Explanation:
The Basel Committee has indeed proposed adjustments to the supervisory specified parameters in the Foundation - Internal ratings based approach (F-IRB). For exposures that are secured by non-financial collateral, the committee has suggested increasing the haircuts that apply to the collateral. A 'haircut' in this context refers to a reduction applied to the value of an asset that is being used as collateral for a loan. The purpose of this haircut is to provide a cushion for the lender in case the value of the collateral falls. In addition to this, for exposures that are unsecured, the committee has proposed reducing the Loss Given Default (LGD) parameter from 45% to 40% for exposures to non-financial corporates. LGD is a measure of the potential loss to a lender or investor in the event of default by a borrower. By reducing the LGD parameter, the committee aims to reflect a lower potential loss on unsecured exposures to non-financial corporates.
Choice B is incorrect because it incorrectly states that the Basel Committee has proposed reducing the LGD parameters for secured exposures. In fact, the committee has proposed increasing the haircuts that apply to the collateral for secured exposures. Furthermore, the committee has not proposed reducing the LGD parameter from 25% to 20% for exposures to non-financial corporates. The correct proposal is to reduce the LGD parameter from 45% to 40% for
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Q.3106 The Basel Committee has agreed on various additional enhancements to the IRB approaches to further reduce unwarranted RWA variability. Which of the following correctly outlines a measure that has been put forth for adoption by banks?
A
Secured exposures: increasing the haircuts that apply to the collateral; Unsecured exposures: reducing the LGD parameter from 45% to 40% for exposures to non-financial corporates.
B
Secured exposures: reducing the LGD parameters; Unsecured exposures: reducing the LGD parameter from 25% to 20% for exposures to non-financial corporates.
C
Secured exposures: decreasing the haircuts that apply to the collateral; Unsecured exposures: reducing the LGD parameter from 45% to 40% for exposures to non-financial corporates.
D
Secured exposures: increasing the LGD parameters; Unsecured exposures: increasing the LGD parameter from 40% to 50% for exposures to non-financial corporates.