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Basel II Formula Question

Lorrach

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Hi all/David,

Quick question : intuitively, why would a customer with a PD of 100 % have an expected loss but have a RWA of zero? The way i see it is that the customer will definitely default over a one year time horizon and therefore i can understand the expected loss part, but how does RWA account for this? I am specifically looking at the formula for k in the IRB advanced approach.
Many thanks for your help,
Lorrach
 
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