Standardized approach (credit risk)

Set of credit risk measurement techniques

Not to be confused with Standardized approach (counterparty credit risk), Standardized approach (operational risk), or Standardized approach (market risk).

Basel Framework
International regulatory standards for banks

* Basel Committee on Banking Supervision
* Basel Accords
* Basel I
* Basel II
* Basel III
* LCR
* NSFR
* FRTB
* Final BIII Reforms

Background

* Banking / Regulation
* Monetary policy / Central bank
* Risk / Risk management

Pillar 1: Regulatory capital

* Capital requirement
* Capital ratio
* Leverage ratio
* Tier 1
* Tier 2
* Credit risk
* SA-CR
* IRB
* F-IRB
* A-IRB
* EAD
* SA-CCR
* IMM
* CCF
* Market risk
* Standardized
* IMA
* CVA vol
* BA-CVA
* SA-CVA
* Operational risk
* Basic
* Standardized
* AMA

Pillar 2: Supervisory review

* Economic capital
* Liquidity risk
* Legal risk

Pillar 3: Market disclosure

* Disclosure

Business and Economics Portal

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The term standardized approach (or standardised approach) refers to a set of credit risk measurement techniques proposed under Basel II, which sets 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 regulators approved in the initial phase of Basel II implementation. The Basel II 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.

Reforms to the standardised approach to credit risk are due to be introduced under the Basel III: Finalising post-crisis reforms.

## The summary of risk weights in standardized approach

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There are some options in weighing 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 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.

* Claims on sovereigns

Credit Assessment | AAA to AA- | A+ to A- | BBB+ to BBB- | BB+ to B- | Below B- | unrated

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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

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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

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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 that are less than 20% of the outstanding amount
100% for provisions that are between 20% - 49% of the outstanding amount
100% for provisions that are no less than 50% of the outstanding amount, but with supervisory discretion are reduced to 50% of the outstanding amount

* Other assets

Risk weight: 100%

* Cash

Risk weight: 0%

## References

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* Basel II: Revised international capital framework (BCBS)
* Basel II: International Convergence of Capital Measurement and Capital Standards: a Revised Framework (BCBS)
* Basel II: International Convergence of Capital Measurement and Capital Standards: a Revised Framework (BCBS) (November 2005 Revision)
* Basel II: International Convergence of Capital Measurement and Capital Standards: a Revised Framework, Comprehensive Version (BCBS) (June 2006 Revision)

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Financial risk and financial risk management

Categories|

| Credit risk|

* Consumer credit risk
* Sovereign credit risk
* Settlement risk
* Default risk
* Concentration risk
* Credit derivative
* Securitization

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Market risk|

* Commodity risk (e.g. Volume risk, Basis risk, Shape risk, Holding period risk, Price area risk)
* Equity risk
* Valuation risk
* FX risk
* Margining risk
* Interest rate risk
* Inflation risk
* Volatility risk
* Liquidity risk (e.g. Refinancing risk, Deposit risk)

Operational risk|

* Operational risk management
* Business risk
* Model risk
* Reputational risk
* Country risk
* Political risk
* Legal risk

Other|

* Execution risk
* Profit risk
* Systemic risk
* Non-financial risk

Modeling|

* Arbitrage pricing theory
* Black–Scholes model
* Replicating portfolio
* Cash flow matching
* Conditional Value-at-Risk (CVaR)
* Copula
* Drawdown
* First-hitting-time model
* Interest rate immunization
* Market portfolio
* Modern portfolio theory
* Omega ratio
* RAROC
* Risk-free rate
* Risk parity
* Sharpe ratio
* Sortino ratio
* Survival analysis (Proportional hazards model)
* Tracking error
* Value-at-Risk (VaR) and extensions (Profit at risk, Margin at risk, Liquidity at risk, Cash flow at risk, Earnings at risk)

Basic concepts|

* Asset allocation
* Asset and liability management
* Asset pricing
* Bad debt
* Capital asset
* Capital structure
* Corporate finance
* Cost of capital
* Diversification
* Economic bubble
* Enterprise value
* ESG
* Exchange traded fund
* Expected return
* Financial
* adviser
* analysis
* analyst
* asset
* betting
* crime
* engineering
* law
* risk
* social work
* Fundamental analysis
* Growth investing
* Hazard
* Hedge
* Investment management
* Risk
* Risk pool
* Risk of ruin
* Systematic risk
* Mathematical finance
* Moral hazard
* Risk-return spectrum
* Speculation
* Speculative attack
* Statistical finance
* Strategic financial management
* Stress test (financial)
* Structured finance
* Structured product
* Systemic risk
* Toxic asset

* Financial economics
* Investment management
* Mathematical finance

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