Why classes exist
A class groups exposures that behave similarly in a downturn. Banks lend to companies, to households against property, and to households through cards and overdrafts; those portfolios do not default together, so they cannot share one correlation. The class chooses the correlation, and correlation drives the risk weight.
Corporate and corporate SME
Corporates use a correlation that falls from about 24% at very low PD to about 12% at high PD, plus a maturity adjustment. Corporate SME starts from the same formula and subtracts a firm-size adjustment of up to 0.04 from correlation when consolidated annual sales are below EUR 50 million. Sales below EUR 5 million are floored at EUR 5 million.
Lower correlation means a lower risk weight for the same PD and LGD, which is the mechanism behind the SME capital discount.
Retail: three subclasses
| Subclass | Correlation | Maturity adjustment |
|---|---|---|
| Residential mortgage | 15% | none |
| Qualifying revolving | 4% | none |
| Other retail | PD dependent | none |
Qualifying revolving exposures carry the lowest correlation in the framework because card portfolios diversify well and the bank can cut limits when a borrower deteriorates. That is why a card exposure with PD 2% and LGD 60% can carry a risk weight close to a corporate exposure with a better PD.
Standardised classes
The standardised approach uses its own mapping: central governments and central banks, institutions, corporates, retail, secured by real estate, past due, and others. Weights are prescribed per class and, where available, per external rating. CRR3 changes the treatment of real estate, unrated corporates and specialised lending.
For a specific standardised exposure, use the standardised calculator rather than extrapolating from IRB numbers.
Comparing the same inputs
Corporate, PD 1%, LGD 40%, maturity 2.5, CRR3: risk weight 82.06%. Move the same exposure to other retail and the correlation changes, so the weight changes with it. Class is not a label; it is a parameter.
Enter an exposure class in the IRB calculator and the comparison table updates, which is the fastest way to see the size of the effect.
What the class does not decide
- Whether the exposure defaults. That is PD's job.
- How much is lost after collateral. That is LGD's job in IRB, and the prescribed rules' job in standardised.
- The size of the exposure. That is EAD.
Questions
Is SME a separate IRB class?
It is treated within the corporate formula with a firm-size adjustment to correlation, not as a separate formula.
Why is the qualifying revolving correlation so low?
Card portfolios diversify across many small exposures and limits can be reduced before default, which lowers the modelled correlation.
Does exposure class change EAD?
No. It changes the risk weight.