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FRM Exam Part II · High-level Summary of Basel III Reforms

Revised Standardised Approach for Credit Risk (SA-CR) in Basel III

Updated 11 October 2026 · Fact-checked

The revised standardised approach (SA-CR) is the Basel III finalised method for setting credit risk weights without internal models. It makes weights more granular and risk-sensitive, cuts mechanical reliance on external ratings through due diligence and non-rated fallbacks, and uses LTV-based weights for real estate. Solve questions by identifying the exposure class, then applying the weight.

Understand Revised Standardised Approach for Credit Risk

Under the standardised approach, a bank multiplies each exposure by a risk weight to get risk-weighted assets (RWA). Capital is then held against RWA. The Basel III reforms, finalised in 2017, rebuilt this approach because the Basel II version was too crude and leaned heavily on external ratings.

There are three main goals. First, make risk weights more granular and risk-sensitive, so riskier exposures get higher weights and safer ones lower. Second, reduce mechanical reliance on external ratings. Third, give a credible alternative to internal models, because the output floor links IRB results to the standardised approach.

To cut reliance on ratings, banks must perform due diligence. They must understand the risk profile of each counterparty, even if it is rated. If due diligence shows the risk is higher than the rating implies, the bank must assign a higher risk weight. It cannot assign a lower one. For jurisdictions that do not allow ratings, the framework offers non-rating-based alternatives. Examples are the Standardised Credit Risk Assessment Approach (SCRA) for banks and an investment-grade test for corporates.

Real estate is treated more granularly. Residential real estate weights depend on the loan-to-value (LTV) ratio, with lower weights for lower LTV. Weights also differ by whether repayment depends materially on cash flows from the property. Income-producing property gets higher weights. Land acquisition, development and construction (ADC) exposures get a higher weight, generally 150%, with some exceptions for residential projects.

Corporates are split more finely. Rated corporates use external ratings subject to due diligence. Unrated corporates generally get 100%. Small and medium-sized enterprises (SMEs) get a lower weight, 85% for unrated corporate SMEs. Specialised lending (project, object and commodities finance) has its own weights. Retail exposures that meet criteria get 75%, and a transactor-type lower weight applies to some revolving products. Off-balance-sheet items use revised credit conversion factors (CCFs).

Key formulas to remember

Risk-weighted assets
RWA = Exposure (after CCF and credit risk mitigation) × Risk weight
Minimum capital = capital ratio × RWA. For example, 8% of RWA is the total capital minimum before buffers.
Loan-to-value ratio
LTV = Loan amount ÷ Property value
Property value must be prudently assessed and not raised except for modifications that improve the property. Higher LTV gives a higher risk weight.
Whole-loan residential weights (not materially dependent on property cash flows)
LTV ≤ 50%: 20%; 50–60%: 25%; 60–80%: 30%; 80–90%: 40%; 90–100%: 50%; > 100%: 70%
Whole-loan approach applies the weight to the entire loan. Weights are for general residential exposures. Check your reading for the variants.
Other key corporate and retail weights
Unrated corporate: 100%; unrated corporate SME: 85%; regulatory retail: 75%; ADC: 150%
Rated corporates use rating-based weights, such as 20% for AAA to AA-, 50% for A, 75% for BBB, 100% for BB, and 150% below BB-.
Due diligence rule
Risk weight after due diligence ≥ risk weight from external rating
Due diligence can only raise the weight, never lower it.

How to solve Revised Standardised Approach for Credit Risk questions

Use the same sequence for any SA-CR question. It stops you mixing exposure classes.

  1. 1Identify the exposure class: sovereign, bank, corporate, SME, retail, real estate, specialised lending, equity or other.
  2. 2Check whether an external rating is eligible and permitted in the stated jurisdiction. If not, use the non-rated or alternative method.
  3. 3For real estate, decide whether it is residential or commercial, and whether repayment materially depends on property cash flows. Then compute LTV.
  4. 4Look up the risk weight from the correct table or band for that class and LTV or rating.
  5. 5Apply any due diligence override. If the question says risk is higher than the rating suggests, raise the weight.
  6. 6Convert off-balance-sheet items with the CCF, then net eligible collateral or guarantees if the question gives them.
  7. 7Multiply exposure by risk weight for RWA, then multiply by the required capital ratio if capital is asked.
  8. 8Check interpretation: is the result higher or lower than under Basel II, and why?

Quickest way: Class, weight, multiply

When to use it: Use when the question gives a single exposure and a table of weights, and time is tight.

