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Banks can determine their own estimation for some components of risk measure: the probability of default (PD), exposure at default (EAD) and effective maturity (M). The goal is to define risk weights by determining the cut-off points between and within areas of the expected loss (EL) and the
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Some credit assessments in standardised approach refer to unrated assessment. Basel II also encourages banks to initiate internal ratings-based approach for measuring credit risks. Banks are expected to be more capable of adopting more sophisticated techniques in credit risk management.
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unexpected loss (UL), where the regulatory capital should be held, in the probability of default. Then, the risk weights for individual exposures are calculated based on the function provided by Basel II.
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Below are the formulae for some banks' major products: corporate, small-medium enterprise (SME), residential mortgage and qualifying revolving retail exposure.
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Basel II: International
Convergence of Capital Measurement and Capital Standards: a Revised Framework, Comprehensive Version (BCBS) (June 2006 Revision)
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387:) for non-retail portfolios. For retail exposures banks are required to use their own estimates of the IRB parameters (PD, LGD, CCF). Then total
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Basel-II benefits banks to hold lower capital requirement as having credit card product customers with lower probability of default (Graph 2).
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Basel II: International
Convergence of Capital Measurement and Capital Standards: a Revised Framework (BCBS) (November 2005 Revision)
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Basel II: International
Convergence of Capital Measurement and Capital Standards: a Revised Framework (BCBS) (November 2005 Revision)
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Basel-II benefits banks to hold lower capital requirement as having corporate customers with lower probability of default (Graph 1).
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for individual clients or groups of clients. Banks can use this approach only subject to approval from their local regulators.
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Convergence of Capital Measurement and Capital Standards: a Revised Framework (BCBS)
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Reforms to the internal ratings-based approach to credit risk are due to be introduced under the
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Under this approach the banks are allowed to develop their own empirical model to estimate the
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Basel-II benefits SME customers to be treated differently from corporates.
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Basel-II benefits customers with lower probability of default.
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Under F-IRB banks are required to use regulator's prescribed
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is calculated as a fixed percentage of the estimated RWA.
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Basel II: Revised international capital framework (BCBS)
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and other parameters required for calculating the RWA (
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402:Some formulae in internal-ratings-based approach
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22:International regulatory standards for banks
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396:Basel III: Finalising post-crisis reforms
444:13 Function is taken from paragraph 229
441:12 Function is taken from paragraph 328
438:11 Function is taken from paragraph 273
435:10 Function is taken from paragraph 272
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362:measurement techniques proposed under
31:Basel Committee on Banking Supervision
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369:rules for banking institutions.
455:PD = the probability of default
355:internal ratings-based approach
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307:Business and Economics Portal
358:, and it refers to a set of
264:Pillar 2: Supervisory review
121:Pillar 1: Regulatory capital
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374:PD (probability of default)
290:Pillar 3: Market disclosure
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461:EAD = exposure at default
458:LGD = loss given default
381:LGD (Loss Given Default)
464:M = effective maturity
351:is an abbreviation of
545:Capital requirement
385:Risk-Weighted Asset
129:Capital requirement
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367:capital adequacy
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272:Economic capital
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550:Credit risk
360:credit risk
353:foundation
205:Market risk
156:Credit risk
534:Categories
504:References
298:Disclosure
282:Legal risk
95:Regulation
83:Background
343:The term
51:Basel III
540:Basel II
364:Basel II
46:Basel II
431:Notes:
222:CVA vol
91:Banking
71:Endgame
41:Basel I
232:SA-CVA
227:BA-CVA
188:SA-CCR
149:Tier 2
144:Tier 1
349:F-IRB
244:Basic
176:A-IRB
171:F-IRB
161:SA-CR
109:Risk
66:FRTB
61:NSFR
448:In
347:or
254:AMA
215:IMA
198:CCF
192:IMM
183:EAD
166:IRB
56:LCR
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332:e
325:t
318:v
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