If an institution uses the combination of A-IRB and F-IRB approaches for its retail (A-IRB) and corporate exposures (FIRB), can this institution then only use the Financial Collateral Comprehensive Method (FCCM) for its corporate exposures?
If yes, what should it do for its retail exposures secured by financial collateral?
The assumption is that an institution has the permission to treat its corporate exposures under the IRB approach (without use of own estimates (foundation or F-IRB approach) and it treats its retail exposures under the Advanced IRB approach, that is it uses own estimates of LGD (because F-IRB approach is not available).
According to Article 108(1) CRR, one would get the impression that the institution can only use the FCCM method for its corporate exposures treated under the F-IRB method, while it cannot use the FCCM method for its retail exposures.
This is due to the fact that exposures treated under F-IRB should use CRM techniques described in Chapter 4 and exposures treated under A-IRB should use credit risk mitigation techniques described under Chapter 3 and the FCCM method is described in the Articles 223 and following, that is Chapter 4.
Typically institutions receives the majority of their financial collateral from corporate customers where the FCCM use is permitted and somehow it seems strange that the institution will have to make a LGD rating system for a very small portfolio of retail loans secures by financial collateral because it cannot use the FCCM method for this small portfolio. It also seem strange that identical collateral received from a retail and a corporate customer has to be treated differently and it seems even stranger that a corporate customer such as a SME with financial collateral suddenly has to be treated differently just because his exposure falls below the threshold in Article 147(5)(a)(ii) CRR.
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