Calculation of RWA for credit risk

Calculation of RWA for credit risk

1. Methodologies

   • Standardised approach
     • It assigns standardised risk weights to exposures.
     • The RWA is the product of the standardised risk weights and the exposure amount.
     • Asset classes
       • Exposures to...
         • Sovereign
         • Non-central government public sector entities
         • Banks
         • Multilateral development banks (MDBs)
         • Covered bonds
         • Securities firms and other financial institutions
         • Corporates
         • Subordinated debt, equity and other capital instruments
         • Retail exposure class
         • Real estate exposure class
         • Off-balance sheet items
         • That give rise to counterparty credit risk
           • OTC derivatives
           • Exchange-traded derivatives
           • Long settlement transactions
           • Securities financing transactions
         • Credit derivatives
         • Defaulted exposures
         • Other assets
     • Use of external ratings
       • Only credit assessments from credit rating agencies recognised as external credit assessment institutions (ECAIs) will be allowed
       • Mapping process
         • Supervisors will be responsible for assigning eligible ECAIs’ ratings to the risk weights available under the standardised risk weighting framework, ie deciding which rating categories correspond to which risk weights.
         • Multiple external ratings
           • If there are two ratings by ECAIs chosen by a bank that map into different risk weights, the higher risk weight will be applied.
           • If there are three or more ratings with different risk weights, the two ratings that correspond to the lowest risk weights should be referred to. If these give rise to the same risk weight, that risk weight should be applied. If different, the higher risk weight should be applied.
           • If there is only one rating by an ECAI chosen by a bank for a particular exposure, that rating should be used to determine the risk weight of the exposure.
       • Domestic currency and foreign currency ratings
         • Foreign currency ratings would be used for exposures in foreign currency
         • Domestic currency ratings, if separate, would only be used to risk-weight exposures denominated in the domestic currency
       • Short-term/long-term ratings
         • Short-term ratings are deemed to be issue-specific, they can only be used to derive risk weights for exposures arising from the rated facility.
         • Short-term ratings may only be used for short-term exposures against banks and corporates.
       • Determination of whether an exposure is rated: Issue-specific and issuer ratings
         • Where a bank invests in a particular issue that has an issue-specific rating, the risk weight of the exposure will be based on this rating.
         • Where the bank’s exposure is not an investment in a specific rated issue, tgeneral principles apply,.
         • In order to avoid any double-counting of credit enhancement factors, no supervisory recognition of credit risk mitigation techniques will be taken into account if the credit enhancement is already reflected in the issue specific rating
       • External ratings for one entity within a corporate group cannot be used to riskweight other entities within the same group.
     • Credit Risk Mitigation
       • Requirements
       • Credit Risk Mitigation Techniques
       • Approaches
         • Simple
         • Comprehensive
   • Internal ratings-based approach
     • It allows banks to use their internal rating systems for credit risk.
     • It is subject to the explicit approval of the bank’s supervisor