The Basel Committee on Banking Supervision (Basel Committee) has published a further consultation paper on revisions to the standardised approach for credit risk.

The revised proposals in this latest consultation paper aim to address the issues raised by respondents with respect to the initial proposals, published in December 2014. Specifically, the Basel Committee notes that:

  • as respondents to the earlier consultation paper expressed concerns relating to the proposal to remove all references to external credit ratings, suggesting that the complete removal was unnecessary and undesirable, the Basel 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 Basel Committee notes that it 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 Basel Committee instead proposes requiring the assessment of a borrower’s ability to pay as a key underwriting criterion;
  • it 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 is materially dependent on the cash flows generated by the property securing the exposure; and
  • it has included proposals for exposures to multilateral development banks, retail and defaulted exposures, and off-balance sheet items.

The deadline for comments on the consultation paper is 11 March 2016.

View Revisions to the Standardised Approach for credit risk – second consultative document, 10 December 2015