UK: Proposed Revisions To The Standardised Approach To Credit Risk - More Risk Sensitivity, More Complexity

Last Updated: 10 February 2015
Article by David Strachan

Most Read Contributor in UK, August 2017

On 22 December, 2014 the Basel Committee on Banking Supervision (BCBS) published a consultation paper on "Revisions to the standardised approach for credit risk"(CRSA) 1. The aim of the revised CRSA as proposed by the BCBS is to tackle weaknesses in the current approach, including:

  •  over-reliance on external credit ratings;
  •  lack of granularity and risk sensitivity;
  •  out-of-date calibration;
  •  lack of comparability across different banks and jurisdictions; and
  •  misalignment of treatment between the current CRSA and exposures risk weighted under the internal ratings based (IRB) approach.

The CRSA is relevant to all banks, including those using IRB approaches. This is because the proposal for the revised CRSA, once finalised, will be used to calculate a new capital floor for IRB banks. As a result IRB banks need to be able to calculate the CRSA as well. The BCBS is also consulting on revisions to the standardised approaches for market and operational risk as part of its efforts to reduce variability in risk weighted assets (RWAs). Once the new standardised approaches to credit, market and operational risk have been agreed, the new floor will be calibrated. This is expected around the end of 2015.

Overview of the revised CRSA

The key feature of the proposed new CRSA is the replacement of the use of external ratings with other risk drivers that vary for each exposure class covered in the consultation 2. Table 1 provides an overview of exposure classes and proposed risk drivers. Risk weights (RWs) for each exposure class are determined based on mapping tables for each risk driver defined in the consultation. It is striking, that RWs may change significantly for some exposures. RWs range between 0% and 400% compared to the current range of 0-250% (see Table 2).

At the same time, the BCBS is introducing more granular exposure classes to the CRSA. In many cases a one-to-one mapping of current exposure classes to the proposed exposure classes is not possible. Additional criteria have been defined by the BCBS to categorize the exposures to the new exposure classes that will require changes to banks' IT systems.

In addition, the BCBS is also proposing changes to credit risk mitigation (CRM) techniques under the CRSA. The range of permitted CRM techniques is reduced and the supervisory haircuts are recalibrated. Increases in net exposures and RWAs will most likely be the result.

Implications of the proposed approach

The revised CRSA, if adopted in its current form, will have a significant impact on the banking sector. Not only could RWAs increase significantly under certain circumstances, but volatility of RWAs could also increase if the proposed risk drivers are more sensitive to the economic cycle than external ratings were. This will have a particular impact on portfolios largely consisting of unrated borrowers.

Even though the proposed risk weights could be higher than under the current approach, the BCBS states that the goal of the revisions is not to increase overall capital requirements. A recalibration of the proposed CRSA is therefore possible. In order to derive a better understanding of the impact of the proposal, a quantitative study (QIS) is planned based on end-2014 data. The QIS could be challenging because many banks currently do not store all the required data on proposed risk drivers systematically, nor will they always be able to source the data easily.

The consultation should be seen from a strategic viewpoint and in the broader context of the changes to the other standardized approaches and proposed the new capital floor. The profitability of certain portfolios may be reduced and banks need to adapt their capital planning and strategy accordingly. The revised CRSA is one more building block banks need to consider when managing their balance sheets in a world of multiple constraints.

Changes to IT systems and processes will also be needed. Early consideration needs to be given to future data capture and maintenance responsibilities to feed into the process design. Timely data availability will be crucial as the BCBS proposes to apply a risk weight of 300% in cases where the required data are not available.

The proposed approach increases complexity relative to the status quo – considerations of "simplicity", so prevalent 18 months ago, seem now to have taken a back seat. However, even so it is not clear if the proposed risk drivers that only contain information on past performance can fully explain the borrower's risk. For example, looking at bank exposures, the RW is determined by the CET1 ratio and the Non-Performing Assets (NPA) ratio. However, neither provides insights into the borrower's liquidity situation. Moreover, using the disclosed "headline" CET1 ratio as the risk driver takes no account of differences in Pillar 2 capital requirements. Two banks with the same reported CET1 ratio may have very different underlying risk profiles. At the same time it is not clear that the new approach will deliver consistent application across the world. As the BCBS itself has noted, the implementation of the Basel framework can vary across jurisdictions:  the EU and the US have recently been given "materially non-compliant" and "largely compliant" ratings respectively3.

Next steps

The BCBS recognizes that the proposal is still at an early stage of development. Given the complexity of the topic, and the openness of some aspects of the consultation (itself indicative of possible differences in views among BCBS members), various iterations of the new CRSA could be needed.

The consultation ends on 27 March, 2015. The BCBS has not yet put forward an implementation timeline. However, it is expected that there will be a clearer picture on the broader set of initiatives by the end of 2015.

Risk Drivers

 Table 1: Overview of proposed quantitative risk drivers

Exposure classes and risk weights

 Table 2: Overview of current and proposed exposure classes and risk weights

Note: The table above does not show a mapping of exposure classes but provides a lit of current and proposed exposure classes and risk weight.



(2) The consultation paper does not cover exposures to sovereigns, central banks and public sector entities. These will be dealt with in a further review.

(3) and

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.