I would like to gain more understanding of the economic background of some Basel formulas.
In the Basel guidelines in retail credit risk we have a risk weight function that depends on the correlation of the debitor's default to the broad economy.

For "other retail" it looks like this:

$$ R = 0.16 - 0.14 \frac{1-e^{-25 pd}}{1-e^{-25}} $$

For qualified revolving (QR) it is fixed at $0.04$ and therefore gives lower correlation for pds below 7%.enter image description here

To get a better intuition to these formula and quantiative analysis that follow from it I would like to discuss:

  • what typical nature of QR retail exposure makes it less risky than other retail exposure?
  • while I can understand the logic that low pds are more (!) correlated to the broad economy for corporates - what is the argument for retail here?

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