where the correlation is calibrated to equal 0.15. As in the BIS II proposals, the
LGD is set at 50% for the IRB Foundation Approach.
The other retail exposures risk weight curve is:
(B3)where
(B4)The impact of the correlation expression in equation (B4) is to decrease the correlation
coefficient at higher levels of PD. Thus, the risk weight for other retail credits is slightly
above the risk weight for residential mortgages at low levels of PD (below 0.50%), but
decreases (relative to the risk weight for residential mortgages) at higher levels of PD,
as a result of the assumed inverse relationship between correlation and PD in equation
(B4). That is, as PD exceeds 0.50%, the correlation on other retail credits calculated
using equation (B4) falls below 0.15, thereby lowering the risk weight and the bank’s
capital requirement for other retail credit as compared to residential mortgages.
The July 2002 proposal introduced a third model for the measurement of bank
capital requirements for revolving credit. Revolving credit has the lowest capital re-
quirement of all three retail credits under the proposed July 2002 IRB. The lower cap-
ital requirements for revolving credit reflect a belief that although retail products
0.17 31 11 e^35 PD2>1 1 e^3524R0.02 11 e^35 PD2>1 1 e^352 G 1 0.999 24BRW12.50 3 LGD N 311 R 2 .0.5 G 1 PD 2 1 R>1 1 R 22 0.5R3 • 20 BIS BASEL INTERNATIONAL BANK CAPITAL ACCORDSProbability of Corporate Loan Retail Loan
Default PD (%) Benchmark Risk Weight Benchmark Weight
0.03 14 6
0.05 19 9
0.1 29 14
0.2 45 21
0.4 70 34
0.5 81 40
0.7 100 50
1 125 64
2 192 104
3 246 137
5 331 195
10 482 310
15 588 401
20 625 479Notes:Both the corporate and retail loans are calibrated to a 3 year ma-
turity and a LGD = 50 percent.
Source:BIS (2001a), “The Internal Ratings–Based Approach.”Exhibit 3B.1 Comparison of Benchmark Risk Weights under BIS Internal Ratings–Based
Foundation Approach for Corporate versus Retail Loans: January 2001 Proposal