Credit Risk Mitigation Specification¶

Basel 3.1 CRM changes: revised 5-band haircut tables, increased equity and gold haircuts, and IRB parameter substitution replacing double default.

Regulatory Reference: PRA PS1/26 Art. 191A–241, CRE22 Test Group: B31-D, B31-D7

Requirements Status¶

Overview¶

Basel 3.1 introduces more granular collateral haircut tables (5 maturity bands instead of 3), increases haircuts for equity and gold collateral, and replaces the double default treatment with parameter substitution for IRB-rated guarantors.

Key Changes from CRR¶

Financial Collateral Haircuts (Art. 224)¶

Cash and Gold¶

Government Bond Haircuts (5-Band)¶

PRA PS1/26 Art. 224 Table 1 — 10-day liquidation period (verified against ps126app1.pdf p.203, 17 Apr 2026; "entity type (b) of paragraph 1 of Article 197" — sovereigns / central banks / certain PSEs and MDBs treated as sovereign):

CQS 5–6 government bonds are ineligible as financial collateral (Art. 197(1)(b)).

Corporate and Institution Bond Haircuts (5-Band)¶

PRA PS1/26 Art. 224 Table 1 — 10-day liquidation period (verified against ps126app1.pdf p.203; "entity types (c) and (d) of paragraph 1 of Article 197" — institutions / corporates):

CQS 4–6 corporate/institution bonds are ineligible (Art. 197(1)(d)).

Equity Haircuts¶

FX Mismatch Haircut¶

Unchanged from CRR: 8% (10-day base liquidation period).

Scaled for other liquidation periods via:

H_fx_scaled = H_fx x sqrt(T_m / 10)

Scope (unchanged from CRR — PS1/26 inherits the Art. 224 / Art. 230 / Art. 233 split):

• Financial collateral (Art. 224 comprehensive method) — H_fx applies via Art. 224 Table 4.
• Unfunded credit protection (Art. 233(3)) — H_fx applies to guarantees and credit derivatives. Article 232 cross-references Art. 233(3) (PS1/26 also pulls in Art. 233(4)) for life insurance / credit-linked notes.
• Funded non-financial collateral (Arts. 229–230 — receivables, real estate, other physical) — H_fx does not apply. The LGD* formula uses the raw collateral value C against the C* / C** thresholds with no FX adjustment; FX risk is captured upstream by the spot-rate FXConverter. The engine gate (engine/crm/haircuts.py) excludes these types via data/schemas.py:NON_FINANCIAL_COLLATERAL_TYPES.

Maturity Band Classification¶

The 5-band boundaries use inclusive upper thresholds:

Null maturity defaults to 10y+ (conservative) under Basel 3.1, vs 5y+ under CRR.

Volatility Scaling (Art. 226)¶

PRA PS1/26 restructures CRR Art. 226 into two numbered paragraphs: paragraph 1 retains the non-daily revaluation formula (from CRR Art. 226); paragraph 2 absorbs the liquidation period scaling formula previously in CRR Art. 225(2)(c), since the own-estimates approach (Art. 225) is removed under Basel 3.1.

Art. 226(1) — Non-Daily Revaluation Adjustment¶

When collateral is revalued less frequently than daily, haircuts must be scaled up using the square-root-of-time formula:

H = H_m × sqrt((N_R + T_m − 1) / T_m)

When revaluation is daily (N_R = 1), the formula reduces to H = H_m (no adjustment).

Art. 226(2) — Liquidation Period Scaling¶

When the applicable liquidation period differs from the haircut table's reference period, scale using:

H_m = H_n × sqrt(T_m / T_n)

Liquidation Periods (Art. 224(2))¶

Art. 224 Table 3 provides haircuts at the 10-day holding period. Apply Art. 226(2) to scale to 5-day (repos) or 20-day (secured lending) periods. Apply Art. 226(1) additionally when revaluation is not daily.

Key Change from CRR¶

F-IRB LGDS Values (Art. 230, Art. 161)¶

For F-IRB exposures, supervisory LGD values for secured exposures:

See F-IRB Specification for full LGD details including unsecured values and the blended LGD formula.

IRB Parameter Substitution (B31-D7)¶

Overview¶

Basel 3.1 replaces the CRR double default treatment with the Parameter Substitution Method (PSM) for IRB-rated guarantors. PSM is one of the six CRM methods listed in Art. 191A and is applied per Art. 236 to the covered portion of an exposure.

The substitution is a four-parameter swap: PD, LGD, correlation R, and maturity M are each replaced (where appropriate) with the value that would apply to a comparable direct exposure to the protection provider. The covered portion's risk weight is then re-computed via the standard IRB capital formula at Art. 153 (corporate / institution / sovereign) or Art. 154 (retail).

Regulatory anchor: PRA PS1/26 Art. 236(1)(a) (BCBS CRE22.70–85), with parameter-specific cross-references to Art. 160, Art. 161, Art. 162, Art. 163 and Art. 164. Verified against ps126app1.pdf pp.215–216 (17 Apr 2026).

