1. Risk-weighted Assets for Retail Exposures
CA-5.4.2
There are three separate risk-weight functions for retail exposures, as defined in paragraphs CA-5.4.3 to CA-5.4.5. Risk weights for retail exposures are based on separate assessments of PD and LGD as inputs to the risk-weight functions. None of the three retail risk-weight functions contains an explicit maturity adjustment. Throughout this section, PD and LGD are measured as decimals, and EAD is measured as currency.
Apr 08(i) Residential Mortgage Exposures
CA-5.4.3
For exposures defined in paragraph CA-5.2.18 that are not in default and are secured or partly secured45 by residential mortgages, risk weights will be assigned based on the following formula:
Correlation (R) = 0.15
Capital requirement (K) = LGD × N[(1 - R)^-0.5 × G(PD) + (R / (1 - R))^0.5 × G(0.999)] - PD x LGD
Risk-weighted assets = K x 12.5 x EAD
The capital requirement (K) for a defaulted exposure is equal to the greater of zero and the difference between its LGD (described in paragraph CA-5.8.79) and the bank's best estimate of expected loss (described in paragraph CA-5.8.82). The risk-weighted asset amount for the defaulted exposure is the product of K, 12.5, and the EAD.
45 This means that risk weights for residential mortgages also apply to the unsecured portion of such residential mortgages.
Apr 08(ii) Qualifying Revolving Retail Exposures
CA-5.4.4
For qualifying revolving retail exposures as defined in paragraph CA-5.2.21 that are not in default, risk weights are defined based on the following formula:
Correlation (R) = 0.04
Capital requirement (K) = LGD × N[(1 - R)^-0.5 × G(PD) + (R / (1 - R))^0.5 × G(0.999)] - PD x LGD
Risk-weighted assets = K x 12.5 x EAD
The capital requirement (K) for a defaulted exposure is equal to the greater of zero and the difference between its LGD (described in paragraph CA-5.8.79) and the bank's best estimate of expected loss (described in paragraph CA-5.8.82). The risk-weighted asset amount for the defaulted exposure is the product of K, 12.5, and the EAD.
Apr 08(iii) Other Retail Exposures
CA-5.4.5
For all other retail exposures that are not in default, risk weights are assigned based on the following function, which allows correlation to vary with PD:
Correlation (R) = 0.03 × (1 - EXP(-35 × PD)) / (1 - EXP(-35)) + 0.16 × [1 - (1 - EXP(-35 × PD))/(1 - EXP(-35))]
Capital requirement (K) = LGD × N[(1 - R)^-0.5 × G(PD) + (R / (1 - R))^0.5 × G(0.999)] - PD x LGD
Risk-weighted assets = K × 12.5 × EAD
The capital requirement (K) for a defaulted exposure is equal to the greater of zero and the difference between its LGD (described in paragraph CA-5.8.79) and the bank's best estimate of expected loss (described in paragraph CA-5.8.82). The risk-weighted asset amount for the defaulted exposure is the product of K, 12.5, and the EAD.
Illustrative risk weights are shown in Appendix CA-6.
Apr 08
