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RETAIL PORTFOLIO IN BASEL 2

The retail portfolio is characterized by a large number of small exposures. An exposure is categorized as retail exposure if it meets all the criteria given hereafter, under Basel 2. The retail portfolio is defined according to several criteria, which are mainly product, "granularity" of the retail portfolio, and maximum size of each exposure. The segment includes lending to small corporations, which include individual corporations (such as for physicians or pharmacies). Finally, mortgages are included in the retail portfolio and segregated into sub-classes.

Nature of Borrower or Low Value of Individual Exposures

Exposures are to individuals - such as revolving credits and lines of credit (e.g. credit cards, overdrafts, and retail facilities secured by financial instruments) as well as personal term loans and leases (e.g. installment loans, auto loans and leases, student and educational loans, personal finance, and other exposures with similar characteristics).

Residential mortgage loans (including first and subsequent lines, term loans and revolving home equity lines of credit) are eligible for retail treatment regardless of exposure size so long as the credit is extended to an individual that is the owner of the property. Loans extended to small businesses and managed as retail exposures are eligible for retail treatment provided the total exposure of the banking group to a small business borrower (on a consolidated basis where applicable) is less than €1 million.

Large Number of Exposures

§232. The exposure must be one of a large pool of exposures, which are managed by the bank on a pooled basis.

The exposure should not exceed 0.2% of the overall regulatory retail portfolio, which imposes a limit to the size of loan. Retail portfolios have to be "granular." Granularity designates the absence of size concentration and wide diversification across a large number of clients. Retail exposures should not exceed €1 million.

SMEs (small and medium-sized enterprises) can be considered as "retail" provided that they are not dealt with on an individual basis when granting credit. When lending is based on a specific credit analysis, the loan falls in the corporate asset class. Accordingly, small business exposures are managed as a part of a pool of exposure for the purpose of risk assessment. For Basel 2 treatment, small business exposures are subject to the €1 million cap.

Retail Portfolio: Further Differentiation for Capital Treatment

§233. Within the retail asset class category, banks are required to identify separately three sub-classes of exposures: (a) exposures secured by residential properties as defined above, (b) qualifying revolving retail exposures..., and (c) all other retail exposures.

Banks divide their retail activities in segments, which are more or less homogeneous, by type of transactions, such as mortgages versus consumer lending, and by type of counterparty, such as SMEs versus individuals. "Qualifying revolving retail exposures" refer to loans which are allowed to fluctuate based on clients' decisions. This includes credit card lending and overdraft of demand deposits.

§234. All of the following criteria must be satisfied for a sub-portfolio to be treated as a qualifying revolving retail exposure (QRRE). These criteria must be applied at a sub-portfolio level consistent with the bank's segmentation of its retail activities generally. Segmentation at the national or country level (or below) should be the general rule.

The exposures are revolving, unsecured, and uncommitted (both contractually and in practice). In this context, revolving exposures are defined as those where customers' outstanding balances are permitted to fluctuate based on their decisions to borrow and repay, up to a limit established by the bank.

The exposures are to individuals.

The maximum exposure to a single individual in the sub-portfolio is €100,000 or less.

 
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