  1. Name the class in your head first. Do not read the options yet.
  2. For real estate, compute LTV and match to the band. Watch boundary values.
  3. Recall the anchor weights: unrated corporate 100%, SME 85%, retail 75%, ADC 150%.
  4. Multiply exposure by weight. Eliminate options that differ by a factor you can see.
  5. If the question mentions due diligence concerns, pick the higher weight.

Common mistakes in Revised Standardised Approach for Credit Risk

  • Assuming due diligence can lower a risk weight below the rating-based weight.

    Students think due diligence is a fine-tuning step in both directions.

    Fix: Remember it is a one-way override. It can only increase the weight.

  • Saying the revised approach removes external ratings entirely.

    The aim of reducing reliance is read as elimination.

    Fix: Ratings remain in use where permitted. The change is that ratings are not used mechanically and non-rated alternatives exist.

  • Using the wrong LTV band at a boundary or computing LTV on the wrong value.

    Bands overlap in notes, and students use the current market value after a price rise.

    Fix: Compute LTV as loan ÷ prudently assessed value and read the band definition carefully. Do not use a value raised by market moves.

  • Applying residential weights to income-producing property.

    Both are real estate, so students use one table.

    Fix: Ask whether repayment materially depends on property cash flows. If yes, use the higher income-producing weights.

  • Giving unrated corporate SMEs 100%.

    Students remember 100% as the unrated corporate weight.

    Fix: Unrated corporate SMEs get 85%. Other unrated corporates get 100%.

  • Forgetting the CCF on undrawn commitments.

    Students multiply the notional by the risk weight directly.

    Fix: Convert off-balance-sheet items to a credit exposure equivalent first, then apply the weight.

Worked examples

Example 1

A bank grants a ₹80,00,000 residential mortgage on a property valued at ₹1,00,00,000. Repayment does not materially depend on property cash flows. Using the whole-loan approach, the risk weight for LTV between 60% and 80% is 30%. What is the RWA?

Show the solution
  1. LTV = 80,00,000 ÷ 1,00,00,000 = 80%.
  2. 80% falls at the top of the 60–80% band, so the weight is 30%, assuming the band includes its upper bound as in the stated table.
  3. RWA = 80,00,000 × 30% = ₹24,00,000.

Answer: RWA = ₹24,00,000, using a 30% risk weight.

Example 2

A bank holds a USD 10 million exposure to an unrated corporate SME and a USD 10 million exposure to an unrated large corporate. Neither is specialised lending. What is the total RWA, and how much lower is it than if both were weighted at 100%?

Show the solution
  1. SME weight is 85%: 10 million × 85% = USD 8.5 million.
  2. Large unrated corporate weight is 100%: 10 million × 100% = USD 10 million.
  3. Total RWA = 8.5 + 10 = USD 18.5 million.
  4. At 100% for both, RWA would be USD 20 million.
  5. Difference = 20 − 18.5 = USD 1.5 million.

Answer: Total RWA is USD 18.5 million, USD 1.5 million lower than a flat 100%.

Exam tips

  • Memorise the anchor weights: unrated corporate 100%, SME 85%, retail 75%, ADC 150%.
  • When the stem mentions due diligence, the answer is a weight at least as high as the rating-based one.
  • In real estate questions, compute LTV first and check whether repayment depends on property cash flows.
  • Link SA-CR to the output floor: internal model RWA is floored against standardised RWA, so SA-CR matters beyond standardised banks.
  • Read whether the question asks for RWA or minimum capital. Applying the capital ratio is an extra step.

Practice questions from High-level Summary of Basel III Reforms

Revised Standardised Approach for Credit Risk in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Revised Standardised Approach for Credit Risk: frequently asked questions

How does the revised standardised approach reduce reliance on external ratings?

It requires banks to carry out their own due diligence, which can only raise a risk weight. It also provides non-rating-based methods, such as SCRA for bank exposures, for jurisdictions that do not allow ratings. Ratings are still used where permitted.

How do LTV ratios affect real estate risk weights?

For general residential exposures not materially dependent on property cash flows, the risk weight rises as LTV rises. Low-LTV loans get weights such as 20%, while loans above 100% LTV get higher weights. Income-producing property uses a separate, higher schedule.

What are the main exposure classes in SA-CR?

They include sovereigns, banks, corporates, specialised lending, retail, real estate, equity and other assets. Corporates are further split into rated, unrated, SME and specialised lending. Real estate is split into residential, commercial and ADC.

Why does the standardised approach matter for banks using internal models?

The Basel III output floor sets a minimum on RWA from internal models relative to standardised RWA. So changes to SA-CR flow through to IRB banks.