Appendix C
Risk-Adjusted Balance Sheet
Basel offers three approaches to calculating risk-adjusted assets: an internal ratings approach (in which each bank will use its own calculations and assumptions), the Standardized approach and the Simplified Standardized Approach, which offers the simplest options for calculating risk-weighted assets. The Standardized approach, the most commonly used, uses external credit assessments from agencies such as Standard and Poor’s. Table C.1 provides a general overview of various weighting schemes under the standardized risk weighting approach as of June 2011. Tables C.2 and C.3 provide the associated weighting schemes for sovereigns, banks and corporates.
Table C.1 Standardized Risk Weighting Approach
Source: BIS http://www.bis.org/publ/bcbsca04.pdf (July 2011)
| Risk Adjustments for Claims on. . . | Standardized |
| Sovereigns and central banks | 0–150% based on external credit assessment (See Table C.2.) |
| Other official entities | Select entities receive 0%, others treated as banks |
| Banks and securities firms | Either 1 notch lower than sovereign risk or based on external assessment of the bank (See Table C.2.) |
| Corporates | 20–100% based on external credit assessment (See Table C.3.) |
| Retail portfolios | 75% |
| Residential property | 35% |
| Commercial property | 100% |
| Past-due loans | 100–150% based on level of provisions and type |
| Higher risk categories | 150% |
| Off-balance sheet items | Equivalent to credit exposure or range 0–100% |
| Other assets | 100% |
Table C.2 Standardized Risk Weightings—Sovereigns and Banks
Source: BIS http://www.bis.org/publ/bcbsca04.pdf (July 2011)
| Sovereign External Credit Assessment | Sovereign External Credit Assessment | Bank External Credit Assessment—Option 2 |
| AAA to AA− | 0% | 20% |
| A + to A− | 20% | 50% |
| BBB + to BBB− | 50% | 50% |
| BB + to B − | 100% | 100% |
| <B − | 150% | 150% |
| Unrated | 100% | 50% |
Table C.3 Standardized Risk Weightings—Corporates
Source: BIS http://www.bis.org/publ/bcbsca04.pdf (July 2011)
| AAA to AA− | 20% |
| A + to A− | 50% |
| BBB + to BB− | 100% |
| <BB− | 150% |
| Unrated | 100% |
These risk weightings can influence the amount of capital a bank is required to hold. Consider the numerous sovereign downgrades in Europe during 2011 and 2012. With sovereign bonds generally comprising a large portion of bank balance sheets, each downgrade can be meaningful if it triggers a higher risk weighting. There is a lot of fine print to the calculations, but in general, if there are more than two credit ratings, the two highest ratings will be used to determine the risk weight.