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 specificallyqualify 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 * 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.

* 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 *

* The Committee, however, recognises that, in exceptional circumstances for well-developed and long established
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-to value (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%.

75. The unsecured portion of any loan (other than a qualifying residential mortgage loan) that is past due for more than 90 days, net of specific provisions (including partial writeoffs), will be risk-weighted as follows: *

• 150% risk weight when specific provisions are less than 20% of the outstanding amount of the loan;

• 100% risk weight when specific provisions are no less than 20% of the outstanding amount of the loan;

• 100% risk weight when specific provisions are no less than 50% of the outstanding amount of the loan, but with supervisory discretion to reduce the risk weight to 50%.

* Subject to national discretion, supervisors may permit banks to treat non-past due loans extended to counterparties subject to a 150% risk weight in the same way as past due loans described in paragraphs 75 to 77.

76. For the purpose of defining the secured portion of the past due loan, eligible collateral and guarantees will be the same as for credit risk mitigation purposes (see Section II.B). *

Past due retail loans are to be excluded from the overall regulatory retail portfolio when assessing the granularity criterion specified in paragraph 70, for risk-weighting purposes.

* There will be a transitional period of three years during which a wider range of collateral may be recognised, subject to national discretion.

77. In addition to the circumstances described in paragraph 75, where a past due loan is fully secured by those forms of collateral that are not recognised in paragraphs 145 and 146, a 100% risk weight may apply when provisions reach 15% of the outstanding amount of the loan.

These forms of collateral are not recognised elsewhere in the standardised approach.

Supervisors should set strict operational criteria to ensure the quality of collateral.

78. In the case of qualifying residential mortgage loans, when such loans are past due for more than 90 days they will be risk weighted at 100%, net of specific provisions.

If such loans are past due but specific provisions are no less than 20% of their outstanding amount, the risk weight applicable to the remainder of the loan can be reduced to 50% at national discretion.

11. Higher-risk categories

79. The following claims will be risk weighted at 150% or higher:

• Claims on sovereigns, PSEs, banks, and securities firms rated below B-.

• Claims on corporates rated below BB-.

• Past due loans as set out in paragraph 75.Securitisation tranches that are rated between BB+ and BB- will be risk weighted at
350% as set out in paragraph 567.

80. National supervisors may decide to apply a 150% or higher risk weight reflecting the higher risks associated with some other assets, such as venture capital and private equity investments.

12. Other assets

81. The treatment of securitisation exposures is presented separately in Section IV.

The standard risk weight for all other assets will be 100%. *

 Investments in equity or regulatory capital instruments issued by banks or securities firms will be risk weighted at 100%, unless deducted from the capital base according to Part 1.

* However, at national discretion, gold bullion held in own vaults or on an allocated basis to the extent backed by bullion liabilities can be treated as cash and therefore risk-weighted at 0%. In addition, cash items in the process of collection can be risk-weighted at 20%.

13. Off-balance sheet items

82. Off-balance-sheet items under the standardised approach will be converted into credit exposure equivalents through the use of credit conversion factors (CCF).

Counterparty risk weightings for OTC derivative transactions will not be subject to any specific ceiling.

83. Commitments with an original maturity up to one year and commitments with an original maturity over one year will receive a CCF of 20% and 50%, respectively.

However, any commitments that are unconditionally cancellable at any time by the bank without prior notice, or that effectively provide for automatic cancellation due to deterioration in a borrower’s creditworthiness, will receive a 0% CCF. *

* In certain countries, retail commitments are considered unconditionally cancellable if the terms permit the bank to cancel them to the full extent allowable under consumer protection and related legislation.

83(i). Direct credit substitutes, e.g. general guarantees of indebtedness (including standby letters of credit serving as financial guarantees for loans and securities) and acceptances (including endorsements with the character of acceptances) will receive a CCF of 100%.

(ii). Sale and repurchase agreements and asset sales with recourse *, where the credit risk remains with the bank will receive a CCF of 100%.

* These items are to be weighted according to the type of asset and not according to the type of counterparty with whom the transaction has been entered into.

84. A CCF of 100% will be applied to the lending of banks’ securities or the posting of securities as collateral by banks, including instances where these arise out of repo-style transactions (i.e. repurchase/reverse repurchase and securities lending/securities borrowing transactions).

See Section II.D.3 for the calculation of risk-weighted assets where the credit converted exposure is secured by eligible collateral.

84(i). Forward asset purchases, forward forward deposits and partly-paid shares and securities *, which represent commitments with certain drawdown will receive a CCF of 100%.

(ii). Certain transaction-related contingent items (e.g. performance bonds, bid bonds, warranties and standby letters of credit related to particular transactions) will receive a CCF of 50%.

* These items are to be weighted according to the type of asset and not according to the type of counterparty with whom the transaction has been entered into.

84(iii). Note issuance facilities (NIFs) and revolving underwriting facilities (RUFs) will receive a CCF of 50%.

85. For short-term self-liquidating trade letters of credit arising from the movement of goods (e.g. documentary credits collateralised by the underlying shipment), a 20% CCF will be applied to both issuing and confirming banks.

86. Where there is an undertaking to provide a commitment on an off-balance sheet item, banks are to apply the lower of the two applicable CCFs.

87. The credit equivalent amount of OTC derivatives and SFTs that expose a bank to counterparty credit risk is to be calculated under the rules set forth in Annex 4 of this Framework.

88. Banks must closely monitor securities, commodities, and foreign exchange transactions that have failed, starting the first day they fail. A capital charge to failed transactions must be calculated in accordance with Annex 3 of this Framework.

89. With regard to unsettled securities, commodities, and foreign exchange transactions, the Committee is of the opinion that banks are exposed to counterparty credit risk from trade date, irrespective of the booking or the accounting of the transaction.

Therefore, banks are encouraged to develop, implement and improve systems for tracking and monitoring the credit risk exposure arising from unsettled transactions as appropriate for producing management information that facilitates action on a timely basis.

Furthermore, when such transactions are not processed through a delivery-versus-payment (DvP) or payment-versus-payment (PvP) mechanism, banks must calculate a capital charge as set forth in Annex 3 of this Framework.

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