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  • 2. Foundation and Advanced Approaches

    • CA-5.2.29

      For each of the asset classes covered under the IRB framework, there are three key elements:

      (a) Risk components — estimates of risk parameters provided by banks some of which are CBB's estimates;
      (b) Risk-weight functions — the means by which risk components are transformed into risk-weighted assets and therefore capital requirements; and
      (c) Minimum requirements — the minimum standards that must be met in order for a bank to use the IRB approach for a given asset class.
      Amended: April 2011
      Apr 08

    • CA-5.2.30

      The CBB has decided to allow only the foundation approach for corporate, sovereign and bank asset classes. However, banks are required to adopt the advanced approach for retail asset class. Under the foundation approach, as a general rule, banks provide their own estimates of PD and rely on CBB's estimates for other risk components. Under the advanced approach, banks provide more of their own estimates of PD, LGD and EAD, and their own calculation of M, subject to meeting minimum standards. For both the foundation and advanced approaches, banks must always use the risk-weight functions provided in this chapter for the purpose of deriving capital requirements. The full suite of approaches is described below.

      Apr 08

    • (i) Corporate, Sovereign, and Bank Exposures

      • CA-5.2.31

        For corporate, sovereign and bank exposures only the foundation approach is allowed under which banks must provide their own estimates of PD associated with each of their borrower grades, but must use CBB's estimates for the other relevant risk components. The other risk components are LGD, EAD and M.35

        35 As noted in section CA-5.3.45, CBB may require/allow banks using the foundation approach to calculate M using the definition provided in section CA-5.3.46 to CA-5.3.50.

        Apr 08

      • CA-5.2.32

        There is an exception to this general rule for the five sub-classes of assets identified as SL.

        Apr 08

      • The SL Categories: PF, OF, CF, IPRE, and HVCRE

        • CA-5.2.33

          Banks that do not meet the requirements for the estimation of PD under the corporate foundation approach for their SL assets are required to map their internal risk grades to five supervisory categories, each of which is associated with a specific risk weight. This version is termed the 'supervisory slotting criteria approach'.

          Apr 08

        • CA-5.2.34

          Banks that meet the requirements for the estimation of PD are able to use the foundation approach to corporate exposures to derive risk weights for all classes of SL exposures except HVCRE. Subject to CBB's discretion, on a case by case basis, banks meeting the requirements for HVCRE exposure are able to use a foundation approach that is similar in all respects to the corporate approach, with the exception of a separate risk-weight function as described in paragraph CA-5.3.11.

          Apr 08

    • (ii) Retail Exposures

      • CA-5.2.35

        For retail exposures, banks must provide their own estimates of PD, LGD and EAD. There is no distinction between a foundation and advanced approach for this asset class.

        Apr 08

    • (iii) Equity Exposures

      • CA-5.2.36

        There are two broad approaches to calculate risk-weighted assets for equity exposures not held in the trading book: a market-based approach and a PD/LGD approach. These are set out in full in paragraphs CA-5.5.1 to CA-5.5.23.

        Apr 08

    • (iv) Eligible Purchased Receivables

      • CA-5.2.37

        The treatment potentially straddles two asset classes. For eligible corporate receivables, only the foundation approach is available subject to certain operational requirements being met. For eligible retail receivables, as with the retail asset class, there is no distinction between a foundation and advanced approach.

        Apr 08