Trigger Conditions¶

Per engine/irb/guarantee.py::_apply_parameter_substitution, PSM activates row-wise when all of the following hold:

1. The exposure carries a non-zero guaranteed_portion (Art. 236(1)(a) covered part);
2. guarantor_approach == "irb" and the guarantor has a non-null guarantor_pd (i.e. the guarantor is rated under an IRB model rather than only externally rated);
3. The guarantee is eligible per Art. 213–217 (gating performed upstream in engine/crm/guarantees.py).

If only guarantor_pd is missing — i.e. the guarantor is on the SA — the row falls back to the SA Risk-Weight Substitution Method (RWSM, Art. 235), with guarantor_rw sourced from _compute_guarantor_rw_sa instead.

The PSM branch fires under both CRR and Basel 3.1 whenever an internal guarantor_pd exists, but the framework selects the F-IRB LGD table used (CRR 0.45 senior unsecured vs Basel 3.1 0.40 non-FSE / 0.45 FSE under Art. 161(1)(aa)). Under CRR, the optional double-default overlay (Art. 153(3) / Art. 202–203) can sit on top — see Double Default Overlay below.

Step 1 — PD Substitution (Art. 202 / CRE22.72)¶

The PD on the covered portion is substituted with the PD that would apply to a comparable direct exposure to the protection provider (PRA PS1/26 Art. 236(1)(a)(i), "PD = ..."; BCBS CRE22.72):

PD_substituted = max(guarantor_pd, PD_floor)

Where:

• guarantor_pd is the firm's internal PD estimate for the protection provider on the rating system the protection provider sits on.
• PD_floor is the Art. 160(1) input floor (corporate / institution / sovereign) or Art. 163(1) input floor (retail) appropriate to the guarantor's exposure class — evaluated via _pd_floor_expression(config, has_transactor_col=...) in the engine.
• The Art. 160(4) (or Art. 163(4)) "no better than direct" uplift is implicit in the way PSM is applied: PSM is recognised only when the resulting guarantor_rw < risk_weight_irb_original (the is_guarantee_beneficial gate); a non-beneficial PSM result is simply not applied (Art. 236(1)(c) blended formula collapses to rn × E / E).

The same floored PD is used in the correlation and maturity-adjustment formulas below — it is not re-floored separately at each step.

Step 2 — LGD Adjustment by Guarantor Seniority (Art. 161 / CRE22.73)¶

PRA PS1/26 Art. 236(1)(a)(i) gives the firm a choice of LGD source for the covered portion:

1. Option (i): Borrower LGD, unprotected — the LGD the borrower exposure would carry under Art. 161 (F-IRB) or Art. 161 + Art. 164(4)/(4A) (A-IRB) as if no unfunded credit protection existed, with the Art. 161(5) input floor and the Art. 161(6) uplift applied; or
2. Option (ii): Guarantor F-IRB LGD — the LGD that would apply to the guarantee if it were a direct exposure to the protection provider under the Foundation IRB Approach, "taking into account the seniority of the guarantee" (Art. 236(1)(a)(i), verbatim). Under Art. 161(1)(aa) (Basel 3.1):
   • 40% — senior unsecured, non-FSE counterparty
   • 45% — senior unsecured, FSE counterparty (Art. 142(1)(4))
   • 75% — subordinated guarantee
   • Art. 161(1)(d) covered-bond LGDs (e.g. 11.25%) where the guarantee is itself a covered-bond claim.

Either choice is then "increased as necessary" to comply with the Art. 161(3) / Art. 160(4) "no better than direct" obligation (Art. 236(1)(a)(i), final sub-paragraph).

The implementation in _apply_parameter_substitution defaults to option (ii) — it sources the F-IRB senior unsecured LGD via get_firb_lgd_table_for_framework and plugs it into _parametric_irb_risk_weight_expr(lgd=firb_lgd_senior, ...). Option (i) (borrower-LGD retention) is not currently surfaced as a config switch.

Step 3 — Correlation Re-Derivation (CRE22.74)¶

PRA PS1/26 Art. 236(1)(a)(i) defines:

R = the correlation coefficient that would be assigned to a comparable direct exposure to the protection provider.

Under Art. 153(2)–(4), R depends on the guarantor's exposure class (and, for SME corporates, the guarantor's turnover and the firm-size adjustment). The Basel 3.1 correlation formulas reused for the substitution step are documented in Asset Correlation (Art. 153(2)–(4)) and Step 2 from F-IRB Capital Formula; for retail guarantors the Art. 154(1) fixed / decay correlations apply (R = 0.15 mortgage, R = 0.04 QRRE, decay form for retail-other).

The FI scalar (Art. 153(2), 1.25× correlation multiplier) re-applies if the guarantor is itself a large or unregulated FSE — see FI Scalar (Art. 153(2)).

Step 4 — Maturity Adjustment (Art. 162 / CRE22.80)¶

For non-retail substitutions, Art. 236(1)(a)(i) reads:

M = the maturity of the exposure calculated in accordance with Credit Risk: Internal Ratings Based Approach (CRR) Part Article 162.

The maturity used in the substitution is therefore the maturity of the underlying exposure measured under Art. 162 (Art. 162(2A) calculation methods, floored at 1.0 year, capped at 5.0 years), not a separate maturity for the guarantor. The Art. 162(2A) machinery is documented in Effective Maturity (Art. 162); the Art. 162(3) one-day floor exceptions for short-term / daily-margined exposures are preserved.

