Title[ Part 2: The First Pillar - Minimum Capital Requirements
Section[ 2. Foundation and advanced approaches
244. For each of the asset classes covered under the IRB framework, there are three key elements:
w Risk components ? estimates of risk parameters provided by banks some of which are supervisory estimates.
w Risk-weight functions ? the means by which risk components are transformed into risk-weighted assets and therefore capital requirements.
w Minimum requirements ? the minimum standards that must be met in order for a bank to use the IRB approach for a given asset class.
245. For many of the asset classes, the Committee has made available two broad approaches: a foundation and an advanced. Under the foundation approach, as a general rule, banks provide their own estimates of PD and rely on supervisory estimates for other risk components. Under the advanced approach, banks provide more of their own estimates of PD, LGD and EAD, and their own calculation of M, subject to meeting minimum standards. For both the foundation and advanced approaches, banks must always use the risk-weight functions provided in this Framework for the purpose of deriving capital requirements. The full suite of approaches is described below.
(i) Corporate, sovereign, and bank exposures
246. Under the foundation approach, banks must provide their own estimates of PD associated with each of their borrower grades, but must use supervisory estimates for the other relevant risk components. The other risk components are LGD, EAD and M. 66
247. Under the advanced approach, banks must calculate the effective maturity (M) 67 and provide their own estimates of PD, LGD and EAD.
248. There is an exception to this general rule for the five sub-classes of assets identified as SL.
The SL categories: PF, OF, CF, IPRE, and HVCRE
249. Banks that do not meet the requirements for the estimation of PD under the corporate foundation approach for their SL assets are required to map their internal risk grades to five supervisory categories, each of which is associated with a specific risk weight. This version is termed the ‘supervisory slotting criteria approach’.
250. Banks that meet the requirements for the estimation of PD are able to use the foundation approach to corporate exposures to derive risk weights for all classes of SL exposures except HVCRE. At national discretion, banks meeting the requirements for HVCRE exposure are able to use a foundation approach that is similar in all respects to the corporate approach, with the exception of a separate risk-weight function as described in paragraph 283.
251. Banks that meet the requirements for the estimation of PD, LGD and EAD are able to use the advanced approach to corporate exposures to derive risk weights for all classes of SL exposures except HVCRE. At national discretion, banks meeting these requirements for HVCRE exposure are able to use an advanced approach that is similar in all respects to the corporate approach, with the exception of a separate risk-weight function as described in paragraph 283.
(ii) Retail exposures
252. For retail exposures, banks must provide their own estimates of PD, LGD and EAD. There is no distinction between a foundation and advanced approach for this asset class.
(iii) Equity exposures
253. There are two broad approaches to calculate risk-weighted assets for equity exposures not held in the trading book: a market-based approach and a PD/LGD approach. These are set out in full in paragraphs 340 to 361.
254. The PD/LGD approach to equity exposures remains available for banks that adopt the advanced approach for other exposure types.
(iv) Eligible purchased receivables
255. The treatment potentially straddles two asset classes. For eligible corporate receivables, both a foundation and advanced approach are available subject to certain operational requirements being met. For eligible retail receivables, as with the retail asset class, there is no distinction between a foundation and advanced approach.
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