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CMA Final · Risk Management in Banking and Insurance · Sovereign Risk and Insolvency Risk

Under the Basel framework's standardised approach to credit risk, which feature best describes how sovereign exposures are risk-weighted?

Under the Basel standardised approach, sovereign risk weights vary with the sovereign's external credit rating: highly rated sovereigns get low weights and poorly rated or unrated ones get higher weights. They are not uniformly zero or uniformly 100%, nor based only on maturity.

  1. ARisk weights depend on the external credit assessment of the sovereign, with highly rated sovereigns receiving lower weights than lowly rated onesCorrect
  2. BAll sovereign exposures receive a uniform 100% risk weight irrespective of rating
  3. CAll sovereign exposures receive a 0% risk weight irrespective of rating
  4. DRisk weights depend solely on the residual maturity of the exposure and not on the rating

Explanation

The Basel standardised approach links sovereign risk weights to external credit assessments, from low weights for high ratings to higher weights for low ratings or unrated sovereigns. A flat 0% or 100% ignores rating differences, and maturity alone is not the determinant.

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