Categorise Claims
The standardised approach is calculated on the level of claims and not on the level of the counterparty. Each claim is assigned a risk weight, determining the capital necessary. Different rules apply to different type of claims. For this reason the portfolio will need to be divided into different types of claims. Make sure your entire portfolio is divided into one of the following categories. Claims on:
- Past due loans (this supersedes all other categories)
- Sovereigns
- Non-central government public sector entities (PSE’s)
- Multilateral development banks (MDB’s)
- Banks<
- Security firms
- Corporates<
- Retail counterparties
- Claims secured by residential property
- Claims part of the retail portfolio
- Claims secured by commercial real estate
- Higher risk categories (these supersede any other category except past due loans)
- Claims on sovereigns, PSE’s, banks and security firms rated below B-(S&P notation)
- Claims on corporates rated below BB- (S&P notation) (this supersedes the corporate category)
- Securitisation tranches rated between BB+ and BB-(S&P notation).
- Other items
- Gold bullion held in own vaults or on an allocated basis to the extent backed by bullion liabilities
- cash items in the process of collection.
- Remaining other
The more elaborate description of these claim types can be found in the BIS2 document page 19 through 27.
Off-balance sheet items should first be divided into the following categories:
- Commitments with an original majority up to one year. (20%)
- Commitments with an original majority over one year. (50%)
- Commitments which are unconditionally cancellable at any time by the bank without prior notice, or that effectively provide for automatic cancellation due to deterioration In a borrower’s credit worthiness. (0%)
- Direct credit substitutes, e.g. general guarantees of indebtedness (including standby letters of credit serving as financial guarantees for loans and securities) and acceptances (including endorsements with the character of acceptances). (100%)
- Sale and repurchase agreements and asset sales with recourse, where the credit
risk remains with the bank. (100%) - The lending of banks’ securities or the posting of securities as collateral by banks, including instances where these arise out of repo-style transactions (i.e. repurchase/reverse repurchase and securities lending/securities borrowing transactions). (100%)
- Forward asset purchases, forward deposits and partly-paid shares and
securities, which represent commitments with certain drawdown. (100%). - Transaction-related contingent items (e.g. performance bonds, bid bonds, warranties and standby letters of credit related to particular transactions). (50%)
- Note issuance facilities (NIFs) and revolving underwriting facilities (RUFs). (50%)
- short-term self-liquidating trade letters of credit arising from the movement of
goods (e.g. documentary credits collateralised by the underlying shipment), irrespective of the banks roll. (20%)
Dependant on the category, the off balance sheet item is transformed into a credit exposure equivalent. This is done by multiplying the value of the off balance sheet item with the appropriate credit conversion factor (CFF) which is given between brackets in the list above.
After the off balance sheet item has been categorised it can be allocated to one of the earlier mentioned claim types in order to determine the risk weight. The regulatory capital is calculated by multiplying the credit exposure equivalent by the risk weight.