Effective Maturity

Definition

Effective Maturity (M) is a duration measure used in the context of the Basel II Pillar I Capital Requirements Regulation

Foundation approach

For banks using the foundation approach for corporate exposures, effective maturity (M) will be 2.5 years except for repo-style transactions where the effective maturity will be 6 months. National supervisors may choose to require all banks in their jurisdiction (those using the foundation and advanced approaches) to measure M for each facility using the definition provided below.

Advanced IRB approach

Banks using any element of the advanced IRB approach are required to measure effective maturity for each facility as defined below. M is defined as the greater of one year and the remaining effective maturity in years as defined below. In all cases, M will be no greater than 5 years.

Formula

$M = \frac{\sum_{t} t \mbox{CF}_{t}}{\sum_{t} \mbox{CF}_{t}}$

where CF_t denotes the cash flows (principal, interest payments and fees) contractually payable by the borrower in period t.

See Also

• Expected Life (IFRS 9)

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