The MA factor itself reuses the Art. 153(1) form documented in Maturity Adjustment Formula, evaluated with the substituted PD from Step 1:

b = (0.11852 - 0.05478 * ln(PD_substituted))^2
MA = (1 + (M - 2.5) * b) / (1 - 1.5 * b)

For retail guarantees (exposure_class ∈ {RETAIL, RETAIL_MORTGAGE, QRRE, RETAIL_OTHER, RETAIL_SME}), MA = 1.0 — this matches Art. 154 (retail formula omits the maturity adjustment) and the explicit override in _parametric_irb_risk_weight_expr (is_retail branch).

A separate maturity-mismatch adjustment (Art. 236A / Art. 237–239) applies before this step when the protection's residual maturity is shorter than the underlying exposure's. The G* → GA reduction is documented in Maturity Mismatch (Art. 237–239); the Art. 237(1) / 237(2) eligibility gates can disqualify the protection entirely (e.g. protection with residual maturity < 3 months and < exposure maturity).

Composing the Four Steps — Covered-Portion Risk Weight¶

The covered portion's risk weight r_g (Art. 236(1)(a)(i)) is the IRB capital formula evaluated with the substituted parameters:

K_g = LGD_covered * N[(1 - R_g)^(-0.5) * G(PD_g) + (R_g / (1 - R_g))^(0.5) * G(0.999)]
       - PD_g * LGD_covered
r_g = K_g * 12.5 * scaling * MA_g

Where PD_g, LGD_covered, R_g and MA_g are the Step 1–4 substituted values, and scaling is 1.0 under Basel 3.1 (Art. 153(1) — 1.06 removed), retained at 1.06 under CRR.

The implementation lives in _parametric_irb_risk_weight_expr (engine/irb/formulas.py:756).

Composing the Four Steps — Blended RWA (Art. 236(1)(c))¶

The whole-exposure risk weight blends the covered and uncovered portions per Art. 236(1)(c):

RW_blended = (E_n * r_n + E_g * r_g) / E
RWA_blended = RWA_borrower * (E_n / E) + E_g * r_g * 12.5_via_K

With:

• E_n (uncovered) = unguaranteed_portion
• E_g (covered) = guaranteed_portion = min(GA, E)
• r_n = the borrower's pre-CRM IRB risk weight (risk_weight_irb_original)
• r_g = the Step 1–4 result above (guarantor_rw post-substitution)

The benefit gate (is_guarantee_beneficial = guarantor_rw < risk_weight_irb_original) disapplies PSM when it would worsen the capital outcome, in line with the implicit Art. 213 economic-substance test and the explicit Art. 160(4) "no better than direct" floor.

Expected Loss Under PSM (Art. 236(1A))¶

Art. 236(1A) blends EL by the same covered/uncovered split:

EL_blended = EL_original * (E_n / E) + PD_g * LGD_covered * E_g

Where PD_g and LGD_covered are the same values used in r_g at Step 1 and Step 2 respectively (Art. 236(1A)(b) verbatim). The implementation (_adjust_expected_loss in engine/irb/guarantee.py) uses guarantor_pd_floored * firb_lgd_senior * guaranteed_portion for the covered-portion EL when _is_pd_substitution is set and the row is not also on the CRR double-default branch.

Double Default Overlay (CRR Only, Art. 153(3))¶

Under CRR, A-IRB firms with a corporate underlying and an eligible institution / MDB / sovereign / rated-corporate guarantor may, in addition to PSM, apply the double-default multiplier of Art. 153(3) / Art. 202–203:

RW_dd = RW_obligor * (0.15 + 160 * PD_g_floored)

floored by RW_g (the substituted PSM RW from Steps 1–4). The Basel 3.1 rule instrument leaves Art. 153(3) "Provision left blank" — double default is not available under PS1/26. The CRR overlay is therefore gated in the engine on the double_default_treatment pack Feature together with config.enable_double_default and has_guarantor_pd (_apply_double_default). See Double Default Removal on the Basel 3.1 A-IRB page for the framework-level rationale.

Audit Trail¶

The guarantee_method_used output column indicates the method applied per row:

Worked Example¶

See acceptance scenarios B31-D7 (single IRB guarantor, full coverage) and B31-D7b (partial coverage blending) in tests/acceptance/ for end-to-end PSM walk-throughs with verified PD / LGD / R / MA inputs and the Art. 236(1)(c) blended-RWA output.

CRM Method Taxonomy (Art. 191A)¶

Art. 191A replaces the old CRR Art. 108, introducing a formal four-part decision tree for CRM method selection with explicit method names.

Method Names¶

Art. 191A Decision Tree¶

Part 1 — Funded CRM with CCR exposure: CCR exposures use IMM / SFT VaR / FCCM / FCSM (SA only).

Part 2 — Funded CRM without CCR (non-CCR exposures):

1. On-balance sheet netting (Art. 219)
2. Financial collateral → FCSM (SA only, Art. 222) or FCCM (Art. 223)
3. Non-financial collateral → FCM (F-IRB, Art. 229-231) / LGD Modelling (A-IRB)
4. Life insurance / other funded CP → Other Funded Protection Method (Art. 232)

Part 3 — Unfunded CRM:

• SA / Slotting → Risk-Weight Substitution Method (Art. 235)
• F-IRB → Parameter Substitution Method (Art. 236) only
• A-IRB without own-LGD permission for the class → Parameter Substitution Method (Art. 236) only
• A-IRB with own-LGD permission for the class → LGD Adjustment Method (Art. 183) or Parameter Substitution Method (Art. 236). Selection is a firm-level methodology choice subject to the Art. 191A(3) consistency rule (same method across the same type of unfunded protection).

