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Ready for Credit Risk Capital SA/TSA calculations under new Basel 3.1/Basel IV/CRR III & CRD VI?

Under Basel 3.1/Basel IV/CRR III & CRD VI/B3E, the Basel Committee on Banking Supervision (BCBS) introduced the new Standardised Approach (SA) calculations for calculating the credit risk capital charge.

Basel 3.1/Basel IV/CRR III & CRD VI/B3E introduces the following changes to the Credit Risk (CR) SA (The Standardised Approach (TSA)) methodology:

• New risk weights (RW) for the majority of the asset classes.
• Provide for more detailed risk weightings (rather than a flat risk weights) for certain categories of exposures, including covered bonds, project finance, residential and commercial real estate.
• Higher granularity of risk-weights for mortgages (mostly depending on the LTV (Loan to Value))
• New methodologies for bank exposures (using either external or standardized credit risk assessments)
• No changes in Sovereign and PSEs (Public Sector Entities) methodology.
• Unrated exposures. A more granular approach has been developed of unrated exposures to banks and corporates, and for rated exposures in jurisdictions where the use of external credit ratings is permitted. Additional due diligence is required
• Exposure to banks. Some of the RWs for rated exposures have been calibrated. In addition, the RW treatment for unrated exposures is more granular than the existing flat RW. A standalone treatment for covered bonds has also been introduced.
• Exposures to corporate. A more granular look-up table has been developed. A specific RW applies to exposures to small and medium-sized Enterprises or SMEs (i.e.  85% will be applied for unrated exposures to corporate SMEs (earlier 100%) and a 75% for exposures to SMEs that are treated as regulatory retail SME exposures).
• Residential real estate exposures. More risk-sensitive approaches have been developed, whereby RWs vary based on the LTV ratio of the mortgage (instead of the existing single RW) and in ways that better reflects differences in market structures.
• Retail exposures. A more granular RW treatment applies, which distinguishes between different types of retail exposures (e.g., the regulatory retail portfolio distinguishes between revolving facilities and transactors).
• Commercial real estate exposures. Approaches have been developed that are more risk-sensitive than the flat RW which generally applies.

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If you wish additional details or a walkthrough, please contact me.

In the next few articles, I’ll continue to discuss issues related to the new capital requirements in further detail.  

* The so called “Basel IV*” Accord is known by various different names, including: Basel 3.1 (in the UK), CRR III & CRD VI (in the EU), B3E (Basel III Endgame in the USA), Basel III Finalised Reforms (by the BCBS), etc.

By: Mark Dougherty, Founder & Managing Director, RiskTAE (Risk Talent, Risk Advisory & Risk Education)

Email: mark.dougherty@risktae.com