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FRM Part II · FRM Exam Part II · Basel III: Finalising Post-crisis Reforms

Under the Basel III finalised standardised approach for credit risk, which treatment applies to exposures to banks when external ratings are used, in a jurisdiction that allows their use?

Where ratings are permitted, bank exposures use the external rating based approach, and unrated banks are assessed under SCRA. The framework does not prescribe a flat 20% weight, nor a ban on ratings worldwide, nor reliance solely on the sovereign rating.

  1. ARisk weights are based on the external credit rating of the counterparty bank, with a separate Standardised Credit Risk Assessment Approach (SCRA) for unrated banksCorrect
  2. BAll bank exposures receive a flat 20% risk weight
  3. CExternal ratings are prohibited and only SCRA may be used worldwide
  4. DBank exposures are risk weighted by the sovereign rating of the jurisdiction only

Explanation

The External Credit Risk Assessment Approach (ECRA) uses external ratings where permitted, and SCRA applies to unrated banks and in jurisdictions that do not allow ratings. A flat 20% is not the rule, and sovereign rating is not the sole basis.

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