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Question 15.14: Explain the difference between the simple and the comprehens...

Explain the difference between the simple and the comprehensive approach for adjusting capital requirements for collateral.

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Under the simple approach, the risk weight of the counterparty is replaced by the risk weight of the collateral for the part of the exposure covered by the collateral. Under the comprehensive approach, the exposure is adjusted for possible increases and the collateral is adjusted for possible decreases in value. The counterparty’s risk weight is applied to the excess of the adjusted exposure over the adjusted collateral.

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