Provisions Specification¶

Provision treatment, expected loss calculation, and EL vs provisions comparison.

Regulatory Reference: CRR Articles 110, 111(2), 158-159

Test Group: CRR-G

Requirements Status¶

Pipeline Position¶

Provisions are resolved before CCF application in the pipeline:

resolve_provisions → CCF → initialize_ead → collateral → guarantees → finalize_ead

This ordering complies with CRR Art. 111(2), which requires provisions to reduce the exposure value before credit conversion factors are applied to off-balance sheet items.

Multi-Level Beneficiary Resolution¶

Provisions can be allocated at different levels and are resolved in priority order:

Direct allocations are applied first. Facility-level and counterparty-level provisions are distributed proportionally based on each exposure's share of the total ead_gross.

SA Approach (CRR Art. 110, 111(2))¶

Under the Standardised Approach, provisions use a drawn-first deduction approach:

# Step 1: Absorb provision against drawn amount first
provision_on_drawn = min(provision_allocated, max(0, drawn_amount))

# Step 2: Remainder reduces nominal before CCF (capped at nominal)
provision_on_nominal = min(provision_allocated - provision_on_drawn, nominal_amount)
nominal_after_provision = nominal_amount - provision_on_nominal

# Step 3: CCF applied to adjusted nominal
ead_from_ccf = nominal_after_provision × CCF

# Step 4: Final EAD (provisions already baked in)
EAD = (max(0, drawn) - provision_on_drawn) + interest + ead_from_ccf

The finalize_ead() step does not subtract provisions again — they are already reflected in ead_pre_crm via the drawn-first deduction.

New Columns (SA)¶

IRB Approach (CRR Art. 158-159)¶

Under IRB, provisions are tracked (provision_allocated) but not deducted from EAD. The provision columns are set to zero:

provision_deducted = 0
provision_on_drawn = 0
provision_on_nominal = 0

Instead, the calculator computes Expected Loss for comparison:

EL = PD × LGD × EAD

EL vs Provisions Comparison¶

• EL > Provisions (shortfall): The difference is deducted 50/50 from CET1 and T2 capital (CRR Art. 159)
• EL < Provisions (excess): The surplus may be added to Tier 2 capital, capped at 0.6% of IRB RWA (CRR Art. 62(d))

Portfolio-Level Summary (ELPortfolioSummary)¶

The aggregator computes a portfolio-level ELPortfolioSummary with:

Slotting Approach¶

Same as IRB: provisions are tracked but not deducted from EAD.

Key Scenarios¶

Acceptance Tests¶