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Basel II PD Floor Question and the Corporate Exposure Threshold

Article Quant Q&A · Author: xiaodai
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Summary

The document asks whether Basel II sets a minimum probability of default for retail portfolios. The accepted answer does not verify the proposed retail threshold; instead, it points to an accord provision for corporate and bank exposures. For those exposure types, the stated PD is the greater of the one-year probability associated with the assigned internal borrower grade or 0.03%.

That correction is useful but limited: the answer concerns corporate and bank exposures, so it does not establish a minimum for retail assets. The document provides no supporting passage for a retail floor, and its brief response should not be generalized across asset classes. Researchers applying Basel rules should check the relevant exposure category and the applicable regulatory text before treating a PD threshold as universal.

Key ideas

  • The answer states a 0.03% PD lower bound for corporate and bank exposures.
  • That threshold is compared with the one-year PD associated with an internal borrower grade.
  • The response does not establish a minimum PD for retail portfolios.
  • PD floors should be checked against the applicable exposure category and regulatory text.

Tags

Risk managementFixed income
Full text
# Minimum PD under Basel II retail asset?


# Minimum PD under Basel II retail asset?












I have been told that under Basel II the minimum PD that one can assign to any portfolio/segment classified under the retail asset class is 0.33%.

But Google searches return nothing and I can't seem to find any references to it in the accord document?

Is this true and where is it mentioned in the accord?

## Answer by jaamor (score 2, accepted)

https://quant.stackexchange.com/a/25990

From the Basel II accord:

- For corporate and bank exposures, the PD is the greater of the one-year PD associated with the internal borrower grade to which that exposure is assigned, or 0.03%.

So it is 0.03%

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.