Exhibit 3.7 shows the impact of the November 2001 modified risk weighting
function on the capital requirements under the IRB Foundation Approach. For ex-
ample, an unsecured $100 million loan with a PD of 10% would have s 262% bench-
mark risk weight under the November 2001 modifications, computed using equa-
tions (3) through (6). Since the loan in our example is unsecured, using equation (1)
theRW. Thus, the loan’s minimum capital requirement
would be millon. In contrast, Exhibit 3.7 shows that
the same loan’s minimum capital requirement under the January 2001 proposals
would have been $38.6 million. Moreover, under BIS I the capital requirement would
have been $100 million 8% = $8 million. Exhibit 3.7 also shows that the capital
requirement for the highest-quality (lowest PD) exposures increases slightly in the
modified proposals, whereas the capital requirement for the lowest quality (highest
PD) exposures decreases significantly as compared to the January 2001 BIS II pro-
posals.^44
(b) Advanced IRB Approach. Sophisticated banks are encouraged to move from the
Foundation to the Advanced Approach. A primary source for this incentive is the re-
sult of the use of the bank’sactualLGD experience in place of the fixed assumption
$100m .08 2.62 $21150 > 502 BRW2.623 • 14 BIS BASEL INTERNATIONAL BANK CAPITAL ACCORDSJan. 2001 BIS II Proposal Nov. 2001 BIS Modified
Probability of Default Capital Requirements Capital Requirements
3 basis points 1.1% 1.4%
10 2.3 2.7
25 4.2 4.3
50 6.4 5.9
75 8.3 7.1
1% 10.0 8.0
1.25 11.5 8.7
1.50 12.9 9.3
2.00 15.4 10.3
2.50 17.6 11.1
3.00 19.7 11.9
4.00 23.3 13.4
5.00 26.5 14.8
10.00 38.6 21.0
20.00 50.0 30.0Notes:The minimum capital requirements shown are a percent of EAD (exposure at default)
assuming LGD = 50%.
Source:BIS (November 5, 2001b).
Exhibit 3.7. Comparison of BIS II Proposals and Potential Modifications: Capital Re-
quirements under the IRB Foundation Approach
(^44) This example is for a single loan. Adjustments for the concentration of the loan portfolio (granu-
larity adjustments) that would measure the portfolio’s level of diversification have been dropped from pil-
lar 1 of the BIS II proposals.