| (5) | Calculation of credit risk exposure: standardised approach |
Subject to the relevant requirements specified in regulation 38(2) and subregulation (20), a bank that adopted the standardised approach for the measurement of the bank’s exposure to credit risk—
| (a) | shall calculate its exposure to credit risk, at the discretion of the bank, either in accordance with Method 1, as set out in subregulations (6) and (7), or Method 2, as set out in subregulations (8) and (9); |
| (b) | shall in a consistent manner, in accordance with the relevant requirements specified below, and in terms of the bank’s internal risk management process, apply the ratings or assessments issued by an eligible external credit assessment institution or export credit agency, selected or nominated by the bank, to calculate the bank’s risk exposure in terms of the relevant provisions contained in these Regulations. Provided that, the bank shall not “cherry pick” ratings or assessments issued by different external credit assessment institutions, arbitrarily change the use of eligible external credit assessment institutions or apply ratings or assessments for purposes of these Regulations differently from the bank’s internal risk management process. |
When a bank has a choice between—
| (A) | two assessments issued by eligible external credit assessment institutions chosen by the bank, which assessments relate to different risk weighting categories, the bank shall apply the higher of the two risk weights; |
| (B) | three or more assessments issued by eligible external credit assessment institutions chosen by the bank, which assessments relate to different risk weighting categories, the bank shall apply the higher of the lowest two risk weights. |
| (ii) | Issuer versus issue-specific assessment |
| (A) | When a bank invests in— |
| (i) | an instrument with an issue-specific assessment, the bank shall risk weight the instrument based upon the said issue-specific assessment; |
| (ii) | an instrument issued by an issuer with a high-quality rating, that is, a rating that maps into a risk weight lower than the risk weight normally applied to an unrated position, but that high-quality rating applies only to a limited or specified class of liabilities, the bank shall use that high-quality rating only when the bank invests in an instrument or exposure that falls within that relevant limited or specified class of liabilities; |
| (iii) | an instrument with no issue-specific assessment or an unrated instrument issued by a borrower or an obligor, which borrower or obligor is assigned— |
| (aa) | a high-quality credit assessment, that is, an assessment that results in a risk weight lower than the risk weight normally applied to an unrated position, the bank may assign that lower risk weight to the said unrated position, provided that— |
| (i) | the claim in respect of that unrated position shall rank pari passu or senior to the claims to which the issuer assessment relates; |
| (ii) | when the unrated position ranks junior to the claims to which the issuer assessment relates, the bank shall assign to the said position the relevant risk weight that relates to an unrated position. |
| (bb) | a low-quality assessment, that is, an assessment that results in a risk weight higher than the risk weight normally applied to an unrated position, the bank shall assign to the said unrated position the said higher risk weight if that unrated instrument ranks pari passu or is subordinated to either the relevant senior unsecured issuer assessment or exposure assessment. |
Provided that in all cases, irrespective of whether the bank relies on an issuer or issue-specific assessment, the bank shall ensure that the relevant assessment takes into account and reflects the aggregate amount of credit exposure in respect of all amounts due, that is, the relevant principal amount due as well as any related interest, and as such no instrument with a principal-only rating shall, for example, constitute an eligible risk mitigation instrument in terms of the provisions of subregulation (7) or (9).
| (B) | A bank shall in no case use an external assessment relating to a particular entity within a corporate group to risk weight other entities within that same group. |
| (iii) | Foreign currency and domestic currency assessments |
When a bank assigns a risk weight to an unrated position based on the rating of an equivalent exposure to that borrower to which an issuer rating is assigned, the bank—
| (A) | shall use that borrower’s foreign-currency rating in respect of exposure denominated in foreign currency; |
| (B) | shall use that borrower’s domestic-currency rating in respect of exposure denominated in domestic currency. |
| (iv) | Short term versus long term assessments |
| (A) | Unless specifically otherwise provided in these Regulations, for the measurement of a bank’s exposure to credit risk, a short-term credit assessment— |
| (i) | shall be deemed to be issue-specific, that is, the assessment shall be used only to derive risk weights for claims arising from a rated facility; |
| (ii) | shall in no event be used to support a risk weight for an unrated long-term claim or exposure; |
| (iii) | shall be used only for short-term claims against or exposures relating to banks or corporate institutions, such as a particular issuance of commercial paper, |
Provided that when a short-term rated facility is assigned a risk weight of 50 per cent, an unrated short-term exposure or claim shall not be assigned a risk weight lower than 100 per cent.
| (B) | Subject to the relevant requirements specified in subregulation (7) or (9) below related to risk mitigation, when a short-term facility of a particular issuer is assigned a risk weight of 150 per cent, based on the facility’s credit assessment, all unrated exposures or claims of the said issuer, whether long-term or short-term, shall be assigned a risk weight of 150 per cent. |
A bank shall not without the prior written approval of the Authority or otherwise than in accordance with conditions approved in writing by the Authority make use of unsolicited ratings issued by an eligible external credit assessment institution.
| (c) | shall duly assess all relevant credit exposures, regardless of whether the said exposures are rated or unrated, to determine whether the risk weights applied to the said exposures in terms of the provisions of subregulations (6) to (9) are appropriate, based on the respective exposures’ inherent risk. Provided that, when the bank determines that the inherent risk of an exposure, particularly if the exposure is unrated, is significantly higher than that implied by the risk weight to which it is assigned, the bank shall consider the higher degree of credit risk in the evaluation of its overall capital adequacy and appropriately increase the required amount of capital and reserve funds held to duly reflect the inherent risk of such exposures; |
| (d) | shall comply with the relevant requirements specified in subregulations (6) to (9) below. |
[Regulation 23(5) substituted by section 2(c) of Notice 6342, GG52907, dated 26 June 2025, shall come into operation on 1 July 2025]
