Standardized approach (credit risk)
Encyclopedia
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.
The Basel Accord proposes to permit banks a choice between two broad methodologies for calculating their capital requirements for credit risk. The other alternative is based on internal ratings.
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.
Risk Weight: 0%
Related to assessment of sovereign as banks and securities companies are regulated.
This includes credit card, overdraft, auto loans, personal finance and small business.
Risk weight: 75%
Risk weight: 35%
Risk weight: 100%
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
Risk weight: 100%
Risk weight: 0%
Credit risk
Credit risk is an investor's risk of loss arising from a borrower who does not make payments as promised. Such an event is called a default. Other terms for credit risk are default risk and counterparty risk....
measurement techniques proposed under Basel II
Basel II
Basel II is the second of the Basel Accords, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision...
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.
The Basel Accord proposes to permit banks a choice between two broad methodologies for calculating their capital requirements for credit risk. The other alternative is based on internal ratings.
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
Foundation IRB
The term Foundation IRB or F-IRB is an abbreviation of foundation internal ratings-based approach and it refers to a set of credit risk measurement techniques proposed under Basel II capital adequacy rules for banking institutions....
and Advanced IRB
Advanced IRB
The term Advanced IRB or A-IRB is an abbreviation of advanced internal ratings-based approach and it refers to a set of credit risk measurement techniques proposed under Basel II capital adequacy rules for banking institutions....
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- BB+ 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- | BB+ 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%