The application of value adjustments to either the secured or the unsecured component of an exposure secured on residential property may be illustrated on the basis of a £110,000 loan on a property valued at £100,000, where £80,000 of the loan is secured, £30,000 of the exposure is unsecured and a value adjustment of £20,000 is taken.
- (1)
Value adjustment applied to unsecured component:
- (a)
Value adjustment of £20,000 taken on £30,000 unsecured exposure.
- (b)
Value adjustment exceeds 20%, so the firm should risk weight the remaining £10,000 unsecured exposure at 100% (as per MIPRU 4.2F.55 R).
- (c)
The risk weight to be applied to the secured exposure of £80,000 is 100% (as per MIPRU 4.2F.51 R).
- (a)
- (2)
Value adjustment applied to secured component:
- (a)
Value adjustment of £20,000 taken on £80,000 secured exposure.
- (b)
Value adjustment exceeds 20%, so the firm should risk weight the remaining £60,000 secured exposure at 50% (as per MIPRU 4.2F.51 R).
- (c)
The risk weight to be applied to the unsecured exposure of £30,000 is 150% (as per MIPRU 4.2F.55 R).
- (a)
- (3)
A diagrammatic illustration of how MIPRU 4.2F.56G (1) and MIPRU 4.2F.56G (2) operate is as follows:
Value adjustment applied to unsecured component (MIPRU 4.2F.51 R)
Risk weightings
Exposure
Risk weightings
Value adjustment to secured component (MIPRU 4.2F.55 R)
£20,000
Unsecured component of £30,000
£30,000 risk weighted at 150%
£10,000 risk weighted at 100%
£80,000 risk weighted at 100%
Secured component of £80,000
£20,000
£60,000 risk weighted at 50%