Part 4 — Unfunded CP covered by funded CP: Where unfunded protection is itself collateralised, funded CRM may be applied to the unfunded protection first (the "look-through"), then the adjusted unfunded protection is applied to the original exposure. Detailed mechanics in Look-Through for Unfunded Protection Backed by Funded Protection below.

Look-Through for Unfunded Protection Backed by Funded Protection (Art. 191A(2)(e), (f))¶

PS1/26 Art. 191A(2)(e) introduces an explicit "look-through" optionality for the case where an institution's exposure is covered by unfunded credit protection (a guarantee or credit derivative) and that unfunded protection is itself covered by funded credit protection posted by the unfunded-protection provider — for example, a guarantor that has pledged collateral to the lending institution to back the guarantee it has written. Verified against ps126app1.pdf p.168 (Art. 191A(2)(e), (f), 1 January 2027 effective text).

Verbatim Text — Art. 191A(2)(e) and (f)¶

(e) where an institution has an exposure that is covered by unfunded credit protection that, in turn, is covered by funded credit protection and such institution chooses to take into account either (i) only the funded credit protection or (ii) both the unfunded credit protection and the funded credit protection, then the institution shall take into account the applicable credit protection or credit protections in an appropriate manner that is consistent with the decision tree in Part 4 of Appendix 1 (and, to the extent referenced therein, the decision trees in Parts 1 to 3 of Appendix 1), and in a way that does not double count the effects of the credit protection. Notwithstanding this point (e), such institution may choose to take into account only the unfunded credit protection in accordance with point (c) and not the funded credit protection; and

(f) to the extent an institution chooses to take into account funded credit protection under point (e), references to the 'borrower' or the 'obligor' in this Part (in the context of unfunded credit protection which is covered by funded credit protection) shall be deemed to refer to either:

• (i) only the provider of the unfunded protection;
• (ii) one of the borrower/obligor or the provider of the unfunded credit protection; or
• (iii) both the obligor and the provider of the unfunded credit protection,

in each case where appropriate from a prudential point of view to reflect the nature of the credit protection arrangement and the risks related to that arrangement.

Plain-English Reading¶

The institution has a choice of three treatments for the exposure → guarantor → collateral chain (Art. 191A(2)(e), final sentence: "may choose"):

The Art. 191A(2)(f) "borrower deeming" rule is a definitional clean-up: where the funded protection sits between the guarantor and the institution, the ordinary Part 2 funded-CRM articles (which speak of "obligor" / "borrower") have to be re-read with the guarantor standing in as the obligor of the funded leg — because the collateral is securing a claim against the guarantor, not directly against the original obligor. The (f)(i)–(iii) options give the firm flexibility to reflect either party (or both) as the relevant counterparty in eligibility tests (e.g. wrong-way-risk checks under Art. 194), depending on which assignment is "appropriate from a prudential point of view".

CRR Comparison — Wholly New Under PS1/26¶

CRR Art. 108 (the predecessor of Art. 191A) was a one-paragraph cross-reference to the CRM techniques in Chapter 4 of Title II of Part Three. It contained no equivalent of (2)(e) / (2)(f): the look-through mechanic for unfunded-backed-by-funded protection is not enumerated as an explicit option anywhere in the CRR text. Under CRR a firm holding a guarantee secured by guarantor-posted collateral could in practice rely on the same economic substance, but the route was via the general "no double-counting" obligation (CRR Art. 193(2)) plus per-form CRM application — not a named optionality with the borrower-deeming flexibility set out in PS1/26 Art. 191A(2)(f).

This is a substantive widening of optionality: PS1/26 lets a firm reach the funded protection directly (skipping the guarantee), which under PSM (Art. 236) or RWSM (Art. 235) can be the more capital-efficient route when the guarantor's PD / risk weight is worse than the substituted CRM benefit from the underlying collateral.

Cross-References¶

• The funded leg, once "looked through", is run through the ordinary funded CRM machinery: see FCSM Under Basel 3.1 (Art. 222), FCCM E* Formula (Art. 223(5)), and the Foundation Collateral Method documented under Supervisory LGD (Art. 161) / Collateral-Type LGDS Values.
• The unfunded leg, where retained alongside the funded leg, follows IRB Parameter Substitution (B31-D7) (PSM, Art. 236) or the SA Risk-Weight Substitution Method (Art. 235), per the Method Selection by Approach table.
• The no-double-counting obligation is anchored in Art. 191A(2)(d) / Art. 193(2); see Anti-Double-Counting and Consistency Rules immediately below.
• Maturity-mismatch handling on each leg is governed by Art. 237–239 — the GA / CVAM adjustment is computed per leg before the look-through composes the two.

