Revisions to the Standardised Approach for credit risk

Basel Committee on Banking Supervision (BCBS)

The Basel framework sets out a range of methods banks use to calculate regulatory capital. One alternative is to measure risk in a standardised manner and the other alternative is based on a bank’s use of its internal model, which is subject to the explicit approval of the bank’s supervisor.
In this context, the BCBS published in December 2014 a consultation paper to revise the standardised approach (SA) for credit risk with the objective of improving the approach by reducing reliance on external credit ratings, reducing national discretions, strengthening the link between the SA and the IRB approach and enhancing comparability of capital requirements across banks.

Following the significant concerns expressed by respondents to the initial proposal, the BCBS has published a second consultation paper on revisions to the standardised approach (SA) for credit risk.

This second consultation paper intends to address the issues raised with respect to the 2014 proposal. Therefore, the BCBS has decided to:

  • Reintroduce the use of ratings, in a non-mechanistic manner, for exposures to banks and corporates.
  • Include alternative approaches for jurisdictions that do not allow the use of external ratings for regulatory purposes.
  • Use the loan-to-value ratio as the principal risk driver for risk weighing of real estate loans.
  • To implement the assessment of a borrower ´s ability to pay as a key underwriting criterion.
  • To categorise all exposures related to real estate, including specialized lending exposures, under the same asset class, and apply higher risk weights to real estate exposures where repayment is materially dependent on the cash flows generated by the property securing the exposure.

This revision also includes a proposal to the credit risk mitigation (CRM) framework for exposures risk-weighted under the standardized approach.
This document prepared by Management Solutions R&D department analyses the main changes introduced by the 2015 revisions to the SA for the credit risk and the credit risk mitigation (CMR) framework, and determines the principal implications.

Executive summary

The new proposal published by the BCBS has significantly changed compared to the previous one due to concerns expressed by respondents to the initial proposal. An important change is the reintroduction of the use of external ratings for banks and corporates, among other changes.

Scope of application:

  • Banks using the standardised approach (SA) for credit risk.

Main content:

  • Second revision to the standardised approach for credit risk: exposures to banks; exposures to corporates; equity and subordinated debt; retail portfolio; real state exposures; exposures with currency mismatch; off-balance sheet exposures; default exposures; exposures to Multilateral Development Banks.

  • Revisions to the credit risk mitigation (CRM) framework: the proposal replaces the second element of the current formula for repo-style transaction, reintroducing of external ratings and reviewing other issues.

Download the technical note by clicking here