Effects expectation of the revised exposure to banks Basel credit risk weighted assets standard

Abstract

In 2017 Basel Committee on Banking Supervision (BCBS) has published additional Basel III reforms for the calculation of the risk weighted assets (RWA) as part of the capital adequacy calculation. The 2017 reforms should resolve shortcomings in the capital adequacy calculation from the pre-crisis period. Revised standardised approach for the credit risk should be valid as of January 2023, based on last available BCBS information. The new reforms are bringing numerous improvements particularly interesting for the bank strategic management. One of the especially important improvements of the 2017 Basel III RWA reforms is the new treatment of the exposures to banks. For the treatment of externally unrated exposure to banks, financial institutions can use Standardised Credit Risk Assessment Approach (SCRA). This topic is the most interesting and important for the banking sectors structured mostly with the externally unrated banks. This is more characteristic of the developing, transition, economies, rather than the developed economies. However, SCRA will be very important also for the developed economies banking sectors and banks in whose portfolios has domination externally rated bank exposure, but in the same time they have significant amount of the exposure to banks without external rating. This paper focus is related to the effects expectation of the SCRA implementation on the unrated banks exposure. The aim of the paper is to define those effects. The paper is analyzing how worldwide SCRA implementation will establish a more detailed RWA approach with enhanced risk sensitivity.