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Basel ii Accord Sections 66 to 74

6. Claims on corporates
66. The table provided below illustrates the risk weighting of rated corporate claims,
including claims on insurance companies. The standard risk weight for unrated claims on
corporates will be 100%. No claim on an unrated corporate may be given a risk weight
preferential to that assigned to its sovereign of incorporation.

67. Supervisory authorities should increase the standard risk weight for unrated claims
where they judge that a higher risk weight is warranted by the overall default experience in
their jurisdiction.
 
As part of the supervisory review process, supervisors may also consider
whether the credit quality of corporate claims held by individual banks should warrant a
standard risk weight higher than 100%.
 
68. At national discretion, supervisory authorities may permit banks to risk weight all
corporate claims at 100% without regard to external ratings. Where this discretion is
exercised by the supervisor, it must ensure that banks apply a single consistent approach,
i.e. either to use ratings wherever available or not at all.
 
To prevent “cherry-picking” of external ratings, banks should obtain supervisory approval before utilising this option to risk weight all corporate claims at 100%.
 
7. Claims included in the regulatory retail portfolios
 
69. Claims that qualify under the criteria listed in paragraph 70 may be considered as
retail claims for regulatory capital purposes and included in a regulatory retail portfolio.
Exposures included in such a portfolio may be risk-weighted at 75%, except as provided in
paragraph 75 for past due loans.
 
70. To be included in the regulatory retail portfolio, claims must meet the following four
criteria:
 
• Orientation criterion ─ The exposure is to an individual person or persons or to a
small business;
 
• Product criterion ─ The exposure takes the form of any of the following: revolving
credits and lines of credit (including credit cards and overdrafts), personal term
loans and leases (e.g. instalment loans, auto loans and leases, student and
educational loans, personal finance) and small business facilities and commitments.
 
Securities (such as bonds and equities), whether listed or not, are specifically
excluded from this category. Mortgage loans are excluded to the extent that they
qualify for treatment as claims secured by residential property (see paragraph 72).
 
• Granularity criterion ─ The supervisor must be satisfied that the regulatory retail
portfolio is sufficiently diversified to a degree that reduces the risks in the portfolio,
warranting the 75% risk weight.
 
One way of achieving this may be to set a numerical limit that no aggregate exposure to one counterpart (28) can exceed 0.2% of the overall regulatory retail portfolio.
 
• Low value of individual exposures. The maximum aggregated retail exposure to one
counterpart cannot exceed an absolute threshold of €1 million.
 
(28) Aggregated exposure means gross amount (i.e. not taking any credit risk mitigation into account) of all forms of debt exposures (e.g. loans or commitments) that individually satisfy the three other criteria. In addition, “to one counterpart” means one or several entities that may be considered as a single beneficiary (e.g. in the case of a small business that is affiliated to another small business, the limit would apply to the bank’s aggregated exposure on both businesses).
 
71. National supervisory authorities should evaluate whether the risk weights in
paragraph 69 are considered to be too low based on the default experience for these types
of exposures in their jurisdictions. Supervisors, therefore, may require banks to increase
these risk weights as appropriate.
 
8. Claims secured by residential property
 
72. Lending fully secured by mortgages on residential property that is or will be
occupied by the borrower, or that is rented, will be risk weighted at 35%.
 
In applying the 35% weight, the supervisory authorities should satisfy themselves, according to their national arrangements for the provision of housing finance, that this concessionary weight is applied restrictively for residential purposes and in accordance with strict prudential criteria, such as the existence of substantial margin of additional security over the amount of the loan based on strict valuation rules.
 
Supervisors should increase the standard risk weight where they judge the criteria are not met.
 
73. National supervisory authorities should evaluate whether the risk weights in
paragraph 72 are considered to be too low based on the default experience for these types
of exposures in their jurisdictions. Supervisors, therefore, may require banks to increase
these risk weights as appropriate.
 
9. Claims secured by commercial real estate
 
74. In view of the experience in numerous countries that commercial property lending
has been a recurring cause of troubled assets in the banking industry over the past few
decades, the Committee holds to the view that mortgages on commercial real estate do not,
in principle, justify other than a 100% weighting of the loans secured. (29)
(29) The Committee, however, recognises that, in exceptional circumstances for well-developed and longestablished markets, mortgages on office and/or multi-purpose commercial premises and/or multi-tenanted commercial premises may have the potential to receive a preferential risk weight of 50% for the tranche of the loan that does not exceed the lower of 50% of the market value or 60% of the mortgage lending value of the property securing the loan. Any exposure beyond these limits will receive a 100% risk weight.
 
This exceptional treatment will be subject to very strict conditions. In particular, two tests must be fulfilled, namely that
 
(i) losses stemming from commercial real estate lending up to the lower of 50% of the market value or 60% of loan-tovalue (LTV) based on mortgage-lending-value (MLV) must not exceed 0.3% of the outstanding loans in any given year; and that
 
(ii) overall losses stemming from commercial real estate lending must not exceed 0.5% of the outstanding loans in any given year. This is, if either of these tests is not satisfied in a given year, the eligibility to use this treatment will cease and the original eligibility criteria would need to be satisfied again before it could be applied in the future. Countries applying such a treatment must publicly disclose that these and other additional conditions (that are available from the Basel Committee Secretariat) are met.
 
When claims benefiting from such an exceptional treatment have fallen past due, they will be risk-weighted at 100%.

 
  
 

 

 

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