have higher rates of estimated default and higher loss given default (LGD), the cor-
relation among retail products is lower than among wholesale products. This as-
sumption is reflected in the proposed regulations in two ways. First, the correlation
expression for revolving credits is lower (at each level of PD) than the correlation for
other retail credits (and lower than the correlation for residential mortgages at most
levels of PD). Second, the capital requirement is lowered for revolving exposures to
allow 90% of expected losses to be covered by future income. Thus, the July 2002
IRB proposals for risk weights for revolving credit are:
(B5)For revolving exposures, the correlation is:(B6)The last term in equation (B5) reduces the capital requirement on revolving cred-
its by 90% of expected losses (PD LGD). Comparing equation (B6) to (B4) shows
the lower correlation (at each level of PD) for revolving credits as compared to other
retail credits.
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31 11 e^50 PD2>1 1 e^5024R0.02 11 e^50 PD 211 e^502 0.15 1 0.90PD LGD 2BRW12.50 LGD N 31 > 21 R G 1 PD 2 1 R> 21 R G 1 0.999 24SOURCES AND SUGGESTED REFERENCES 3 • 21