International revised approach to credit risk proposed by Basel Committee

The Basel Committee on Banking Standards has recently published a second consultation on revisions to the Standardized Approach for credit risk management and assessment. Seeking to address concerns and criticism leveled at the proposals issued during the first consultation, The Basel Committee is now proposing that several different approaches should be adopted when formulating external ratings for exposures to banks and corporates, depending on whether a jurisdiction prohibits the use of external ratings for regulatory purposes.

This differs from the original purposed approach that was focused on assigned risk weights based on two risk drivers.

"The revised proposals in this second consultative document aim to address the issues raised by respondents with respect to the initial proposals," reads the text of the consultation. "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 standardized approach (SA) constitutes a suitable alternative and complement to the Internal Ratings-Based (IRB) approach."

These approaches include:

  • In jurisdictions that allow the use of ratings for regulatory purposes, external ratings would be the "primary source to determine risk weights for rated exposures," subject to due diligence requirements
  • In jurisdictions that do not allow the use of ratings for regulatory purposes, exposures would be classified into three different buckets, subject to certain criteria being met.

This differs from the original purposed approach that was focused on assigned risk weights based on two risk drivers. The Committee also put forth revised approaches for exposures to corporates, secured by real estate, multilateral development banks, retail and defaulted exposures and off-balance sheet items.

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