Basel
ii in the United States of America
From the
Basel ii
Compliance Professionals Association (BCPA),
the largest association of Basel ii Professionals in the
world
Final Rule, USA: Risk-Based Capital Standards:
Advanced Capital Adequacy Framework — Basel II
Retail
exposures
To
implement the advanced approach for retail exposures, a
bank must have an internal system that segments its
retail exposures to differentiate accurately and
reliably among degrees of credit risk.
The
most significant difference between the treatment of
wholesale and retail exposures is that the risk
parameters for wholesale exposures are assigned at the
individual exposure level, whereas risk parameters for
retail exposures are assigned at the segment level.
Banks
typically manage retail exposures on a segment basis,
where each segment contains exposures with similar risk
characteristics.
Therefore, a key characteristic of the final rule’s
retail framework is that the risk parameters for retail
exposures are assigned to segments of exposures rather
than to individual exposures. Under the retail
framework, a bank groups its retail exposures into
segments with homogeneous risk characteristics and
estimates PD and LGD for each segment.
Some
commenters stated that for internal risk management
purposes they assign risk parameters at the individual
retail exposure level rather than at the segment level.
These
commenters requested confirmation that this practice
would be permissible for risk-based capital purposes
under the final rule.
The
agencies believe that a bank may use its advanced
systems, including exposure-level risk parameter
estimates, to group exposures into segments with
homogeneous risk characteristics.
Such
exposure-level estimates must be aggregated in order to
assign segment-level risk parameters to each segment of
retail exposures.
A bank
must group its retail exposures into three separate
subcategories:
(i)
residential mortgage exposures;
(ii)
QREs; and
(iii)
other retail exposures.
The
bank must classify the retail exposures in each
subcategory into segments to produce a meaningful
differentiation of risk. The final rule requires banks
to segment separately
(i)
defaulted retail exposures from non-defaulted retail
exposures and
(ii)
retail eligible margin loans for which the bank adjusts
EAD rather than LGD to reflect the risk mitigating
effects of financial collateral from other retail
eligible margin loans.
Otherwise, the agencies do not require that banks
consider any particular risk drivers or employ any
minimum number of segments in any of the three retail
subcategories.
In
determining how to segment retail exposures within each
subcategory for the purpose of assigning risk
parameters, a bank should use a segmentation approach
that is consistent with its approach for internal risk
assessment purposes and that classifies exposures
according to predominant risk characteristics or
drivers.
Examples of risk drivers could include loan-to-value
ratios, credit scores, loan terms and structure,
origination channel, geographical location of the
borrower, collateral type, and bank internal estimates
of likelihood of default and loss severity given
default.
Regardless of the risk drivers used, a bank must be able
to demonstrate to its primary Federal supervisor
that
its system assigns accurate and reliable PD and LGD
estimates for each retail segment on a consistent basis.
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