Credit Risk Management under the Basel Accords

Explore regulatory capital and its components: common equity tier one, additional tier one, tier two. Understand risk weighted assets and the 8% capital adequacy ratio to protect depositors.

Learn how risk weighted assets determine required capital under Basel, as asset type and exposure affect capital adequacy, and how to compute capital using risk weights and the capital ratio.

Define credit risk as the risk banks face when borrowers may not repay, distinguish it from default, and compare standardized and internal rating-based approaches to calculating risk weighted assets.

Explore Basel II's standardized approach as an evolution from Basel I, using external ratings and regulator-defined risk weights to balance simplicity with risk sensitivity for wholesale and retail exposures.

Explore Basel two risk weighting for sovereign exposures using external ratings and ECA scores, with weights from 0% to 150%, and zero for own central banks and governments.

Explore two options for risk weighting exposures to public sector entities: sovereign-weighted bands and long-term claims weights by rating bands.

This lecture explains Basel II risk weights for multilateral development banks, covering rating-based weights and the 0% eligibility criteria for MDBs such as IBRD, IFC, ADB, AfDB, EBRD, and IADB.

Explore two Basel accords methods for weighting exposures to banks: fixed risk weights by rating and counterparty risk weights by maturity, including long and short term claims and unrated banks.

Explore how corporate exposures are risk weighted under Basel Accords, using external ratings or a flat 100% weight, and classify insurance company exposures as corporate.

Identify retail exposures as individuals or small businesses and apply the four criteria—orientation, product, granularity, and low value—to determine a 75% risk weight; otherwise assign 100%.

Learn how banks risk weight residential and commercial mortgages using loan to value ratios, base entity country, and secured or unsecured risk weights, with commercial real estate typically 100%.

Assign risk weights to past due exposures by provisions and exposure type: under 20% provisions yield 100% for residential mortgage and 150% for other; over 20% yield 50% and 100%.

Understand Basel risk weights for high risk and equity exposures. 150% for low-rated sovereigns, PSEs, banks, and below BB minus corporates; 100% for diversified equity; 370% for venture capital waivers.

computes original exposure for term loans, revolving assets, letters of credit, and bonds under Basel, detailing current drawn down, undrawn commitments, and bond components including notional principal and accrued items.

Calculate exposure value (EAD) under Basel for term loans, revolving assets, letters of credit, bonds, repos, and equity, using current drawn down, undrawn commitments, and CCF.

Learn how Basel credit risk mitigation techniques—on-balance sheet netting, collateral, and guarantees—adjust exposure at default and calculate CRM adjusted RWA using the obligor and guarantor risk weights.

Explore Basel II standardized approach with practical EAD calculations, end-of-period balances, undrawn commitments and ccf, applying Moody's ratings to derive rwa and illustrate 50% and 20% risk weights.

Explore the internal rating based (IRB) approach to credit risk under Basel. Compare the foundation and advanced IRB variants, and learn PD, LGD, and EAD estimates for granular, risk-sensitive capital.

Explore six IRB asset classes—sovereigns, banks, corporates, corporate SMEs (defined as corporate with annual turnover under €50 million), retail, and equity exposures—and how PD, EAD, LGD, and maturity determine RWA.

Explore the four asset classes under IRBF—sovereigns, banks and institutions, corporate exposures, and corporate SMEs—and how asset class and classification factors influence IRB risk weights, with retail exposures excluded.

Derive pd from asset class, borrower type, credit rating, and internal rating to determine irb risk weights, using 4.3 for corporates and 2.2 for banks/sovereigns when internal ratings are unavailable.

Explain how LGD and maturity derive Basel II IRBF risk weights, including senior vs subordinated LGD, collateral mitigation, implicit and explicit maturity, floor and cap rules, and overrides.

Learn to calculate exposure at default (ead) under Basel II IRBF across term loans, revolvers, letters of credit, bonds, repos and equity shares, using ccf, notional principal, and book value.

Explore key input fields to calculate exposure at default (EAD) for term loans, revolving assets, letters of credit, and bonds, including undrawn commitments, end-of-period balance, accrued items, and the CCF.

Explore Basel II IRBF concepts, including the correlation coefficient, maturity adjustment, capital requirement, risk weight, and how risk weighted assets derive the final RWA.

Learn how to reduce RWA under Basel II IRBF approach by applying on-balance sheet netting, collateral, and guarantees, using EAD, PD, maturity, and LGD.

Demonstrates calculating ead, pd, lgd, and rwa under Basel II irbf for a Tesco corporate loan, highlighting residual maturity, ccf, and foundation versus standardized approach comparisons.

Explains Basel II IRBA asset class derivation, showing how business customer type, turnover, and product type determine exposure classes, with SMEs eligible for preferential risk weight under €50 million turnover.

Explore how the Basel II IRBA probability of default is derived from asset class and internal rating, and how PD drives risk-weighted assets and RWA calculations.

Examine the difference between gross LGD and CRM-adjusted LGD, and learn how downturn LGD derives from ELGD via country-based mapping and parameters A and B, shaping regulatory capital and RWA.

