5 Rules for Retail Exposures
5.1 Risk-Weighted Assets for Retail Exposures
5.1.1 There are three separate risk-weight functions for retail exposures, as defined in paragraphs 5.1.2 to 5.1.5 below. 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 in Saudi Riyals.
Residential mortgage exposures
5.1.2 For exposures defined in paragraph 2.5.6 above that are not in default and are secured or partly secured1 by residential mortgages, risk weights are assigned based on the following formula:
Correlation ® = 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
5.1.3 The capital requirement (K) for a defaulted exposure is equal to the greater of zero and the difference between its LGD (described in paragraphs 4.5.1 to 4.5.2 of "Minimum Requirements for Risk Quantification under IRB Approach") and a banks‘ best estimate of EL (described in paragraph 4.5.5 of the same paper). The amount of risk-weighted asset for the defaulted exposure is the product of K, 12.5, and the EAD.
5.1.4 QRRE For QRRE as defined in paragraph 2.5.8 above that are not in default, risk weights are assigned based on the following formula:
Correlation ® = 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
5.1.5 The capital requirement (K) for a defaulted exposure is equal to the greater of zero and the difference between its LGD (described in paragraphs 4.5.1 to 4.5.2 of ―Minimum Requirements for Risk Quantification under IRB Approach") and a bank‘s best estimate of EL (described in paragraph 4.5.5 of the same paper). The amount of risk-weighted asset for the defaulted exposure is the product of K, 12.5, and the EAD.
Other retail exposures
5.1.6 For all other retail exposures that are not in default, risk weights are assigned based on the following function, which also allows correlation to vary with PD:
Correlation ® = 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 x 12.5 x EAD
5.1.7 The capital requirement (K) for a defaulted exposure is equal to the greater of zero and the difference between its LGD (described in paragraphs 4.5.1 to 4.5.2 of ―Minimum Requirements for Risk Quantification under IRB Approach") and a banks best estimate of EL (described in paragraph 4.5.5 of the same paper). The amount of risk-weighted asset for the defaulted exposure is the product of K, 12.5, and the EAD. 1 This mean that risks weights for residential mortgages also apply to the unsecured portion of such residential mortgages.
5.2 Risk Components
Probability of default (PD) and loss given default (LGD)
5.2.1 For each identified pool of retail exposures, banks are expected to provide an estimate of the PD and LGD associated with the pool, subject to the minimum requirements as set out in “Minimum Requirements for Risk Quantification under IRB Approach”. Additionally, the PD for retail exposures is the greater of the one- year PD associated with the internal borrower grade to which the pool of retail exposures is assigned or 0.03%.
Banks may reflect the risk-reducing effects of guarantees and credit derivatives, either in support of an individual obligation or a pool of exposures, through an adjustment of either the PD or LGD estimate, subject to the minimum requirements in paragraphs 480 to 489 of the International Convergence of Capital Measurement and Capital Standards – June 2006. Whether adjustments are done through PD or LGD, they must be done in a consistent manner for a given guarantee or credit derivative type.
(Refer para 332, International Convergence of Capital Measurement and Capital Standards – June 2006)
Consistent with the requirements outlined above for corporate, sovereign, and bank exposures, banks must not include the effect of double default in such adjustments. The adjusted risk weight must not be less than that of a comparable direct exposure to the protection provider. Consistent with the standardized approach, banks may choose not to recognize credit protection if doing so would result in a higher capital requirement.
(Refer para 333, International Convergence of Capital Measurement and Capital Standards – June 2006)