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

Under the finalised Basel III framework, a bank that uses the foundation internal ratings-based (F-IRB) approach for corporate exposures must apply which treatment to loss given default (LGD) for senior unsecured claims on corporates?

Under F-IRB, senior unsecured corporate exposures use a supervisory LGD of 40%, lowered from 45% in the finalised Basel III reforms. Banks cannot use their own LGD estimates in the foundation approach, and subordinated claims remain at 75%.

  1. AA supervisory LGD of 40%, replacing the earlier 45%Correct
  2. BA supervisory LGD of 45%, replacing the earlier 40%
  3. CA bank-estimated LGD subject to a 25% floor
  4. DA supervisory LGD of 75%, applied to all unsecured claims

Explanation

The finalised reforms reduced the F-IRB supervisory LGD for senior unsecured exposures to corporates from 45% to 40%. Subordinated claims stay at 75%. Bank-estimated LGD is not permitted under F-IRB, and the 25% floor relates to A-IRB unsecured LGD input floors.

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