CA-5.1 CA-5.1 Overview
CA-5.1.1
This chapter of the Capital Adequacy Module describes the IRB approach to credit risk. Subject to certain minimum conditions and disclosure requirements, banks that have received CBB's approval to use the IRB approach may rely on their own internal estimates of risk components in determining the capital requirement for a given exposure. The risk components include measures of the probability of default (PD), loss given default (LGD), the exposure at default (EAD), and effective maturity (M). In most cases, banks are required to use a value given by the CBB as opposed to an internal estimate for one or more of the risk components.
Apr 08CA-5.1.2
The IRB approach is based on measures of unexpected losses (UL) and expected losses (EL). The risk-weight functions produce capital requirements for the UL portion. Expected losses are treated separately, as outlined in paragraph CA-2.1.5 and section CA-5.7.
Apr 08CA-5.1.3
In this chapter, the asset classes are defined first. Adoption of the IRB approach across all asset classes is also discussed early in this section, as are transitional arrangements. The risk components, each of which is defined later in this section, serve as inputs to the risk-weight functions that have been developed for separate asset classes. For example, there is a risk-weight function for corporate exposures and another one for qualifying revolving retail exposures. The treatment of each asset class begins with a presentation of the relevant risk-weight function(s) followed by the risk components and other relevant factors, such as the treatment of credit risk mitigants. The legal certainty standards for recognising CRM as set out in Section CA-4.1 apply for both the foundation and advanced IRB approaches. The minimum requirements that banks must satisfy to use the IRB approach are presented at the end of this chapter starting at section CA-5.8, paragraph CA-5.8.1.
Apr 08CA-5.1.4
A scaling factor of 1.06 must be applied to the risk-weighted assets for credit risk assessed under the IRB approach.
Apr 08
