Other Exposure Classes¶

This page covers exposure classes not detailed in previous sections: Equity, Defaulted, PSE, MDB, RGLA, and other specialized categories.

Equity Exposures¶

Definition¶

Equity exposures include: - Direct equity holdings - Investments in funds - Private equity - Venture capital investments - Subordinated debt with equity characteristics

SA Risk Weights¶

IRB Treatment¶

CRR IRB Options:

Simple Risk Weight Approach:

Calculation Example¶

Exposure: - £10m listed equity portfolio - Mix of exchange-traded and private equity

CRR (Simple Approach):

# Exchange-traded: £7m
RWA_exchange = £7,000,000 × 190% = £13,300,000

# Private equity: £3m
RWA_private = £3,000,000 × 370% = £11,100,000

# Total
Total_RWA = £24,400,000

Basel 3.1:

# Exchange-traded: £7m
RWA_exchange = £7,000,000 × 100% = £7,000,000

# Private equity: £3m
RWA_private = £3,000,000 × 400% = £12,000,000

# Total
Total_RWA = £19,000,000

Defaulted Exposures¶

Definition¶

An exposure is classified as defaulted when: - Past due > 90 days on a material amount - Unlikely to pay in full without recourse to collateral - Subject to distressed restructuring - Bankruptcy or insolvency proceedings initiated - Similar credit quality deterioration

SA Risk Weights¶

Basel 3.1 High Coverage: - ≥50% specific provisions: 50% RW for secured portion - Unsecured portion: 100% RW

IRB Treatment¶

For defaulted exposures under IRB: - PD = 100% - LGD = "best estimate LGD" (ELGD) - Expected Loss = LGD × EAD

# Defaulted exposure IRB
PD = 1.00  # 100%
LGD = best_estimate_lgd  # Bank's expectation of loss
EL = LGD × EAD

# K formula still applies but with PD = 100%
# Results in RWA reflecting unexpected loss only

Calculation Example¶

Exposure: - £5m defaulted corporate loan - Specific provision: £1.5m (30% coverage) - Collateral value: £2m

SA Calculation:

# Net exposure
Net_EAD = £5,000,000 - £1,500,000 = £3,500,000

# Provision coverage 30% → 100% RW
Risk_Weight = 100%

RWA = £3,500,000 × 100% = £3,500,000

Public Sector Entities (PSE)¶

Definition¶

PSEs are non-commercial administrative bodies: - Regional governments - Local authorities - Administrative bodies - Enterprises owned by governments

Treatment Options¶

Risk Weights¶

Depends on treatment option elected:

UK Regional Governments: - Scottish Government - Welsh Government - Northern Ireland Executive - Typically treated as sovereign (0% RW)

Calculation Example¶

Exposure: - £50m loan to Transport for London - Treated as PSE with institution option - Rating: AA (CQS 1)

# Institution treatment, CQS 1
Risk_Weight = 20%
RWA = £50,000,000 × 20% = £10,000,000

Multilateral Development Banks (MDB)¶

Eligible MDBs (0% RW)¶

Non-Eligible MDBs¶

Treated as institutions with applicable risk weight.

Calculation Example¶

Exposure: - £25m bond issued by World Bank

# Eligible MDB = 0% RW
Risk_Weight = 0%
RWA = £25,000,000 × 0% = £0

Regional Governments and Local Authorities (RGLA)¶

Treatment¶

RGLAs can receive: - Sovereign treatment (if explicitly guaranteed) - PSE treatment (based on characteristics) - Institution treatment (default)

UK RGLAs¶

International Organisations¶

0% Risk Weight¶

Calculation Example¶

Exposure: - £100m deposit with BIS

# International organisation = 0% RW
Risk_Weight = 0%
RWA = £100,000,000 × 0% = £0

Covered Bonds¶

Definition¶

Debt securities secured by a dedicated pool of assets (cover pool): - Residential mortgages - Public sector exposures - Ship mortgages

Risk Weights¶

Eligibility Requirements¶

• Issued by credit institution in EEA/equivalent
• Subject to special public supervision
• Cover pool meets quality requirements
• Overcollateralization of at least 5%

Securitisation Positions¶

Definition¶

Exposures to tranched credit risk: - Asset-backed securities - Mortgage-backed securities - Collateralized loan obligations

Treatment¶

Securitisation has dedicated rules (outside scope of this calculator): - SEC-IRBA (IRB approach) - SEC-SA (Standardised approach) - SEC-ERBA (External ratings-based)

Items Associated with High Risk¶

Categories¶

Other Items¶

Tangible Assets¶

Deferred Tax Assets¶

Cash Items in Collection¶

Summary Table¶

Regulatory References¶

Next Steps¶

• Exposure Classes Overview
• Standardised Approach
• Configuration Guide