Under the latest capital regulations, most assets have a risk weighting of 100% which implies an 8% capital requirement. However, certain assets (primarily investments and housing-related lending) have a lower capital requirement and other assets (primarily HVCRE loans and loans on non-accrual) have higher capital requirements.
When we set up the Risk Ratings for a client we include a minimum capital level, which generally starts at 6% for the very best rated credits and steps up to 8% for average rated credits and worse. There are some classes of loan products that should have different minimums capital levels, including:
- HVCRE - Risk weighting is 150% for average rated borrowers and worse. For more details on HVCRE loans see our High Volatility Commercial Real Estate article.
- Municipal Loans - Risk weighting is 20% for a direct governmental obligation and 50% for other governmental entities and industrial-development zones.
- 1-4 Family Residential First Lien Mortgages - Risk weighting is 50%.
- Multi-family Housing - Risk weighting is 50%, subject to certain limitations.
- Mixed use properties are dependent on the percentage that is multifamily.
- Statutory Multifamily applies 100% risk weighting for the first year, then 50% starting month 13 through the Maturity date.
- Loans collateralized by cash and marketable securities - Risk weighting is between 20% and 50% (assuming these are a first lien position).
- Assumes that the Cash and Marketable securities are at least equal to the loan balance.
- Loans to foreign governments - Risk weighting is 0 to 20%.
For these products, set your minimum capital level as if the risk weighting is 100% and then adjust for risk weight by selecting the applicable types of exposure under Allowable Exposure Types in the Capital/Annual Loss section of the product configuration page.
Setting up Minimum Capital Level and Risk Weight in PrecisionLender
Minimum Capital Level (Minimum Capital Allocation) and Risk Weight is configured at the Product level. To configure Minimum Capital Level and/or Risk Weight:
- Navigate to 'Administration' and click 'Products'
- Once you see the product screen, search for and select the desired product.
3. If you would like to add or edit the Minimum Capital Allocation for any or all of the Risk Ratings or add or edit Risk Weights for the product, click the 'Edit' button in the upper left of the screen.
4. To update Minimum Capital Allocation, select 'Risk Ratings' at the top of the product page.
5. To add or edit Risk Weights, select 'Capital/Annual Loss' at the top of the product page. Select the Allowable Exposure Types applicable for your product.
6. Once you have made your edits, click the 'Save' button in the upper left of the screen.
7. If a risk weight other than 'Unspecified Risk Weight' has been selected, then the Exposure Type field will appear in the opportunity screen for that product.
