Setting Up Risk Weights

Risk weight rules define the risk weights that you assign to ledger balances, forecasted balances, product balances, and position balances, to calculate risk-weighted capital and normalized loss.

This section provides an overview of risk weights and discusses how to:

Define risk weights.
Define risk weight rules.
Define operating risk weight overrides for Basel II.

Pages Used to Set Up Risk Weights

Page Name	Definition Name	Navigation	Usage
Risk Weight Rules - Definition	RWC_CALC_DEFN	select Financial Services Industries, then select Risk-Weighted Capital Rules, then select Risk Weight Rules, then select Definition	Define specific risk weights for ledger accounts, forecasted balances, positions, and products, according to risk type.
Risk Weights	RWC_CALC_SEQ	select Financial Services Industries, then select Risk-Weighted Capital Rules, then select Risk Weight Rules, then select Risk Weights	Define risk weight rules by assigning specific default risk weights and incremental risk weights.
Notes	RWC_CALC_NOTES	select Financial Services Industries, then select Risk-Weighted Capital Rules, then select Risk Weight Rules, then select Notes	Enter text related to the defined Risk-Weighted Capital rule code.
RWC Operating Risk	FI_RWC_OR_DEFN	select Financial Services Industries, then select Risk-Weighted Capital Rules, then select Risk Weight Rules, then select Operating Risk, then select Operating Risk Factors	Define operating risk factors for Basel II (PE, LGE).

Understanding Risk Weights

To establish a risk weight, you begin with a default risk weight based on instrument or ledger attributes, and then define additional risk weights such as interest rate risk based on instrument or ledger attributes. Risk weight rules are processed by the general PeopleSoft Risk-Weighted Capital processing engines (RWC_RATE, RWC_ACCT), rather than by the credit risk engine (FI_RWC_CR).

For example, suppose that you have a default credit risk weight of six percent for auto loans. The exception to this rule is that auto loans in California that are less than one year old and held by borrowers with a poor credit rating have a credit risk weight of 10 percent. You have two options for setting up risk weight rules:

Create a constraint that covers the exception (loans in California, less than one year old, with a poor credit rating), and assign it a risk weight of four percent.
Create narrowly defined constraints (one for loans in California, one for loans less than one year old, and one for poor credit ratings) and assign incremental risk weights to each constraint, so that they total four percent.

Four percent plus the default six percent equals the desired 10 percent for the exception auto loans described previously.

You may set up risk-weighted capital rules using a set of additive weights that can be applied based on user-defined criteria—that is, use constraints to identify the set of instruments, accounts, or positions for which the specific weight should be applied.

You may also choose to override the default risk weights by applying the predefined Risk-Weighted Capital operating risk factors for Basel II processing and other requirements.

Risk Weight Rules - Definition Page

Use the Risk Weight Rules - Definition page (RWC_CALC_DEFN) to define specific risk weights for ledger accounts, forecasted balances, positions, and products, according to risk type.

Navigation

select Financial Services Industries, then select Risk-Weighted Capital Rules, then select Risk Weight Rules, then select Definition

Image: Risk Weight Rules - Definition page

This example illustrates the fields and controls on the Risk Weight Rules - Definition page. You can find definitions for the fields and controls later on this page.

Risk Type

Select a risk type.

If the risk type does not already exist, you can create it on the Risk Type Definition page.

RWC Data Source

Select a risk-weighted capital data source for the rule. Values are: Forecasted Pools,Ledger Balances, Treasury Position Balances, andProduct Balances.

Calculate Normalized Loss

Select to calculate normalized loss.

Ledger Event Codes

RWC Ledger Event Code

Select the Risk-Weighted Capital ledger event code (ledger account) to which the capital allocation is posted.

Normalized Loss

Select the ledger account or ledger event code to which the normalized loss is posted. This field is inactive if you cleared the Calculate Normalized Loss check box.

Start Date / Commitment Date

If you select Product Balancesor Forecasted Pools in theRWC Data Source field, then you must select one of the check boxes that appear in this group box.

Calc. Risk as of Commit. Date (calculate risk as of commitment date)

Select this option to calculate the risk-weighted capital as of the commitment date.

Accrue Loss as of Commit. Date

Select this option to accrue the normalized loss amount as of the commitment date.

If you do not select one of these check boxes, the system performs the calculations as of the start date of the instrument or forecasted pool.

Risk Weights Page

Use the Risk Weights page (RWC_CALC_SEQ) to define risk weight rules by assigning specific default risk weights and incremental risk weights.

Navigation

select Financial Services Industries, then select Risk-Weighted Capital Rules, then select Risk Weight Rules, then select Risk Weights

Image: Risk Weights page

This example illustrates the fields and controls on the Risk Weights page. You can find definitions for the fields and controls later on this page.

Terms on this page vary depending on your selections on the Risk Weight Rules - Definition page.

Weight Calculation Override

Enter if you want the engine to use the factors in the Operational Risk Factor lookup table (FI_RWC_OR_DEFN) when calculating risk weights. To use the override, you must first define the override factors on the RWC Operating Risk page. The RWC_ACCT application engine then ignores the rule normally used, and overrides it with the operational risk factors for its risk weight calculations. The output is stored in the RWC_CALC_AC_F00 table.

Note: The override feature cannot be used with constraints nor to calculate normalized loss.

Default Weight in Basis Points

If you are not using the Weight Calculation Override option, enter the default risk weight and the normalized loss weight in basis points.

Additive Risk Weight Rules (bps)

You can adjust the risk and normalized loss weights by specifying the basis points that you want to add to the default weights. This adjusted weight applies only to the balance amounts that satisfy the conditions in the corresponding constraint codes. To decrease the default basis weight, precede the entry with a negative sign.

RWC Operating Risk Page

Use the RWC Operating Risk page (FI_RWC_OR_DEFN) to define operating risk factors for Basel II (PE, LGE).

Navigation

select Financial Services Industries, then select Risk-Weighted Capital Rules, then select Risk Weight Rules, then select Operating Risk, then select Operating Risk Factors

Image: RWC Operating Risk page

This example illustrates the fields and controls on the RWC Operating Risk page. You can find definitions for the fields and controls later on this page.

To override a risk weight, you must first define the override factors on this page. Enter operating risk definitions that match risk rules that you have already established on the Risk Weight Rules pages, and ensure that the calculations are defined as calculation override rules on the Risk Weights page.

Enter values between 0 and1 for the three factors:

Probability of Event

Enter the probability that an operational risk event will occur over the planning horizon—usually one year.

Loss Given Event

Enter the proportion of the exposure that will be lost should the event occur. This value defines the likely magnitude of the event.

Exposure Indicator Multiplier

Enter the exposure indicator multiplier, which is a factor that can be used for any multiplicative purpose. For example, it can be used to define the effect of risk type correlations.

The system stores these factors in the operating risk factor table, FI_RWC_OR_DEFN, which is keyed by RWC_RULE_ID. The application matches the rule ID that it is processing with the same rule ID in FI_RWC_OR_DEFN, and uses these factors to compute the weight in basis points. The formula is: PE × LGE × M, where PE is the probability of the event, LGE is the loss given event, and M is the user-defined multiplier, which can be used for any purpose.