Article 154 Risk-weighted exposure amounts for retail exposures

The calculation of risk-weighted exposure amounts for retail exposures mandates adherence to specified formulae. Defaulted exposures necessitate a risk weight (RW) that is contingent on the loss given default (LGD) in relation to the expected loss (ELBE). For non-defaulted exposures, a defined coefficient of correlation applies, particularly substituting the standard formula with specific figures for secured retail exposures.

Furthermore, criteria for purchasing retail receivables include ensuring they stem from unrelated third parties, adherence to arm's-length transactions, and maintaining a diversified portfolio. Institutions must properly manage first loss protections and hybrid pools where optimal capital requirements are essential.

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Version status: Amended | Document consolidation status: Updated to reflect all known changes

Version date: 1 January 2025 - onwards

1. The risk-weighted exposure amounts for retail exposures shall be calculated in accordance with the following formulae:

Risk - weighted exposure amount = RW · exposure value

where the risk weight RW is defined as follows:

(i) if PD = 1, i.e., for defaulted exposures, RW shall be

RW = max {0;12,5 · (LGD - EL_BE)};

where EL_BE shall be the institution's best estimate of expected loss for the defaulted exposure in accordance with Article 181(1)(h);

(ii)if PD < 1, then:

where:

N = the cumulative distribution function for a standard normal random variable, i.e. N(x) equals the probability that a normal random variable with mean of 0 and variance of 1, is less than or equal to x;

G = the inverse cumulative distribution function for a standard normal random variable, i.e. if x = G(z), x is the value such that N(x) = z;

R = the coefficient of correlation, which is defined as: