Difference between revisions of "ASRF model"
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Contents
Definition
ASFR Model (asymptotic single factor risk model) is a simplified Credit Portfolio risk model that underpins the Basel II capital requirements
Assumptions
The following is an indicative list of assumptions / design choices in constructing the ASFR model
- One year risk horizon
- Single factor model
- Normal distributions
- Homogeneous and large pool of exposures
Formulae
Below are the explicit formulae for some banks’ major products:
- Corporate exposures,
- Small-medium enterprise (SME) exposures
- Residential mortgages and
- Qualifying revolving retail exposure. (S being Min(Max(Sales Turnover),5),50 )
In the formulas below:
- N(x) denotes the normal cumulative distribution function
- G(z) denotes the inverse cumulative distribution function
- PD is the probability of default as calculated by an approved internal risk model
- LGD is the loss given default as calculated by an approved internal risk model
- EAD is the Exposure At Default as calculated by an approved internal risk model
- M is the effective maturity as calculated by an approved internal risk model
Corporate Exposures
The exposure for corporate loans is calculated as follows[1]
Correlation Parameter
The correlation parameter offers a simple approach to capture an element of Default Correlation. The peculiar presence of exponentials is for normalization purposes
Maturity Adjustment
The maturity adjustment offers a simple approach to capture residual credit risks that may not materialise within the one-year risk horizon implied by the ASRF model.
Capital requirement
Risk-weighted assets
Correlation adjustment for Large Financial Institutions
A multiplier of 1.25 is applied to the corporate correlation parameter of all exposures to financial institutions meeting the following criteria[2]
- Regulated financial institutions whose total assets are greater than or equal to US $100 billion. Regulated financial institutions include, but are not limited to, prudentially regulated Insurance Companies, Broker/Dealers, Banks, Thrifts and Futures Commission Merchants
- Unregulated financial institutions, regardless of size.
Correlation Parameter
Correlation adjustment for SME
For small and medium enterprises with annual Sales Turnover below 50 million euro, the correlation may be adjusted as follows:[3]
SME Correlation
In the above formula, S is the enterprise's annual sales turnover in millions of euro.
Residential mortgage exposures
The exposure related to residential mortgages can be calculated as this[4]
Correlation
Capital Requirement
Risk-weighted assets
Qualifying revolving retail exposures (credit card products)
The exposure related to unsecured retail credit products can be calculated as follows:[5]
QRRE Correlation Assumption
Capital Requirement
Risk-weighted assets
References
- ↑ Basel II: International Convergence of Capital Measurement and Capital Standards: a Revised Framework (BCBS) (November 2005 Revision), Paragraph 272
- ↑ Basel III: A global regulatory framework for more resilient banks and banking systems
- ↑ Basel II: International Convergence of Capital Measurement and Capital Standards: a Revised Framework (BCBS) (November 2005 Revision), Paragraph 273
- ↑ Basel II: International Convergence of Capital Measurement and Capital Standards: a Revised Framework (BCBS) (November 2005 Revision), Paragraph 328
- ↑ Basel II: International Convergence of Capital Measurement and Capital Standards: a Revised Framework (BCBS) (November 2005 Revision), Paragraph 329