International Finance and Accounting Handbook

(avery) #1

There are two options for Standardized risk weighting of claims on banks and se-
curities firms. Under option 1, all banks incorporated in a given country are assigned
a risk weight one category less favorable than the sovereign country’s risk weight.
Thus, the risk weights for option 1 shown in the heading in Exhibit 3.3 pertain to the
sovereign’srisk weight. For example, a bank that is incorporated in a country with an
AAA rating will have a 20% risk weight under option 1, resulting in a 1.6% capital
requirement.^21 Option 2 uses the external credit rating of the bank itself to set the risk


3 • 6 BIS BASEL INTERNATIONAL BANK CAPITAL ACCORDS

AAA to AA– A+ to A– BBB+ to BBB– BB+ to B– Below B–
or ECA or ECA or ECA or ECA or ECA
External Credit Rating Rating 1 Rating 2 Rating 3 Rating 4 to 6 Rating 7


Risk Weight under 0% 20% 50% 100% 150%
BIS II
Capital Requirement 0% 1.6% 4% 8% 12%
under BIS II


Notes:ECA denotes Export Credit Agencies. To qualify, the ECA must publish its risk scores
and use the OECD methodology. If there are two different assessments by ECAs, then the
higher risk weight is used. Sovereigns also have an unrated category with a 100 percent risk
weight (not shown). Under BIS I, the risk weight for OECD government obligations is 0 per-
cent. OECD interbank deposits and guaranteed claims, as well as some non-OECD bank
and government deposits and securities carry a 20 percent risk weight under BIS I. All other
claims on non-OECD governments and banks carry a 100 percent risk weight under BIS I.
(See Saunders and Cornett, 2002.)


Exhibit 3.2. Total Capital Requirements on Sovereigns under the Standardized Model of BIS II


External
Credit Rating AAA to AA– A+ to A– BBB+ to BBB– BB+ to B– Below B– Unrated


Risk Weight 20% 50% 100% 100% 150% 100%
under BIS II
Option 1
Capital 1.6% 4% 8% 8% 12% 8%
Requirement
under BIS II
Option 1
Risk Weight 20% 50% 50% 100% 150% 50%
under BIS II
Option 2
Risk Weight for 20% 20% 20% 50% 150% 20%
short-term claims
under BIS II
Option 2


Notes:The capital requirements for option 2 can be calculated by multiplying the risk
weight by the 8 percent capital requirement.


Exhibit 3.3. Total Capital Requirements on Banks under the Standardized Model of BIS II


(^21) That is, an AAA rating would normally warrant a 0% risk weight, but instead the risk weight is set
one category higher at 20%.

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