A
NEW STANDARDISED APPROACH
In
the greater scheme of things, the Standardised Approach, where banks
must
use risk weights (percentages) imposed by the regulator to calculate
their capital, was not meant to be the bedrock of the system.
Quite
the opposite. It was intended for those banks without the financial
resources, the systems, or the skills, required to use the Internal
Ratings Based (IRB) Approaches, which were very much the “holy
grail” of the system.
The
Standardised Approach was only meant to be a temporary entry level,
from which banks were meant to upgrade. And to encourage them to do
just that the system “punished” them with, all other
things being equal, heavier capital requirements and no access to
risk mitigation techniques.
No
wonder that some kind of “second class bank” stigma was
somehow attached to standardised banks.
Not
anymore it seems. The reality check brought about by the financial
crisis has shifted the centre of gravity of the Basel architecture.
Under the Basel IV rules it is now the IRB Approaches that must be
constrained, and it is the Standardised Approach, now deemed more
reliable, that defines the minimum capital required.
The
corollary of all this, however, was that the existing Standardised
Approach was too rudimentary, in fact too much like Basel I, for this
new “status”.
Accordingly,
the first objective of the Basel IV revisions, as indicated in the
introduction to this series, is to enhance the risk sensitivity of
the Approach, which they seek to do by:
Importing
IRB asset classes into the Standardised Approach to replace broad
“flat rate” generic asset classes.
Recalibrating
the Standardised Approach risk weights to align them more closely to
the equivalent risk weights of the IRB Approaches. This removes, or
at least softens, the “punishment” of higher capital
requirements mentioned above.
Granting
more discretion to banks.
This
paper examines the changes to the capital treatment of corporate
exposures, which are first summarised and then explained in more
details. An overall assessment is provided at the end.
 Corporate exposures
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