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  • — Methodology for Recognition of Eligible IRB Collateral

    • CA-5.3.26

      The methodology for determining the effective LGD under the foundation approach for cases where banks have taken eligible IRB collateral to secure a corporate exposure is as follows:

      (a) Exposures where the minimum eligibility requirements are met, but the ratio of the current value of the collateral received (C) to the current value of the exposure (E) is below a threshold level of C* (i.e. the required minimum collateralisation level for the exposure) would receive the appropriate LGD for unsecured exposures or those secured by collateral which is not eligible financial collateral or eligible IRB collateral;
      (b) Exposures where the ratio of C to E exceeds a second, higher threshold level of C** (i.e. the required level of over-collateralisation for full LGD recognition) would be assigned an LGD according to the following table.

      The following table displays the applicable LGD and required over-collateralisation levels for the secured parts of senior exposures:

      Minimum LGD for Secured Portion of Senior Exposures

        Minimum LGD Required minimum collateralisation level of the exposure (C*) Required level of over-collateralisation for full LGD recognition (C**)
      Eligible Financial collateral 0% 0% n.a.
      Receivables 35% 0% 125%
      CRE/RRE 35% 30% 140%
      Other collateral41 40% 30% 140%
      (a) Senior exposures are to be divided into fully collateralised and un-collateralised portions;
      (b) The part of the exposure considered to be fully collateralised, C/C**, receives the LGD associated with the type of collateral;
      (c) The remaining part of the exposure is regarded as unsecured and receives an LGD of 45%.

      41 Other collateral excludes physical assets acquired by the bank as a result of a loan default.

      Amended: April 2011
      Apr 08