. portion covered by collateral, portion covered by guarantee) and the risk-weighted assets of each portion must be calculated separately" But this is for SA approach, I'm not sure if this rule is valid for F-IRB approach. If If you divide the exposure into portions, will the collateral or guarantee be recognized first? Please look at the below example: - A senior loan with exposure of 100k USD, - CRE/RRE collateral covers 30k USD. LGD applied for CRE/RRE is 0.35 according to bcbs128. - Guarantee covers 20k USD. - The rest (no collateralized, no guaranteed): 20k USD. - The LGD applied for no collateralized part is 0.45 (according to bcbs128) - PD of the customer is 5%, PD of the guarantor is 2% As far as we understand, the LGD can be calculated as below. Please confirm if we understand correctly. - The collateralized part (30k) will be applied the LGD of 0.35, PD = 5% - The guaranteed part (20k) will be applied LGD of 0.45, PD = 2% - The no guaranteed/collateralized part (50k) will be both applied the LGD of 0.45, PD = 5% If Guarantee in above example covers 80k (instead of 20k), collateral covers 30k, how should we divide exposure 100k? Thanks ## Answer by Robert (score 0) https://quant.stackexchange.com/a/75928 You use the more favorable CRM, in this case the guarantee with the 80k and for the rest you take the CRE/RRE CRM. Y don't need to use the full available RRE/CRE. IMHO you do some allocation the most risky exposure get the most favorable CRM to reduce the RWA
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