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Alpha


In the context of regulatory capital for counterparty credit risk (CCR), under the internal model method, alpha is a multiplier applied to the effective expected positive exposure (EPE) to determine a bank’s exposure at default (EAD). A bank can set its own alpha using its estimates with a floor of 1.2.

Alpha accounts for the extra capital needed for certain exposures such as (derivatives), compared to loans with the same EPE, to cover the additional risks involved in such exposures.

To convert effective expected positive exposure (EEPE) risk measures into EAD, banks are required by regulatory authorities to apply the multiplier alpha which has a default value of 1.4. The alpha value may be adjusted under two circumstances: 1) supervisors at own discretion can increase alpha based on the compliance with qualitative criteria for counterparty credit risk management and 2) upon approval from supervisors, banks are allowed to model their own alpha taking into account the diversification of their portfolios across counterparties. In which case, alpha cannot drop below a floor value of 1.2.

It is also known as regulatory multiplier.



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