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Basel Committee on Banking Supervision Consultative Document the Standardised Approach to Credit Risk

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Basel Committee on Banking Supervision Consultative Document the Standardised Approach to Credit Risk Superseded document Basel Committee on Banking Supervision Consultative Document The Standardised Approach to Credit Risk Supporting Document to the New Basel Capital Accord Issued for comment by 31 May 2001 January 2001 Superseded document Superseded document Table of Contents INTRODUCTION: OBJECTIVES OF THE STANDARDISED APPROACH.............................................. 1 A. THE RISK WEIGHTS IN THE STANDARDISED APPROACH........................................................ 1 1. INDIVIDUAL CLAIMS.............................................................................................................................. 2 (i) Sovereign risk weights ...................................................................................................................... 2 (ii) Risk weights for Non-Central Government Public Sector Entities (PSEs) ....................................... 4 (iii) Risk weights for multilateral development banks (MDBs)................................................................ 5 (iv) Risk weights for banks ...................................................................................................................... 6 (v) Risk weights for securities firms ....................................................................................................... 7 (vi) Risk weights for corporates............................................................................................................... 7 (vii) Risk weights of retail assets .............................................................................................................. 8 (viii) Risk weights of claims secured by residential property ....................................................................8 (ix) Risk weights of claims secured on commercial real estate ............................................................... 9 (x) Higher risk categories....................................................................................................................... 9 (xi) Other assets....................................................................................................................................... 9 (xii) Off-balance sheet items..................................................................................................................... 9 (xiii) Maturity .......................................................................................................................................... 10 2. EXTERNAL CREDIT ASSESSMENTS...................................................................................................11 (i) The recognition process.................................................................................................................. 11 (ii) Eligibility criteria............................................................................................................................ 11 3. IMPLEMENTATION CONSIDERATIONS............................................................................................. 12 (i) The mapping process ...................................................................................................................... 12 (ii) Multiple assessments....................................................................................................................... 13 (iii) Issuer versus issue assessment........................................................................................................ 13 (iv) Short term/long term assessments................................................................................................... 14 (v) Level of application of the assessment............................................................................................ 14 (vi) Unsolicited ratings.......................................................................................................................... 14 B. CREDIT RISK MITIGATION IN THE STANDARDISED APPROACH ........................................ 14 1. INTRODUCTION...................................................................................................................................... 14 2. COLLATERAL.......................................................................................................................................... 16 (i) Minimum conditions........................................................................................................................ 17 (ii) The methodologies .......................................................................................................................... 19 (iii) Eligible collateral ........................................................................................................................... 19 (iv) The comprehensive approach ......................................................................................................... 20 (v) The simple approach....................................................................................................................... 28 3. NETTING .................................................................................................................................................. 30 (i) On-balance sheet netting ................................................................................................................ 30 (ii) Off-balance sheet netting/PFEs ...................................................................................................... 31 4. GUARANTEES AND CREDIT DERIVATIVES..................................................................................... 31 (i) Introduction .................................................................................................................................... 31 (ii) Minimum conditions........................................................................................................................ 32 (iii) Operational requirements for guarantees....................................................................................... 33 (iv) Operational requirements for credit derivatives.............................................................................33 (v) Range of eligible guarantors/protection providers......................................................................... 35 (vi) Risk weights .................................................................................................................................... 35 (vii) Sovereign guarantees...................................................................................................................... 37 (viii) The level of w .................................................................................................................................. 37 5. MATURITY MISMATCHES.................................................................................................................... 38 (i) Definition of maturity...................................................................................................................... 38 (ii) Risk weights for maturity mismatches............................................................................................. 38 Superseded document 6. CURRENCY MISMATCHES................................................................................................................... 39 (i) Collateral........................................................................................................................................ 39 (ii) On-balance sheet netting ................................................................................................................ 39 (iii) Guarantees/credit derivatives......................................................................................................... 40 7. DISCLOSURE REQUIREMENTS ........................................................................................................... 40 (i) Collateral/on-balance sheet netting................................................................................................ 40 (ii) Guarantees/credit derivatives......................................................................................................... 40 Superseded document The Standardised Approach to Credit Risk INTRODUCTION: OBJECTIVES OF THE STANDARDISED APPROACH 1. This paper, which forms part of the second consultative package on the new capital adequacy framework produced by the Basel Committee on Banking Supervision (the Committee), describes the standardised approach to credit risk in the banking book. 2. The New Basel Capital Accord will continue to be applied to internationally-active banks in the G10 countries. Nevertheless, the Committee expects that its underlying principles should be suitable for application to banks of widely varying levels of complexity and sophistication. 3. In revising the Capital Accord, the Committee realises that a balance between simplicity and accuracy needs to be struck. In recognition that the optimal balance may differ markedly across banks, the Committee is proposing a range of approaches to credit risk, as it has for market risk. Banks will be expected to calculate regulatory capital in a manner that best reflects the current state of their risk measurement and management practices. 4. The standardised approach is the simplest of the three broad approaches to credit risk. The other two approaches are based on banks’ internal rating systems – see Supporting Document Internal Ratings-Based Approach to Credit Risk. The Committee expects that it will
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