capital requirement and RWA under IRB

[ajsa]

Hi David,

I wonder if the calculation of capital requirement (K) and RWA under IRB is limited to credit risk, because it uses LGD, PD, EAD? or is IRB for credit risk only?
"RWA (IRB) =12.5*EAD*K
K =LGD*f (PD)* f (M,b)"


Thanks.

 

[David Harper CFA FRM]

Hi asja,

not sure i follow, sorry...just to locate (which, IMO, is the hardest part of basel; i.e., where are we on the basel map?):

Pillar 1: capital charge rules (mechanics)
Pillar 1 > Credit (as opposed to market or ops)
Pillar 1 > Credit > IRB (as opposed to standardized/basic)

so, this capital req formula pertains only to the credit risk, the other charges (market, ops) will be computed separately and added...sorry if i misunderstand?

Thanks, David

 

[ajsa]

Hi David,

yes, you are right. IRB is for credit risk only.

could you elaborate "Pillar 1 > Credit > IRB". I do not follow that..

thanks.

 

[David Harper CFA FRM]

Hi ajsa,

I just meant there are 2 (or 3) ways to get the credit risk capital charge:

Pillar 1 > Credit > standardized (i.e., i call this "lookup table" as in 20% risk weight * exposure)
Pillar 1 > Credit > Foundation IRB, or
Pillar 1 > Credit > Advanced IRB (i call the IRB "functions")...so my shorthand for diff btwen standardized and advanced is "lookup table vs. function"

David