Skip to content

Corporate Exposures

Corporate exposures are claims on companies that do not qualify as sovereigns, institutions, or retail. This includes large corporates, SMEs, and specialised lending.

Definition

Corporate exposures include:

Entity Type Description
Large corporates Companies with turnover > EUR 50m
Corporate SMEs Companies with turnover ≤ EUR 50m
Unincorporated businesses Partnerships, sole traders (non-retail)
Non-profit organisations Charities, associations
Special purpose vehicles SPVs not qualifying as specialised lending

SME Definition

An entity qualifies as an SME if:

Criterion Threshold (EUR) Threshold (GBP @ 0.88)
Annual turnover ≤ EUR 50m ≤ GBP 44m
OR Total assets ≤ EUR 43m ≤ GBP 37.84m 
def is_sme(counterparty):
    return (
        counterparty.annual_turnover <= 50_000_000 or  # EUR
        counterparty.total_assets <= 43_000_000         # EUR
    )

Risk Weights (SA)

Rated Corporates

CQS S&P/Fitch Moody's CRR Basel 3.1
CQS 1 AAA to AA- Aaa to Aa3 20% 20%
CQS 2 A+ to A- A1 to A3 50% 50%
CQS 3 BBB+ to BBB- Baa1 to Baa3 100% 75%
CQS 4 BB+ to BB- Ba1 to Ba3 100% 100%
CQS 5 B+ to B- B1 to B3 150% 100%
CQS 6 CCC+ and below Caa1 and below 150% 150%

Unrated Corporates

Framework Risk Weight
CRR 100%
Basel 3.1 100%

Investment Grade

Basel 3.1 introduces an "investment grade" corporate category with potentially lower risk weights for qualifying unrated corporates meeting specific criteria.

IRB Treatment

F-IRB Parameters

Parameter Source Value
PD Bank estimate Floor 0.03% (CRR) / 0.05% (Basel 3.1)
LGD Supervisory 45% (senior), 75% (subordinated)
M Effective maturity 1-5 years

A-IRB Parameters

Parameter Source Basel 3.1 Restrictions
PD Bank estimate Floor 0.05%
LGD Bank estimate Floor 25% (unsecured)
EAD Bank estimate CCF floors apply

Large Corporate Restriction

Under Basel 3.1, corporates with consolidated revenues > EUR 500m (GBP 440m) are restricted to F-IRB only. A-IRB is no longer permitted for these exposures.

Correlation

Standard Corporate: 

R = 0.12 × (1 - exp(-50 × PD)) / (1 - exp(-50)) +
    0.24 × [1 - (1 - exp(-50 × PD)) / (1 - exp(-50))]

SME Correlation Adjustment: 

# Size adjustment for corporates with turnover £5m-£50m
S = min(50, max(5, turnover_millions))
adjustment = 0.04 × (1 - (S - 5) / 45)
R_sme = R - adjustment

Turnover (£m) Correlation Reduction
5 4.0 pp
15 3.1 pp
25 2.2 pp
35 1.3 pp
45 0.4 pp
≥50 0.0 pp

SME Supporting Factor (CRR Only)

Eligibility

  • Counterparty is SME (turnover ≤ EUR 50m)
  • Exposure class: Corporate, Corporate SME, or secured by RE
  • Not in default

Tiered Calculation

threshold = EUR_2_500_000  # GBP 2,200,000

if total_exposure <= threshold:
    factor = 0.7619  # 23.81% reduction
else:
    factor = (threshold × 0.7619 + (total_exposure - threshold) × 0.85) / total_exposure

Factor Examples

Total Exposure Factor RWA Reduction
GBP 1m 0.7619 23.81%
GBP 2.2m 0.7619 23.81%
GBP 5m 0.811 18.9%
GBP 10m 0.831 16.9%
GBP 50m 0.843 15.7%

Calculation Examples

Example 1: Rated Large Corporate (SA)