Implementation Status¶

Anti-Double-Counting and Consistency Rules¶

• Para 2(d): Funded and unfunded CRM must not be recognised simultaneously on the same portion of an exposure (no double-counting).
• Para 3: An institution must use the same CRM method for the same type of unfunded credit protection across its portfolio (consistency requirement).
• AIRB own-LGD anti-double-counting (Art. 169A): Where collateral has been used to construct the firm's own LGD model, that collateral must not also contribute supervisory CRM benefit to non-AIRB exposures of the same counterparty. The pipeline supports this via the is_airb_model_collateral flag on the collateral table (default False):
• When True, the collateral is allocated only to AIRB-pool exposures (rows where the modelled LGD is preserved). Non-AIRB exposures receive zero. Direct allocation onto a non-AIRB exposure raises a CRM006 data-quality warning.
• Even when False, AIRB-pool exposures are excluded from the pro-rata base at facility / counterparty level, so unflagged collateral routes entirely to non-AIRB rows rather than being "wasted" on AIRB rows whose LGD ignores it.

Method Selection by Approach¶

LGD-AM Availability Gate (Art. 143, Art. 179(1)(aa), Art. 147A)¶

LGD-AM sits inside the A-IRB own-LGD model rather than as a stand-alone CRM overlay. Four PS1/26 provisions, read together, gate whether a firm may apply LGD-AM to a given exposure at all.

1. A-IRB permission for the exposure class (Art. 143(2A)(c))¶

Art. 143(2A) requires a firm, when applying for IRB permission, to state "in relation to each exposure class, exposure subclass or type of exposures" which IRB approach it proposes — (a) Slotting, (b) F-IRB, or (c) A-IRB. The permission therefore attaches to the class/subclass, not to the institution as a whole. Art. 143(2B) confirms that a firm with IRB permission for one approach (e.g. F-IRB) that wishes to move a class to a more sophisticated approach (e.g. A-IRB) needs further prior PRA permission.

Consequence: LGD-AM is available only for exposures that fall inside an exposure class / subclass / type of exposures for which the firm currently holds A-IRB permission. F-IRB classes are restricted to PSM under Art. 236.

2. Art. 179(1)(aa) — own-LGD ban on guarantee recoveries except via LGD-AM¶

Art. 179(1)(aa) (ps126app1.pdf p.131) states verbatim: "an institution shall not take account of recoveries from guarantees, credit derivatives and other support arrangements when quantifying LGD estimates, except where recoveries are recognised under the LGD Adjustment Method in accordance with Article 183."

Consequence: the LGD Adjustment Method is the only channel through which an A-IRB firm may reflect unfunded credit protection inside its own-LGD model. Firms without A-IRB permission for the class cannot take the Art. 179(1)(aa) exception — they fall back to PSM (Art. 236) applied outside the LGD model.

3. Art. 147A — approach restrictions that pre-empt LGD-AM¶

Even where a firm holds A-IRB permission historically, PS1/26 Art. 147A removes A-IRB from the menu for certain classes. The restrictions most material for LGD-AM scope are:

For these classes, PSM under Art. 236 is the only unfunded-CRM channel, regardless of any historical A-IRB permission. See Model Permissions spec for the full Art. 147A restriction table.

4. Art. 191A(3) — portfolio-wide consistency¶

Art. 191A(3) requires a firm to use the same CRM method for the same type of unfunded credit protection across its portfolio. A firm that elects LGD-AM for guarantees in one A-IRB class must not also run PSM on the same type of guarantee in another A-IRB class — the consistency rule is per protection type, not per exposure class. (The rule does not force LGD-AM onto F-IRB classes: PSM remains mandatory there under limb 1 above.)

Tranched Coverage (Art. 234)¶

Art. 234 governs partial / tranched unfunded credit protection — structures where the protection covers only part of the loss range on the underlying exposure (for example, a guarantee that absorbs losses between an attachment point and a detachment point, while the borrower retains the first-loss and senior tranches).

Under Art. 234 the protected and unprotected tranches are treated as separate exposures, and the protection is recognised only on the covered tranche, with the risk weight or PD/LGD of the protection provider substituted via the appropriate method (RWSM under Art. 235 for SA / Slotting, or PSM under Art. 236 for IRB).

FCSM Under Basel 3.1 (Art. 222)¶

The Financial Collateral Simple Method is retained for SA exposures under Basel 3.1. Paragraph references below verified against ps126app1.pdf pp.199–200 (17 Apr 2026).

Art. 222(3) — 20% RW Floor¶

The risk weight of the collateralised portion is the RW that would apply to a direct exposure to the collateral instrument, with a minimum 20% floor (Art. 222(3), second sub-paragraph), except as specified in paragraphs 4 and 6.

Art. 222(4) — 0% / 10% Floor for SFTs (Art. 227 Criteria)¶

For securities financing transactions that meet the criteria in Art. 227, the collateralised portion receives a 0% risk weight where the counterparty is a core market participant, and 10% where the counterparty is not a core market participant. This paragraph replaces the flat 20% floor for qualifying SFTs.

Art. 222(6) — 0% Floor for Same-Currency Cash or 0%-RW Sovereign Debt¶

For non-SFT transactions where the exposure and the collateral are denominated in the same currency, the floor drops to 0% if either:

• (a) the collateral is cash on deposit (or a cash-assimilated instrument) with the lending institution, or
• (b) the collateral is central-government or central-bank debt that is eligible for a 0% SA risk weight, with its market value discounted by 20% (Art. 222(6)(b), with the extended definition of "central government / central bank debt" in Art. 222(7) covering certain RGLAs, MDBs, and international organisations).

