This chapter sets out the treatment of expected losses and provisions within the internal ratings-based approach.

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

35.1 This chapter discusses the calculation of expected losses (EL) under the internal ratings-based (IRB) approach, and the method by which the difference between provisions (eg specific provisions, partial write-offs, portfolio-specific general provisions such as country risk provisions or general provisions) and EL may be included in or must be deducted from regulatory capital, as outlined in the definition of capital standard (CAP10.19 and CAP30.13). The treatment of EL and provisions related to securitisation exposures is outlined in CRE40.36.

Calculation of expected losses

35.2 A bank must sum the EL amount (defined as EL multiplied by exposure at default) associated with its exposures to which the IRB approach is applied (excluding the EL amount associated with securitisation exposures) to obtain a total EL amount.