Revisions to the Standardised Approach for credit risk: Basel Committee issues second consultative document

The Basel Committee on Banking Supervision has today released a second consultative document on Revisions to the Standardised Approach for credit risk. The revised proposals form part of the Committee's broader review of the capital framework to balance simplicity and risk sensitivity, and to promote comparability by reducing variability in risk-weighted assets across banks and jurisdictions.

The proposals published today differ in several ways from an initial set of proposals published by the Committee in December 2014. That earlier proposal set out an approach that removed all references to external credit ratings and assigned risk weights based on a limited number of alternative risk drivers. Respondents to the first consultative document expressed concerns, suggesting that the complete removal of references to ratings was unnecessary and undesirable. The Committee has decided to reintroduce the use of ratings, in a non-mechanistic manner, for exposures to banks and corporates. The revised proposal also includes alternative approaches for jurisdictions that do not allow the use of external ratings for regulatory purposes.

The proposed risk weighting of real estate loans has also been modified, with the loan-to-value ratio as the main risk driver. The Committee has decided not to use a debt service coverage ratio as a risk driver given the challenges of defining and calibrating a global measure that can be consistently applied across jurisdictions. The Committee instead proposes requiring the assessment of a borrower's ability to pay as a key underwriting criterion. It also proposes to categorise all exposures related to real estate, including specialised lending exposures, under the same asset class, and apply higher risk weights to real estate exposures where repayment ismaterially dependent on the cash flows generated by the property securing the exposure.

This consultative document also includes proposals for exposures to multilateral development banks, retail and defaulted exposures, and off-balance sheet items.The credit risk standardised approach treatment for sovereigns, central banks and public sector entities are not within the scope of these proposals. The Committee is considering these exposures as part of a broader and holistic review of sovereign-related risks.

The Committee will conduct a comprehensive quantitative impact study (QIS) in 2016. All calibrations in the consultative document are preliminary, and will be subject to review based on evidence from the QIS, to ensure adequate capitalisation and overall consistency with other components of the capital framework.

Prior to finalising the revised standardised approach by end 2016, the Committee will evaluate appropriate implementation arrangements, and will provide sufficient time for implementation taking into account the range of other reforms that have been, or are due to be, agreed by the Committee.

The Committee welcomes comments on all aspects of this consultative document and the proposed standards text. Comments on the proposals should be uploaded here by Friday 11 March 2016. All comments will be published on the website of the Bank for International Settlements unless a respondent specifically requests confidential treatment.