Art. 222 — No Maturity Mismatch¶

Under the FCSM, the collateral's residual maturity must be at least equal to the exposure's residual maturity. The Art. 239(2) maturity mismatch adjustment formula (CVAM = CVA × (t − 0.25) / (T − 0.25), with t and T measured per Art. 238) does not apply to the FCSM — Art. 239(1) excludes FCSM from the maturity-mismatch formula entirely: the collateral simply does not qualify as eligible funded credit protection where any mismatch exists.

FCCM E* Formula (Art. 223(5))¶

The Financial Collateral Comprehensive Method produces a net adjusted exposure value:

E* = max(0, E(1 + HE) - CVA(1 - HC - HFX))

Life Insurance Method (Art. 232)¶

Life insurance policies assigned to the institution are the principal non-cash item recognised through the Other Funded Credit Protection Method (OFCP) introduced by PS1/26 Art. 191A. Paragraph references below verified against ps126app1.pdf pp.211–212.

Scope Gate (Art. 232(A1))¶

Art. 232 applies only to an institution that has elected the Other Funded Credit Protection Method under the Art. 191A(1) taxonomy. Under Basel 3.1 life insurance is not available through FCSM or FCCM — those methods are restricted to financial collateral (Art. 222, 223). This is a structural change from CRR, where Art. 232 stood alone without the Art. 191A method taxonomy.

Paragraph 1 — Cash / Cash-Assimilated Deposits Held by a Third Party¶

Where the Art. 212(1) conditions are met (pledge / assignment, notification, payment-control), cash on deposit with — or cash-assimilated instruments issued by the institution and held by — a third-party institution in a non-custodial arrangement may be treated as a guarantee by the third party institution. The exposure is then routed through the unfunded CRM path (Art. 235 Risk-Weight Substitution for SA, or Art. 236 Parameter Substitution for IRB) per the Part 3 decision tree of Appendix 1.

Paragraph 2 — Life Insurance Treatment¶

Where the Art. 212(2) conditions are met (policy pledged / assigned, insurer notified, right to cancel on default, surrender value declared and non-reducible, maturity-match), the portion of the exposure collateralised by the current surrender value is subjected to:

• (a) Standardised Approach: risk-weighted per paragraph 3 (derivation table below).
• (b) Foundation IRB: assigned LGD = 40%. CRR's broader "IRB but not own estimates of LGD" phrasing is narrowed to F-IRB in PS1/26 — A-IRB firms now handle life insurance through their own LGD models (subject to Art. 169A/169B).

The credit protection value equals the current surrender value, reduced for currency mismatch in accordance with Art. 233(3) and (4) (PS1/26 adds the (4) cross-reference to capture the full Art. 233 currency-mismatch machinery, not just the 8% haircut).

Paragraph 3 — SA Derivation Table (Life Insurance)¶

The risk weight applied to the secured portion is derived from the risk weight that would be assigned to a senior unsecured exposure to the insurer under the SA (Credit Risk: Standardised Approach (CRR) Part and Chapter 2 of Title II of Part Three of CRR):

Paragraph 4 — Repurchase-on-Request Instruments (Art. 200(1)(c))¶

Instruments repurchased on request by the issuing institution and eligible under Art. 200(1)(c) may be treated as a guarantee by the issuing institution (again routed via Art. 235 / 236 per the Part 3 decision tree). Protection value = face value if face-repurchase, or the Art. 197(4) valuation if market-price-repurchase.

Paragraph 5 — Mandatory Maturity-Mismatch Adjustment (new)¶

Unlike FCSM, which is exempt from the Art. 237-239 maturity-mismatch framework (see Art. 239(1)), the Other Funded Credit Protection Method is in scope. Paragraph 5 makes this explicit: an institution using OFCP "shall take into account any maturity mismatch in accordance with the provisions of Articles 237 to 239". CRR had no equivalent standalone sub-paragraph — the obligation was implicit through the general Art. 238 scope — so PS1/26 tightens the wording without changing the substantive outcome.

Structural Changes vs CRR Art. 232¶

Implementation¶

Life insurance collateral flows through the Art. 232 derivation table in engine/crm/life_insurance.py. Inputs: the insurer identifier on the facility / loan row, the pledged surrender value, and the policy currency. The insurer's senior-unsecured SA RW is re-computed against the framework in play (CRR: CRR Table 3 / 4; B31: ECRA Table 3 / 4 or SCRA Table 5 per Art. 121). The mapping is then applied to produce the secured-portion RW emitted as the life_ins_secured_rw column.

Spec ↔ Output-Column Cross-Reference¶

The two life_ins_* columns produced by engine/crm/life_insurance.py::compute_life_insurance_columns are the machine-readable image of Art. 232(2) and Art. 232(3). The mapping between regulatory mechanics and engine outputs is one-to-one:

Defaults: where no eligible life-insurance collateral is pledged to an exposure, both columns are emitted as 0.0 (_add_default_life_ins_columns, engine/crm/life_insurance.py lines 155-160) and apply_life_insurance_rw_mapping is a no-op.

