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Revisions to the Standardised Approach for Credit Risk

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Revisions to the Standardised Approach for Credit Risk Basel Committee on Banking Supervision Second consultative document Standards Revisions to the Standardised Approach for credit risk Issued for comment by 11 March 2016 December 2015 This publication is available on the BIS website (www.bis.org). © Bank for International Settlements 2015. All rights reserved. Brief excerpts may be reproduced or translated provided the source is stated. ISBN 978-92-9197-380-4 (print) ISBN 978-92-9197-381-1 (online) Contents Revisions to the standardised approach for credit risk ...................................................................................................... 1 Introduction ......................................................................................................................................................................................... 1 Section 1: Proposed revisions to the standardised approach for credit risk ............................................................. 3 1.1 Exposures to banks and corporates ........................................................................................................................ 3 1.1.1 Exposures to banks ...................................................................................................................................... 4 1.1.2 Exposures to corporates ............................................................................................................................ 7 1.2 Specialised lending exposures to corporates ...................................................................................................... 8 1.3 Subordinated debt, equity and other capital instruments ............................................................................. 8 1.4 Retail portfolio ................................................................................................................................................................. 9 1.5 Real estate exposure class ......................................................................................................................................... 11 1.5.1 Residential real estate exposures ......................................................................................................... 12 1.5.2 Commercial real estate exposures ....................................................................................................... 13 1.5.3 Land acquisition, development and construction (ADC) exposures ...................................... 14 1.6 Risk weight add-on for exposures with currency mismatch ........................................................................ 14 1.7 Off-balance sheet exposures .................................................................................................................................... 15 1.8 Defaulted exposures .................................................................................................................................................... 16 1.9 Exposures to multilateral development banks (MDBs) .................................................................................. 17 1.10 Other assets .................................................................................................................................................................... 18 Section 2: Proposed revisions to the credit risk mitigation framework for exposures risk-weighted under the standardised approach ............................................................................................................................................ 18 Section 3: Objectives of the SA review in light of current proposals.......................................................................... 21 Annex 1 Proposals on risk weighting for exposure classes and credit risk mitigation ....................................... 24 Introduction ....................................................................................................................................................................................... 24 A. Individual exposures ............................................................................................................................................................. 25 1. Exposures to sovereigns ............................................................................................................................................. 25 2. Exposures to non-central government public sector entities (PSEs) ........................................................ 26 3. Exposures to multilateral development banks (MDBs) .................................................................................. 26 4. Exposures to banks ...................................................................................................................................................... 27 5. Exposures to securities firms and other financial institutions ..................................................................... 30 6. Exposures to corporates ............................................................................................................................................. 30 7. Subordinated debt, equity and other capital instruments ........................................................................... 33 8. Retail exposures............................................................................................................................................................. 33 2nd consultation - Revisions to the Standardised Approach for credit risk iii 9. Real estate exposure class ......................................................................................................................................... 34 10. Add-on risk weight to certain exposures with currency mismatch ........................................................... 38 11. Off-balance sheet items ............................................................................................................................................. 38 12. Defaulted exposures .................................................................................................................................................... 39 13. Other assets ..................................................................................................................................................................... 40 B. Recognition of external ratings by national supervisors ........................................................................................ 41 C. Implementation considerations in jurisdictions that allow use of external ratings for regulatory purposes .................................................................................................................................................................................... 42 D. Credit risk mitigation techniques for exposures risk-weighted under the standardised approach ...... 45 1. Overarching issues ........................................................................................................................................................ 45 2. Overview of credit risk mitigation techniques ................................................................................................... 47 3. Collateralised transactions ......................................................................................................................................... 48 4. On-balance sheet netting .......................................................................................................................................... 57 5. Guarantees and credit derivatives .......................................................................................................................... 58 Annex 2 Summary of results from first QIS on 2014 consultative document ......................................................... 63 iv 2nd consultation - Revisions to the Standardised Approach on credit risk Revisions to the standardised approach for credit risk Introduction This is the Committee’s second consultation on Revisions to the Standardised Approach for credit risk. The Committee wishes to thank all respondents for their extensive feedback on its first consultative document, which was published in December 2014.1 The revised proposals in this second consultative document aim to address the issues raised by respondents with respect to the initial proposals. These revised proposals also seek to achieve the objectives set out in the first consultative document to balance simplicity and risk sensitivity, to promote comparability by reducing variability in risk-weighted assets across banks and jurisdictions, and to ensure that the standardised approach (SA) constitutes a suitable alternative and complement to the Internal Ratings-Based (IRB) approach. The current SA prescribes the use of external credit ratings to determine risk weights for certain exposures. In line with the objective of reducing mechanistic reliance on credit rating agency (CRA) ratings,2 the Committee proposed, in its first consultative document, an approach for exposures to banks and corporates that removed references to external ratings and assigned risk weights based on two risk drivers. Respondents expressed significant concerns, suggesting that the complete removal of references to ratings was unnecessary and undesirable. Some respondents were of the view that the approach would be overly complex, while others argued that it would be extremely insensitive to risk. Acknowledging the limitations of removing all
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