capital requirement and RWA under IRB

Discussion in 'P2.T7. Basel II & Regulatory' started by ajsa, Sep 19, 2009.

  1. ajsa

    ajsa New Member

    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.
  2. 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
  3. ajsa

    ajsa New Member

    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.
  4. 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

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