The full output-frame schema entry for these two columns lives in Output Schemas — CRM life insurance collateral.

Worked Example — SA Exposure Secured by an Investment-Grade Life-Insurance Policy¶

A small, PDF-faithful end-to-end trace using the new B31 input tier 35% (Art. 232(3)(b), insurer SA RW = 30%):

Inputs

Step 1 — Eligibility (Art. 200(b), Art. 212(2))

The policy is pledged to the institution, the insurer has been notified, the surrender value is declared and non-reducible, and the policy is in scope of LIFE_INSURANCE_COLLATERAL_TYPES. The collateral row therefore enters the Art. 232 path. (If any operational requirement fails, the row is dropped from li_coll.)

Step 2 — Per-policy mapped secured-portion RW (Art. 232(3))

insurer_risk_weight = 30% falls into Art. 232(3)(b) ("30% or 50%"), so the per-policy mapped secured-portion RW is 35% (LIFE_INSURANCE_RW_MAP[0.30] = 0.35).

Step 3 — Aggregation per beneficiary (compute_life_insurance_columns)

A single policy is pledged, so the value-weighted RW collapses to the per-policy RW:

_li_total_value   = 600,000
_li_weighted_rw   = 600,000 × 0.35 = 210,000
avg_rw            = 210,000 / 600,000 = 0.35
capped_value      = min(600,000, 1,000,000) = 600,000   # ≤ ead_gross

Step 4 — Output columns set on the exposure frame

Step 5 — SA risk-weight blending (apply_life_insurance_rw_mapping)

secured_pct   = min(life_ins_collateral_value / ead, 1.0)
              = 600,000 / 1,000,000 = 0.60
unsecured_pct = 1 − 0.60 = 0.40
blended_rw    = 0.60 × 0.35 + 0.40 × 1.00
              = 0.210 + 0.400 = 0.610

The original risk_weight = 1.00 is overwritten with 0.61. EAD is unchanged (Art. 232 is an RW mechanic, not an EAD reduction).

Step 6 — Resulting RWA

RWA = ead_final × risk_weight
    = 1,000,000 × 0.61 = 610,000

vs. an unmitigated RWA of GBP 1,000,000 — a 39.0% RWA reduction driven entirely by the Art. 232(3)(b) 30% → 35% mapping on the secured 60% of the exposure. No Art. 222 20% floor applies (Art. 232 does not import the FCSM floor) — see apply_life_insurance_rw_mapping, engine/sa/rw_adjustments.py.

Maturity Mismatch (Art. 237-239)¶

PS1/26 Section 5 (ps126app1.pdf pp.217–219) covers maturity mismatches across both funded and unfunded credit protection. Article 238(1A) enumerates the six CRM methods within scope; Article 237 sets the eligibility gates that apply to all six; Article 239 sets the per-method valuation formula.

Methods in Scope (Art. 238(1A))¶

The maturity-mismatch framework applies to credit protection recognised under any of the following methods:

Art. 237 — Eligibility Gates¶

Two cumulative tests determine whether the protection is eligible at all when a mismatch exists. Failing either makes the protection ineligible — no adjustment formula is applied; the protection is simply ignored.

Art. 237(1) — Combined residual-maturity and shorter-than-exposure test. A maturity mismatch arises when the residual maturity of the credit protection is less than that of the protected exposure. Where the protection has residual maturity < 3 months and the protection maturity is less than the underlying exposure maturity, "an institution shall not use that protection as eligible credit protection" (PS1/26 Art. 237(1) verbatim).

Art. 237(2) — Disqualifying conditions (either limb). Where there is a maturity mismatch, "an institution shall not use the credit protection as eligible credit protection where either of the following conditions is met" (PS1/26 Art. 237(2) verbatim):

• (a) the original maturity of the protection is less than one year; or
• (b) the exposure is a short-term exposure subject to a one-day floor on the maturity value M under Credit Risk: Internal Ratings Based Approach (CRR) Part Article 162(3) (e.g. certain repo / SFT / short-term trade-finance IRB exposures with M floored at one day).

These eligibility gates apply uniformly to funded and unfunded protection under the six in-scope methods — a guarantee or CDS with original maturity < 1 year is ineligible for an exposure with residual maturity > 1 year, just as a financial-collateral instrument with the same characteristics is.

Art. 238 — Measuring Protection Maturity¶

Effective protection maturity is the time to the earliest date at which the protection may terminate (or be terminated). Specific rules:

• On-balance sheet netting — earlier of the netting agreement termination date and the date the deposit can be withdrawn / loan called (Art. 238(1)).
• Protection-seller termination option — maturity is the earliest exercise date of that option (Art. 238(2), first sentence).
• Protection-buyer termination option — maturity is the earliest exercise date only if the contract contained a positive incentive at origination for the institution to call before contractual maturity; otherwise the buyer option is ignored for maturity measurement (Art. 238(2)(a)–(b)).
• Credit-derivative grace period — protection maturity is reduced by the length of any grace period before failure-to-pay default, where the credit derivative is not prevented from terminating before the grace period expires (Art. 238(3)).

