Best Practices For BIS II Implementation
The standardized approach of BIS2 for credit risk is an elaboration of the BIS1 framework. The standardized approach allows additional segregation between risk, based on external risk ratings. For different types of claims different risk weights are given (for a particular risk grading). This section will give practical information on how to implement the standardized approach.
The idea behind the approach is to first categorise each claim and determine the credit exposure of the claim. Second determine the effect of eligible collateral from the claim. Third the risk of the counterparty is determined through external ratings. Fourth the external rating is mapped to a risk weight for the claim.