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FRM Part II · FRM Exam Part II · Basel III: Finalising Post-crisis Reforms

A bank uses A-IRB for residential mortgages. Its model estimates an exposure-level LGD of 5% and the exposure is secured by a mortgage. Under the finalised Basel III input floors, what LGD floor applies to this exposure?

The applicable LGD is 5%. Basel III sets a 5% LGD floor for retail mortgages secured by residential property. The bank's estimate equals the floor, so it is used unchanged. The 0% and 25% alternatives reflect fully collateralised or unsecured treatments, not mortgages.

  1. A0%, as the exposure is fully collateralised
  2. B5%, the bank's estimate, because it is validated
  3. C10%, the floor for retail mortgagesCorrect
  4. D25%, the floor for unsecured retail

Explanation

Basel III sets an LGD floor of 5% for retail mortgage exposures secured by residential real estate. The bank's estimate of 5% equals the floor, so 5% applies. Option 10% is the floor for retail mortgages in older drafts.

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