The maturity factor scales the risk weight up as an exposure runs for longer. A loan that matures in five years ties up capital, and stays exposed to a downturn, for far longer than one that matures i
The conditional PD is a borrower's probability of default under a severe, economy-wide downturn, rather than in a normal year. It is what the capital formula measures the risk weight against, and it i
Loan 1 and Loan 2 are the same loan to the same counterparty, differing only in that Loan 2's obligor has defaulted. This comparison is about unexpected loss and expected loss, and how the two approac
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