Basel Committee on Banking Supervision: Revisions to the standardised approach for credit risk

22 December 2014

The proposed Revisions seek to strengthen the regulatory capital standard.

The proposed Revisions seek to strengthen the regulatory capital standard via: reduced reliance on external credit ratings; enhanced granularity and risk sensitivity; updated risk weight calibrations; more comparability with the IRB approach; and better clarity on the application of the standards. 

The Committee is considering replacing references to external ratings, as used in the current standardised approach, with a limited number of risk drivers. These alternative risk drivers vary based on the particular type of exposure and have been selected on the basis that they are simple, intuitive, readily available and capable of explaining risk across jurisdictions.

Given the challenges associated with identifying risk drivers that can be applied globally but which also reflect the local nature of some exposures - such as retail credit and mortgages - the Committee recognises that the proposals are still at an early stage of development. Thus, the Committee seeks respondents' comments and anlaysis with a view to enhancing the proposals set out in this consultative document.

The key aspects of the proposals are:

• Bank exposures: would no longer be risk-weighted by reference to the bank's external credit rating or that of its sovereign of incorporation, but would instead be based on two risk drivers: the bank's capital adequacy and its asset quality
• Corporate exposures: would no longer be risk-weighted by reference to the borrowing firm's external credit rating, but would instead be based on the firm's revenue and leverage. Further, risk sensitivity and comparability with the IRB approach would be increased by introducing a specific treatment for specialised lending
• Retail category: would be enhanced by tightening the criteria to qualify for a preferential risk weight, and by introducing an alternative treatment for exposures that do not meet the criteria
• Residential real estate: would no longer receive a 35% risk weight. Instead, risk weights would be based on two commonly used loan underwriting ratios: the amount of the loan relative to the value of the real estate securing the loan (ie the loan-to-value ratio) and the borrower's indebtedness (ie a debt-service coverage ratio)
• Commercial real estate: two options are currently under consideration: (a) treating the exposures as unsecured with national discretion for a preferential risk weight under certain conditions; or (b) determining the risk weight based on the loan-to-value ratio
• Credit risk mitigation: the framework would be amended by reducing the number of approaches, recalibrating supervisory haircuts and updating the corporate guarantor eligibility criteria

Comments on the proposals should be uploaded by Friday 27 March 2015.

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