Title[ Part 2: The First Pillar - Minimum Capital Requirements
Section[ G. Treatment of Expected Losses and Recognition of Provisions
374. Section III.G discusses the method by which the difference between provisions (e.g. specific provisions, portfolio-specific general provisions such as country risk provisions or general provisions) and expected losses may be included in or must be deducted from regulatory capital, as outlined in paragraph 43.
1. Calculation of expected losses
375. A bank must sum the EL amount (defined as EL multiplied by EAD) associated with its exposures (excluding the EL amount associated with equity exposures under the PD/LGD approach and securitisation exposures) to obtain a total EL amount. While the EL amount associated with equity exposures subject to the PD/LGD approach is excluded from the total EL amount, paragraphs 376 and 386 apply to such exposures. The treatment of EL for securitisation exposures is described in paragraph 563.
(i) Expected loss for exposures other than SL subject to the supervisory slotting criteria
376. Banks must calculate an EL as PD x LGD for corporate, sovereign, bank, and retail exposures both not in default and not treated as hedged exposures under the double default treatment. For corporate, sovereign, bank, and retail exposures that are in default, banks must use their best estimate of expected loss as defined in paragraph 471 and banks on the foundation approach must use the supervisory LGD. For SL exposures subject to the supervisory slotting criteria EL is calculated as described in paragraphs 377 and 378. For equity exposures subject to the PD/LGD approach, the EL is calculated as PD x LGD unless paragraphs 351 to 354 apply. Securitisation exposures do not contribute to the EL amount, as set out in paragraph 563. For all other exposures, including hedged exposures under the double default treatment, the EL is zero.
(ii) Expected loss for SL exposures subject to the supervisory slotting criteria
377. For SL exposures subject to the supervisory slotting criteria, the EL amount is determined by multiplying 8% by the risk-weighted assets produced from the appropriate risk weights, as specified below, multiplied by EAD.
Supervisory categories and EL risk weights for other SL exposures
378. The risk weights for SL, other than HVCRE, are as follows:
Strong Good Satisfactory Weak Default
5% 10% 35% 100% 625%
Where, at national discretion, supervisors allow banks to assign preferential risk weights to other SL exposures falling into the “strong” and “good” supervisory categories as outlined in paragraph 277, the corresponding EL risk weight is 0% for “strong” exposures, and 5% for
“good” exposures.
Supervisory categories and EL risk weights for HVCRE
379. The risk weights for HVCRE are as follows:
Strong Good Satisfactory Weak Default
5% 5% 35% 100% 625%
Even where, at national discretion, supervisors allow banks to assign preferential risk weights to HVCRE exposures falling into the “strong” and “good” supervisory categories as outlined in paragraph 282, the corresponding EL risk weight will remain at 5% for both
“strong” and “good” exposures.
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