II.
Credit Risk — The Standardised
Approach
50.
The Committee proposes to permit banks a choice between two
broad
methodologies for
calculating their capital requirements for
credit risk. One alternative will
be to
measure credit risk in a standardised manner,
supported by external credit
assessments.(14)
(14) The notations follow the
methodology used by one institution, Standard
& Poor’s. The use of Standard & Poor’s
credit ratings is an example only; those of some
other external credit assessment institutions
could equally well be used. The ratings used
throughout this document, therefore, do not
express any preferences or determinations on
external assessment institutions by the
Committee.
51.
The alternative methodology, which is subject to
the explicit approval of the
bank’s
supervisor,
would allow banks to use their internal rating
systems for credit risk.
52.
The following section sets out revisions to the
1988 Accord for risk weighting
banking
book exposures. Exposures that are not
explicitly addressed in this section
will
retain
the current treatment; however, exposures
related to securitisation are dealt with
in
Section
IV.
Furthermore,
the credit equivalent amount of Securities
Financing Transactions
(SFT)
(15) and OTC
derivatives that expose a bank to counterparty
credit risk (16)
is to
be
calculated under the
rules set forth in Annex 4
(17).
In
determining the risk weights in
the
standardised approach, banks may use assessments
by external credit assessment institutions
recognised as eligible for capital purposes by
national supervisors in accordance with the
criteria defined in paragraphs 90 and 91.
Exposures should be risk-weighted net
of
specific provisions.
(18)
(15) Securities Financing
Transactions (SFT) are transactions such as
repurchase agreements, reverse repurchase
agreements, security lending and borrowing, and
margin lending transactions, where the value of
the transactions depends on the market
valuations and the transactions are often
subject to margin
agreements.
(16) The counterparty credit risk
is defined as the risk that the counterparty to
a transaction could default before the final
settlement of the transaction’s cash flows. An
economic loss would occur if the transactions or
portfolio of transactions with the counterparty
has a positive economic value at the time of
default.
Unlike a firm’s exposure to credit
risk through a loan, where the exposure to
credit risk is unilateral and only the lending
bank faces the risk of loss, the counterparty
credit risk creates a bilateral risk of loss:
the market value of the transaction can be
positive or negative to either counterparty to
the transaction. The market value is uncertain
and can vary over time with the movement of
underlying market
factors.
(17) Annex 4 of this Framework is
based on the treatment of counterparty credit
risk set out in Part 1 of
the
Committee’s paper The Application of
Basel II to Trading Activities and the Treatment
of Double Default
Effects (July
2005).
(18) A simplified standardised
approach is outlined in Annex
11.
A.
Individual
claims
1.
Claims on
sovereigns
53.
Claims on sovereigns and their central banks
will be risk weighted as
follows:
54. At national
discretion, a lower risk weight may be applied
to banks’ exposures to
their sovereign
(or central bank) of incorporation denominated
in domestic currency and
funded (19) in that currency.
(20)
Where this
discretion is exercised, other national
supervisory authorities may also permit their
banks to apply the same risk weight to domestic
currency exposures to this sovereign (or central
bank) funded in that
currency.
(19) This
is to say that the bank would also have
corresponding liabilities denominated in the
domestic currency.
(20) This
lower risk weight may be extended to the risk
weighting of collateral and guarantees. See
Sections II.D.3 and
II.D.5.
55. For the
purpose of risk weighting claims on sovereigns,
supervisors may recognise
the country risk
scores assigned by Export Credit Agencies
(ECAs). To qualify, an ECA must publish its risk
scores and subscribe to the OECD agreed
methodology.
Banks may choose
to use the risk scores published by individual
ECAs that are recognised by their supervisor, or
the consensus risk scores of ECAs participating
in the “Arrangement on Officially Supported
Export Credits”.
(21)
The
OECD agreed methodology establishes eight risk
score
categories
associated with minimum export insurance
premiums. These ECA risk scores will correspond
to risk weight categories as detailed
below.
(21) The consensus country risk
classification is available on the OECD’s
website (http://www.oecd.org) in the Export
Credit Arrangement web-page of the Trade
Directorate.
56. Claims on the Bank for
International Settlements, the International
Monetary Fund,
the European Central Bank and the
European Community may receive a 0% risk
weight.
2. Claims on non-central
government public sector entities
(PSEs)
57.
Claims on domestic PSEs will be risk-weighted at
national discretion, according
to
either option 1 or
option 2 for claims on
banks.
(22)
When option 2 is
selected, it is to be applied
without the use of the preferential treatment
for short-term
claims.
(22)
This is regardless of the option chosen at
national discretion for claims on banks of that
country. It therefore does not imply that when
one option has been chosen for claims on banks,
the same option should also be applied to claims
on PSEs.
58.
Subject to national discretion, claims on
certain domestic PSEs may also be
treated
as claims on the
sovereigns in whose jurisdictions the PSEs are
established.
(23)
Where
this
discretion is exercised, other national
supervisors may allow their banks to risk weight
claims on such PSEs in the same
manner.
(23)
The following examples outline how PSEs might be
categorised when focusing on one specific
feature, namely revenue raising powers. However,
there may be other ways of determining the
different treatments applicable to different
types of PSEs, for instance by focusing on the
extent of guarantees provided by
the central
government:
- Regional
governments and local authorities
could
qualify for the same treatment as claims on
their
sovereign or central government if these
governments and local authorities have specific
revenue raising powers and have specific
institutional arrangements the effect of which
is to reduce their risks of
default.
- Administrative
bodies responsible to central governments,
regional governments or to
local
authorities and other
non-commercial undertakings
owned
by the governments or local authorities may not
warrant the same treatment as claims on their
sovereign if the entities do not have revenue
raising powers or other arrangements as
described above. If strict lending rules apply
to these entities and a declaration of
bankruptcy is not possible because of their
special public status, it may be appropriate to
treat these claims in the same manner as claims
on banks.
-
Commercial undertakings
owned
by central governments, regional governments or
by local authorities may be treated as normal
commercial enterprises. However, if these
entities function as a corporate in competitive
markets even though the state, a regional
authority or a local authority is the major
shareholder of these entities, supervisors
should decide to consider them as corporates and
therefore attach to them the applicable risk
weights.
|
