This chapter sets out the calculation of the risk components used in risk-weight functions (PD, LGD, EAD, M) for each asset class.

Version effective as of 01 Jan 2023

Changes due to the December 2017 Basel III publication and the revised implementation date announced on 27 March 2020.

Introduction

32.1 This chapter presents the calculation of the risk components (PD, LGD, EAD, M) that are used in the formulas set out in CRE31. In calculating these components, the legal certainty standards for recognising credit risk mitigation under the standardised approach to credit risk (CRE22) apply for both the foundation and advanced internal ratings-based (IRB) approaches.

Risk components for corporate, sovereign and bank exposures

32.2 This section, CRE32.2 to CRE32.56, sets out the calculation of the risk components for corporate, sovereign and bank exposures. In the case of an exposure that is guaranteed by a sovereign, the floors that apply to the risk components do not apply to that part of the exposure covered by the sovereign guarantee (ie any part of the exposure that is not covered by the guarantee is subject to the relevant floors).

Probability of default (PD)