Calculate the residual term to maturity under Basel II IRBA and its impact on risk weights, including end date, data effective date, overrides, and default end date rules.

Explore Basel II IRBA EAD calculation, covering overrides, nil versus zero, and EADs for distinct and portfolio customers, including end-of-period portfolio balance.

Compute risk weight and risk weighted assets for wholesale exposures under the internal rating based advanced approach, using correlation R, maturity adjustment B, capital requirements K, and the 1.06 scaling.

Apply the Basel II IRBA framework to retail exposures—residential mortgage, QRRE, and other retail—by calculating capital requirements with LGD, PD, and R, then derive risk weights and RWA.

Identify the key input fields for calculating exposure at default (EAD) under the IRBA. Cover term loans, revolving assets, letter of credit, bonds, and retail exposures.

Calculate expected loss under the Basel II internal rating based advanced approach by multiplying the probability of defaults, the loss given defaults, and the exposure at default.

Explore how Basel II IRBA computes risk-weighted assets for defaulted exposures using LGD and the best estimate of expected loss, and how CRM adjusted RWA differs in capital requirements.

explains how on-balance sheet netting reduces EAD in the Basel II internal rating based advanced approach, while collateral and guarantees do not affect RWA; downturn LGD governs CRM adjusted RWA.

Explore Basel III as foundation for Basel IV, detailing how capital and liquidity requirements protect customers after 2008 financial crisis. Compare Basel III with Basel II’s borrower focus on defaults.

Explore how Basel iii strengthens capital adequacy and introduces liquidity risk management, enhances capital composition, and maintains credit risk calculations, preparing banks to withstand shocks.

Compare Basel II and Basel III capital structures, highlighting 8% capital under Basel II (4% tier one, 2% core, 4% tier two) and Basel III's higher tier one and buffers.

Basel III establishes a 2.5% capital conservation buffer in core tier 1, raising total common equity to 7%, with a rollout from 2016 to 2019 to absorb losses in stress.

Banks should hold a discretionary countercyclical buffer of 0% to 2.5% of core tier one capital during credit growth. Capital requirements include 4.5% core tier one and 2.5% conservation buffers.

examine the Basel III capital requirements for globally systemically important banks, detailing loss-absorbing capacity, capital surcharges, and contingent capital, plus reporting to the PRA and EBA.

Explore Basel IV reforms that restore credibility and comparability of risk-weighted assets and capital ratios by standardizing approaches, constraining internal models, and phasing in floors.

Basel IV enhances the standardised approach with detailed risk weights for residential and commercial real estate. Banks perform due diligence and use internal or non-ratings-based approaches when needed.

Basel IV updates exposure treatment for sovereigns, PSEs, and MDBs, with extended 0% risk weight to additional MDBs such as CEDB, IFFIm, AIIB, while sovereigns largely mirror Basel II.

Basel IV refines bank exposure risk with two approaches: ECRA for rated banks and SCRA for unrated ones, and introduces a standardised grade-based framework with due diligence.

Learn how Basel IV weights covered bonds based on underlying assets, including sovereign claims and real estate, and adjust for issue-specific ratings, unrated exposures, and due diligence.

Examine Basel IV corporate exposures, including general corporate and specialized lending, and how external ratings determine risk weights, with special rules for unrated and investment-grade corporates.

Explore Basel IV specialized lending exposures, including project, object, and commodities finance, and how risk weights from external ratings and due diligence shape regulatory capital across pre-operational and operational phases.

Learn how Basel IV assigns risk weights to subordinated debt, equity, and other capital instruments, including 400% for speculative unlisted equity. See how volatility and government programs affect capital requirements.

Explore Basel IV's risk weighting for retail exposures, detailing regulatory retail at 75%, transactors at 45%, and others at 100%, with product, value, and granularity criteria.

basel iv introduces new risk weight tables for residential real estate exposures, with weight brackets tied to loan-to-value ratios and whether cash flows drive repayment, ranging from 20% to 105%.

Explains Basel IV risk weights for commercial real estate, based on loan-to-value and cash-flow dependence, with thresholds and counterparty weights.

Basel iv introduces rules for land acquisition, development and construction exposures, risk-weighted at 150% unless underwriting standards are met and pre-sale contracts; real estate may be 100% if criteria met.

Explore Basel IV's currency mismatch multiplier for retail and residential real estate. Apply a 1.5 risk weight cap of 150% when the lending currency devalues against borrower's income, per mapping.

Explore Basel IV's internal ratings-based changes, including removal of advanced IRB for banks and corporates, equity exposures, and alignment of credit conversion factors, with capital impact estimates.

Basel IV imposes exposure-level floors for IRB portfolios, detailing pd and lgd floors for wholesale and retail assets, including a 0.05% pd floor and lgd floors from 0% to 50%.

Basel IV IRB changes: secured exposure parameters for FIRB, LGD and haircuts, collateral treatments, removal of double default and scaling factor, implementation began January 2023.