The effective maturity of the underlying exposure is the longest possible remaining time before the obligor is scheduled to perform, capped at 5 years (Art. 238(1)).

Art. 239 — Adjustment Formulas (Funded vs Unfunded)¶

Two parallel formulas — Art. 239(2) for funded methods (a)–(d) and Art. 239(3) for unfunded methods (e)–(f). The multiplier (t − 0.25) / (T − 0.25) is identical between the two; only the protection input differs.

Art. 239(2) — Funded credit protection (methods (a)–(d)):

CVAM = CVA x (t - 0.25) / (T - 0.25)

For FCCM, CVAM substitutes for CVA in the E formula at Art. 223(5). For on-balance sheet netting*, CVAM flows through Art. 219(3), where "collateral" is read as the netted loans/deposits.

Art. 239(3) — Unfunded credit protection (methods (e)–(f)):

GA = G* x (t - 0.25) / (T - 0.25)

GA is then used as the credit-protection amount input to the RWSM (Art. 235, SA / slotting guarantees and CDS) or the PSM (Art. 236, F-IRB / A-IRB guarantees and CDS). The same GA formula governs guarantee and credit-derivative maturity mismatches under both SA and IRB — the distinction between RWSM and PSM is only in how the resulting GA is consumed (RW substitution vs PD/LGD parameter substitution), not in the maturity-mismatch adjustment itself.

When t ≥ T, no maturity-mismatch adjustment is needed — the multiplier collapses to 1 and GA = G* / CVAM = CVA.

Currency Mismatch 1.5x Multiplier (Art. 123B)¶

Overview¶

PS1/26 introduces a new 1.5x risk-weight multiplier (Art. 123B of the Credit Risk: Standardised Approach (CRR) Part) for unhedged retail and residential real estate exposures where the lending currency differs from the currency of the obligor's source of income. This captures FX risk on household and SME borrowers that is not otherwise reflected in the exposure's base risk weight.

Scope¶

Applies to exposures assigned to the SA exposure classes at points (h) (retail) and (i) (residential real estate) of Art. 112(1) where either:

• the obligor is a natural person and the lending currency differs from the currency of the obligor's source of income (Art. 123B(1)(a)); or
• the obligor is a special-purpose entity created to finance or operate immovable property, a natural-person guarantor receives the economic benefit of the residential real estate, and the lending currency differs from the currency of that guarantor's source of income (Art. 123B(1)(b)).

"Source of income" includes salary, rental income and remittances but excludes proceeds from asset sales or institution recourse actions (Art. 123B(4)(a)).

Multiplier and Cap¶

RW_adjusted = min(1.5 x RW_base, 150%)

where RW_base is the risk weight calculated under Art. 123 (retail) or Art. 124F-124L (real estate), as applicable. The multiplier is applied after any other risk-weight overrides (e.g. regulatory-RE loan-splitting, ADC floor, charge-priority adjustments), and is capped so the final risk weight does not exceed 150%.

Hedge Exemption (Art. 123B(2))¶

An exposure is hedged (and therefore outside Art. 123B scope) only if:

1. The obligor — or, for the SPE case, the obligor and/or guarantor — has a natural hedge or financial hedge against the FX risk arising from the currency mismatch; and
2. Those hedges together cover at least 90% of any instalment for the exposure.

For natural hedges comprising assets held by the obligor, the hedge value is determined by applying volatility adjustments assuming the assets are collateral against an exposure without currency mismatch, using a 5-day liquidation period under Art. 223(2) and Art. 224-227 (Art. 123B(2)(b)).

Revolving facilities (Art. 123B(2A)): instalment amount is the greater of (a) the contractual minimum, (b) the fully-drawn contractual amount; for multi-currency facilities the instalment is calculated ignoring current drawings and assuming full draw in a currency which both mismatches the income currency and for which hedges cover less than 90% (conservative drawing assumption).

Fallback Rule (Art. 123B(3))¶

Where an institution is unable to identify which exposures have a currency mismatch and the exposure was incurred prior to 1 January 2027, the 1.5x multiplier must be applied to all unhedged retail and residential real estate exposures in scope of points (h)/(i) of Art. 112(1) — except where the lending currency equals the domestic currency of the obligor's country of residence or country of employment — subject to the 150% cap.

Reporting¶

The multiplier-affected exposures appear in:

• OF 07.00 row 0380 — "Retail and real estate exposures subject to the currency mismatch multiplier (Art. 112(1)(h)/(i))".
• UKB CR5 — reported against the base (pre-multiplier) risk weight, but the RWEA column reflects the multiplier (per Annex XX CR5 instructions).

Implementation Status¶

References¶

• PS1/26 Appendix 1, Credit Risk: Standardised Approach (CRR) Part, Article 123B — Retail exposures and residential real estate exposures with a currency mismatch (Annex D, pages 49–50 of ps126app1.pdf).
• BCBS CRE20.88 (currency mismatch multiplier for retail and RRE exposures — underlying methodology).

Unfunded Credit Protection Transitional (Rule 4.11)¶

Pre-1 January 2027 unfunded credit protection contracts may continue to use CRR eligibility criteria until 30 June 2028, even if they do not meet the stricter Basel 3.1 requirements (e.g., the new "or changeable" criterion in Art. 213).

Key Scenarios¶

Acceptance Tests¶