Table of Contents:

Retail Portfolio

The retail portfolio is subject to the top-down approach, starting from homogeneous segments defined by the nature of the transaction and of the borrower. This implies that the assessment of risk components is done at the segment level rather than at the individual exposure level, as for corporate exposures.

For retail exposures, the Accord also proposes, as an alternate assessment of risk, to evaluate directly "expected loss." Expected loss is normally the product of DP and LGD. This approach bypasses the separate assessment for each segment of the DP and LGD. The maturity (M) of the exposure is not a risk input for retail banking capital.

Equity Exposures

Equity exposures in the trading book are subject to the market risk capital rules. For equity exposures not held in the trading book, there are several approaches.

Equity exposures can be weighted using supervisory standard weights. A 300% risk weight is to be applied to equity holdings that are publicly traded and a 400% risk weight is to be applied to all other equity holdings.

Alternatively, there are two model-based approaches to calculate risk weights for equity: the market-based approach and the DP/LGD approach. In IRB approaches, banks may use internal risk measurement models (VaR-based models) to calculate the risk-based capital requirement. The capital charge equals the potential loss on the institution's equity holdings subject to the 99thpercentile, one-tailed confidence interval of the difference between quarterly returns and an appropriate risk-free rate computed over a long-term sample period. Under the DP/LGD approach, banks estimate the DP of the corporate entity, and use a 90% LGD for deriving risk weight. If the bank does not hold debt of the entity, the risk weight is scaled by a factor of 1.5. The minimum risk weights are 100%, 200% for publicly traded equity and 300% for all other equity holdings. When the risk weight is zero, equity exposure can be excluded from the equity approach, or if equity exposures are not material. Materiality refers to the size of equity exposures relative to bank's capital. The materiality threshold is 10% or 5% of aggregated tier 1 plus tier 2.

The measure of an equity exposure on which capital requirements is based on the value presented in the financial statements, which, depending on national accounting and regulatory practices, may include unrealized revaluation gains.

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