Exposure: - £75m term loan to Tesco PLC - Rating: BBB (CQS 3) - Undrawn commitment: £25m

Calculation: 

# Drawn portion
EAD_drawn = £75,000,000

# Undrawn (50% CCF for committed facilities)
EAD_undrawn = £25,000,000 × 50% = £12,500,000

# Total EAD
EAD = £87,500,000

# Risk weight (CQS 3)
Risk_Weight = 75%

# RWA
RWA = £87,500,000 × 75% = £65,625,000

Example 2: SME with Supporting Factor (SA)

Exposure: - £8m loan to regional SME - Turnover: £30m (qualifies as SME) - Unrated (100% RW)

Calculation: 

# Base RWA
EAD = £8,000,000
Base_RWA = £8,000,000 × 100% = £8,000,000

# SME factor (tiered)
threshold = £2,200,000
factor = (2,200,000 × 0.7619 + 5,800,000 × 0.85) / 8,000,000
factor = (1,676,180 + 4,930,000) / 8,000,000 = 0.826

# Adjusted RWA (CRR)
Adjusted_RWA = £8,000,000 × 0.826 = £6,606,400

# Basel 3.1 (no factor)
B31_RWA = £8,000,000

Example 3: Corporate IRB

Exposure: - £50m corporate loan - Bank PD estimate: 0.75% - F-IRB (LGD = 45%) - Maturity: 4 years - Turnover: £100m (no SME adjustment)

Calculation: 

# Step 1: PD (above floor)
PD = 0.0075

# Step 2: Correlation
R = 0.12 × (1 - exp(-50 × 0.0075)) / (1 - exp(-50)) +
    0.24 × (1 - (1 - exp(-50 × 0.0075)) / (1 - exp(-50)))
R = 0.12 × 0.313 + 0.24 × 0.687 = 0.202

# Step 3: K calculation
K ≈ 0.0445  # From IRB formula

# Step 4: Maturity adjustment
b = (0.11852 - 0.05478 × ln(0.0075))^2 = 0.149
MA = (1 + (4 - 2.5) × 0.149) / (1 - 1.5 × 0.149) = 1.29

# Step 5: RWA (CRR)
RWA_CRR = 0.0445 × 12.5 × £50,000,000 × 1.29 × 1.06
RWA_CRR = £38,107,313

# Basel 3.1 (no scaling)
RWA_B31 = £35,950,295

Example 4: SME Corporate IRB

Exposure: - £15m loan - PD: 1.5% - F-IRB (LGD = 45%) - Maturity: 3 years - Turnover: £20m (SME)

Calculation: 

# SME correlation adjustment
S = 20
R_base = 0.179
adjustment = 0.04 × (1 - (20 - 5) / 45) = 0.027
R_sme = 0.179 - 0.027 = 0.152

# Results in lower K, lower RWA
# Plus SME Supporting Factor on final RWA (CRR)

Subordinated Debt

Instrument Type CRR Treatment Basel 3.1
Senior unsecured Standard corporate RW Standard
Subordinated debt Corporate RW + premium 150%
Mezzanine Corporate RW + premium 150%
Equity-like 150% 250%

CRM for Corporates

Eligible Collateral

Collateral Type SA F-IRB LGD
Cash ✅ 0%
Government bonds ✅ 0%
Corporate bonds ✅ Varies
Listed equity ✅ Varies
Real estate ✅ 35%
Receivables ✅ 35%
Other physical Limited 40%

Guarantees

Corporate exposures can benefit from guarantees by: - Sovereigns (0% if CQS 1) - Institutions (if better rated) - Parent companies (under conditions)

Regulatory References

Topic CRR Article BCBS CRE
Corporate definition Art. 122 CRE20.35-40
Risk weights Art. 122 CRE20.41-45
SME definition Art. 501(2) N/A
SME factor Art. 501 N/A
IRB corporate Art. 153 CRE31
Correlation Art. 153(3) CRE31.5

Next Steps