Standardized Approach (Credit Risk)

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Basel II

Bank for International Settlements
Basel Accord - Basel I
Basel II
Background

Banking
Monetary Policy - Central Bank
Risk - Risk management
Regulatory Capital
Tier 1 - Tier 2
Pillar 1: Regulatory Capital

Credit Risk
Standardized - F-IRB - A-IRB
PD - LGD - EAD
Operational Risk
Basic - Standardized - AMA
Market Risk
Duration - Value at Risk
Pillar 2: Supervisory Review

Economic Capital
Liquidity Risk - Legal Risk
Pillar 3: Market Disclosure

Disclosure
Business and Economics Portal

The term "Standardized Approach" or "Standardised Approach" refers to a set of credit risk measurement techniques proposed under Basel II capital adequacy rules for banking institutions.

Under this approach the banks are required to use ratings from External Credit Rating Agencies to quantify required capital for credit risk. In many countries this is the only approach the regulators are planning to approve in the initial phase of Basel II Implementation.

[edit] The Summary of Risk Weights in Standardized Approach

There are some options in weighting risks for some claims, below are the summary as it might be likely to be implemented.

NOTE: For some "unrated" risk weights, banks are encouraged to use their own internal-ratings system based on Foundation IRB and Advanced IRB in Internal-Ratings Based approach with a set of formulae provided by the Basel-II accord. There exist several alternative weights for some of the following claim categories published in the original Framework text.


  • Claims on Sovereigns
Credit Assessment AAA to AA- A+ to A- BBB+ to BBB- B+ to B- Below B- unrated
Risk Weight 0% 20% 50% 100% 150% 100%


  • Claims on the BIS, the IMF, the ECB, the EC and the MDBs

Risk Weight: 0%


  • Claims on banks and securities companies

Related to assessment of sovereign as banks and securities companies are regulated.

Credit Assessment AAA to AA- A+ to A- BBB+ to BBB- B+ to B- Below B- unrated
Risk Weight 20% 50% 100% 100% 150% 100%


  • Claims on corporates
Credit Assessment AAA to AA- A+ to A- BBB+ to BB- Below BB- unrated
Risk Weight 20% 50% 100% 150% 100%


  • Claims on retail products

This includes credit card, overdraft, auto loans, personal finance and small business.

Risk weight: 75%


  • Claims secured by residential property

Risk weight: 35%


  • Claims secured by commercial real estate

Risk weight: 100%


  • Overdue loans

more than 90 days other than residential mortgage loans.

Risk weight:

150% for provisions are less than 20% of the outstanding amount

100% for provisions are between 20% - 49% of the outstanding amount

100% with supervisory discretion to reduce to 50% for provisions are 50% and more of the outstanding amount


  • Other assets

Risk weight: 100%


  • Cash

Risk weight: 0%

[edit] References

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