Minimum Capital Requirements for Credit Risk

Banks will apply the SCRA to all their unrated bank exposures. The SCRA requires banks to classify bank exposures into one of three risk-weight buckets (i.e. Grades A, B and C) and assign the corresponding risk weights in Table 5. Under the SCRA, exposures to banks without an external credit rating may receive a risk weight of 30%, provided that the counterparty bank has a Common Equity Tier 1 ratio which meets or exceeds 14% and a Tier 1 leverage ratio which meets or exceeds 5%. The counterparty bank must also satisfy all the requirements for Grade A classification. For the purposes of SCRA only, “published minimum regulatory requirements” in paragraphs 7.18 to 7.26 excludes liquidity standards. Risk weight table for bank exposures Standardized Credit Risk Assessment Approach (SCRA) Table 5 Credit risk assessment of counterparty Grade A Grade B Grade C “Base” risk weight 40% 75% 150% Risk weight for shortterm exposures 20% 50% 150% SCRA: Grade A 7.18 Grade A refers to exposures to banks, where the counterparty bank has adequate capacity to meet their financial commitments (including repayments of principal and interest) in a timely manner, for the projected life of the assets or exposures and irrespective of the economic cycles and business conditions. 7.19 A counterparty bank classified into Grade A must meet or exceed the published minimum regulatory requirements and buffers established by its national supervisor as implemented in the jurisdiction where it is incorporated, except for bank-specific minimum regulatory requirements or buffers that may be imposed through supervisory actions (e.g. via the Supervisory Review Process) and not made public. If such minimum regulatory requirements and buffers (other than bank-specific minimum requirements or buffers) are not publicly disclosed or otherwise made available by the counterparty bank, then the counterparty bank must be assessed as Grade B or lower. 7.20 If as part of its due diligence, a bank assesses that a counterparty bank does not meet the definition of Grade A in paragraphs 7.18 and 7.19, exposures to the counterparty bank must be classified as Grade B or Grade C. SCRA: Grade B 7.21 Grade B refers to exposures to banks, where the counterparty bank is subject to substantial credit risk, such as repayment capacities that are dependent on stable or favorable economic or business conditions. 7.22 A counterparty bank classified into Grade B must meet or exceed the published minimum regulatory requirements (excluding buffers) established by its national supervisor as implemented in the jurisdiction where it is incorporated, except for bank-specific minimum regulatory requirements that may be imposed through supervisory actions (e.g. via the Supervisory Review Process) and not made public. If such minimum regulatory requirements are not publicly disclosed or otherwise made available by the counterparty bank then the counterparty bank must be assessed as Grade C. 7.23 Banks will classify all exposures that do not meet the requirements outlined in paragraphs 7.18 and 7.19 into Grade B, unless the exposure falls within Grade C under paragraphs 7.24 to 7.26. SCRA: Grade C 7.24 Grade C refers to higher credit risk exposures to banks, where the counterparty bank has material default risks and limited margins of safety. For these counterparties, adverse business, financial, or economic conditions are very likely to lead, or have led, to an inability to meet their financial commitments.