AI Summary of Article 235a Calculating risk-weighted exposure amounts and expected loss amounts under the substitution approach where the guaranteed exposure is treated under the IRB Approach and a comparable direct exposure to the protection provider is treated under the Standardised Approach
This document outlines the risk-weighted exposure amount calculation for institutions applying the Internal Ratings-Based (IRB) Approach to unfunded credit protections, particularly where direct exposures to protection providers are assessed under the Standardised Approach. The formula necessitates the integration of exposure value, adjusted credit protection amounts, and assigned risk weights, ensuring clarity in how institutions must navigate differing seniorities between protected and unprotected exposures.
Furthermore, it stipulates that the expected loss for covered exposures is null, while for uncovered portions, institutions must employ relevant risk weights and adjustments, thereby reinforcing compliance with regulatory expectations and ensuring robust credit risk management protocols are in place.
Article 235a Calculating risk-weighted exposure amounts and expected loss amounts under the substitution approach where the guaranteed exposure is treated under the IRB Approach and a comparable direct exposure to the protection provider is treated under the Standardised Approach
1. For exposures with unfunded credit protection to which an institution applies the IRB Approach set out in Chapter 3 and where comparable direct exposures to the protection provider are treated under the Standardised Approach, institutions shall calculate the risk-weighted exposure amounts in accordance with the following formula:
where:
E = the exposure value determined in accordance with Chapter 3, Section 5; for that purpose, institutions shall calculate the exposure value for off-balance-sheet items other than derivatives treated under the IRB Approach using a CCF of 100 % instead of the SA-CCFs or IRB-CCF provided for in Article 166(8), (8a) and (8b);
GA = the amount of credit protection adjusted for foreign exchange risk (G*) as calculated in accordance with Article 233(3) further adjusted for any maturity mismatch as laid down in Section 5 of this Chapter;
r = the risk weight of exposures to the obligor as specified in Chapter 3;