Under the Basel II guidelines, especially in the Advanced Internal Ratings-Based (A-IRB) approach, maturity adjustments in the capital requirement calculations are based on two key considerations:

• Risk associated with loan maturity:

  • Long-term borrowers are considered riskier compared to short-term borrowers, as the likelihood of downgrades increases over a longer time horizon.
  • Consequently, the capital requirement for a loan increases with its maturity.

• Influence of probability of default (PD):

  • Low PD borrowers are perceived to have more potential to downgrade over time compared to high PD borrowers.
  • As a result, maturity adjustments should be higher for low PD borrowers, reflecting the increased risk over time.

This understanding is crucial for banks to accurately calculate the capital requirements for their loan portfolios, aligning the risk assessment with the loan's term and the borrower's creditworthiness.

A is incorrect because it incorrectly suggests that capital requirements decrease with longer