BRP cheat sheet

Expected Loss (EL) = PD × LGD × EAD; unexpected loss is covered by economic capital, not by provisions.

PD is a one-year probability of default; through-the-cycle PD is smoothed across the cycle, while point-in-time PD reflects current conditions.

LGD = 1 − recovery rate; it is usually lower for secured exposures and higher in downturns (downturn LGD).

EAD for on-balance-sheet loans equals drawn amount plus a credit conversion factor (CCF) applied to undrawn commitments.

Standardised approach risk weights depend on external ratings and exposure class; IRB approach uses internal PD, LGD, EAD and maturity estimates.

Credit risk mitigation reduces risk-weighted assets only if the collateral is legally effective, enforceable and meets eligibility criteria; haircuts apply to marketable collateral.

Wrong-way risk arises when exposure to a counterparty increases as the counterparty's credit quality deteriorates.

Concentration risk is measured with single-name and sector limits, Herfindahl indices, or granularity adjustments to capital.

Credit valuation adjustment (CVA) captures mark-to-market loss from counterparty default on derivatives and is a separate capital charge.

VaR at confidence level α states the loss not exceeded with probability α over a holding period; it says nothing about the size of losses beyond that threshold.

Expected shortfall (ES) is the average loss beyond the VaR threshold and is sub-additive, unlike VaR.

Parametric VaR = z × σ × √t × portfolio value, assuming normally distributed returns and linear exposures.

Basel FRTB replaces 10-day 99% VaR with 97.5% expected shortfall and adds a non-modellable risk factor (NMRF) charge.

Delta measures first-order sensitivity to the underlying; gamma measures the change in delta; vega measures sensitivity to implied volatility; theta measures time decay.

Interest rate risk in the banking book (IRRBB) is measured with repricing gap, duration gap and EVE/NII sensitivity under supervisory rate shocks.

Historical simulation VaR revalues the portfolio using past return scenarios and captures fat tails but is limited by the historical window.

Backtesting compares daily P&L with VaR; under Basel, more than 4 exceptions in 250 days triggers a multiplier add-on.

Basel defines operational risk as the risk of loss from inadequate or failed internal processes, people, systems, or external events; it excludes strategic and reputational risk.

The seven Basel event types are internal fraud, external fraud, employment practices and workplace safety, clients/products/business practices, damage to physical assets, business disruption and system failures, and execution/delivery/process management.

Under the Standardised Approach (SA), the business indicator (BI) determines the bucket; the business indicator component (BIC) = BI × marginal coefficients (12%, 15%, 18%).

Total operational risk capital under SA = BIC × internal loss multiplier (ILM), where ILM = ln(e − 1 + (LC/BIC)) and LC is average annual loss.

The basic indicator approach uses a fixed 15% of the average annual gross income over the previous three positive years.

Key risk indicators (KRIs) are forward-looking metrics with thresholds that trigger escalation before losses materialise.

RCSA (risk and control self-assessment) identifies process-level risks, assesses inherent and residual risk, and rates control effectiveness.

Loss distribution approach models frequency (Poisson) and severity (lognormal) separately, then aggregates by convolution or Monte Carlo.

Basel III minimum requirements: CET1 4.5%, Tier 1 6%, total capital 8% of risk-weighted assets.

Capital conservation buffer 2.5% CET1; countercyclical buffer 0–2.5%; G-SIB surcharge 1–3.5% CET1.

Leverage ratio = Tier 1 capital / total exposure measure, minimum 3%.

Liquidity Coverage Ratio = high-quality liquid assets / net cash outflows over 30 days, minimum 100%.

Net Stable Funding Ratio = available stable funding / required stable funding, minimum 100%.

Large exposure limit: a single counterparty exposure must not exceed 25% of Tier 1 capital (10% for G-SIBs to other G-SIBs).

Compliance risk is the risk of legal or regulatory sanctions, financial loss, or reputational damage from failure to comply with laws and regulations.

Three lines of defence: business units own risk, risk/compliance functions oversee, internal audit provides independent assurance.

AML/CFT obligations include customer due diligence, beneficial ownership identification, ongoing monitoring, and suspicious activity reporting.