Risk Weighted Asset calculation under
BASEL
Biswaranjan Mohanty
25 April 2013
Basel II – Three Pillars
First Pillar
Minimum Capital Charges: Minimum capital requirements based on market,
credit and operational risk to (a) reduce risk of failure by cushioning against
losses and (b) provide continuing access to financial markets to meet liquidity
needs, and (c) provide incentives for prudent risk management
Second Pillar
Supervisory Review: Qualitative supervision by regulators of internal bank risk
control and capital assessment process including supervisory power to require
banks to hold more capital than required under the First Pillar
Third Pillar
Market Discipline: New public disclosure requirements to compel improved
bank risk management
Fundamental calculation
Capital Adequacy Ratio =
Tier I + Tier II
-----------------------Risk weighted asset
Risk weighted asset = Exposure X Risk weight of the counterpaerty
E* = max {0, [E x (1 + He) – C x (1 – Hc – Hfx)]}
where:
E* = the exposure value after risk mitigation
E = current value of the exposure
He = haircut appropriate to the exposure
C = the current value of the collateral received
Hc = haircut appropriate to the collateral
Hfx = haircut appropriate for currency mismatch between the collateral and exposure
Basel II – Sovereign Capital Charges
Sovereigns
 Risk weights for sovereign exposures:
Rating
AAA to
AA-
A+ to
A-
BBB+
to BBB-
BB+ to
B-
Below
B-
Unrated
Risk Weight
0%
20%
50%
100%
150%
100%
 Claims on non-central government public sector entities based on corporate
exposure risk weights
 Claims on multilateral development banks have 0% risk weight if conditions are met,
including: (i) majority of MDB’s ratings are AAA, (ii) significant portion of
shareholders are AA- or better rated sovereigns, (iii) funding is in form of paid-in
equity with little or no leverage, and (iv) conservative lending criteria
 At national discretion, lower risk weight for banks’ exposures to their sovereign (or
central bank) in domestic currency; if adopted, other regulators may permit same
risk weight
Basel II – Bank Capital Charges
Banks
2 options, selected by national regulator to apply for all banks in jurisdiction:
 Option 1: Banks risk weighted one category below risk weights of banks’ sovereigns:
Rating of
sovereign
AAA to
AA-
A+ to
A-
BBB+
to BBB-
BB+ to
B-
Below
B-
Unrated
Risk Weight
20%
50%
100%
100%
150%
100%
 Option 2:
At national discretion, banks risk weighted on basis of own external
ratings (plus more favourable risk weight if claim maturity < 3 months)
Rating of
the bank
AAA to
AA-
A+ to
A-
BBB+
to BBB-
BB+ to
B-
Below
B-
Unrated
Risk Weight
20%
50%
50%
100%
150%
50%
Short-term
20 %
20 %
20 %
50 %
150 %
20 %
 Local currency reduction: National regulators may reduce by one notch risk weight
of local currency bank debt having maturity of less than 3 months, subject to floor of
20%
 Exposures to securities firms treated as bank claims if regulatory arrangements
comparable, otherwise the will have corporate treatment
Basel II – Corporate Capital Charges
Corporate
2 options, selected by national regulator to apply for all banks in jurisdiction:
 Option 1: Corporates risk weighted as set out in following chart (supervisory authority
to increase 100% risk weight for unrated corporates where warranted by higher
default rates):
AAA to
A+ to
BBB+
Below
Rating
Unrated
AAAto BBBBRisk Weight
20%
50%
100%
150%
100%
 Option 2: At national discretion, all corporates risk weighted at 100% without regard
to external ratings. (No cherry picking)
 Includes claims on insurance companies
Basel II – Retail Capital Charges
Retail
Generally
 75% risk weight if:
 Exposure to individual or small business
 Exposure takes form of revolving credit, line of credit, personal loan, lease
 Portfolio diversified (granular); Basel II accord suggests no aggregate exposure to
any one counterparty should exceed 0.2% of overall regulator retail portfolio
 Maximum aggregate counterparty exposure €1 million or less
Basel II – Real Estate Capital Charges
Real Estate
Residential Real Estate
 35% risk weight for exposures fully secured by mortgages on residential property
occupied by the borrower or rented
Commercial Real Estate
 Generally 100% risk weight, given experience in numerous countries with troubled
credits over the past few decades
Basel II – Off Balance Sheet Items
Off Balance Sheet Items
Off-balance sheet items converted into credit exposure equivalents using credit
conversion factor (CCF)
Commitments
 Original maturity of up to one year: 20% CCF
 Original maturity in excess of one year: 50% CCF
 Unconditionally cancelable: 0% CCF
Securities lending
 Repo and reverse repo transactions: 100% CCF
Where there is an undertaking to provide a commitment on an off-balance sheet
item, banks are to apply the lower of the two applicable CCFs.
Basel II – Other assets
 All other assets at 100 % weightage
 Investments in equity or regulatory capital instruments issued by banks or securities firms
will be risk weighted at 100%, unless deducted from the capital base. Under IRB approach
300 % for equity holdings those are publicly traded and 400 % for other equity holdings.
 At national discretion, gold bullion held in own vaults risk-weighted at 0%.
 In addition, cash items in the process of collection can be risk-weighted at 20%.
High risk categories
The following claims will be risk weighted at 150% or higher:
 Claims on sovereigns, PSEs, banks, and securities firms rated below B-.
 Claims on corporates rated below BB-.
 Securitisation tranches that are rated between BB+ and BB- will be risk weighted at 350%.
 150 % risk weight for venture capital and private equity investments.
Basel II-Past due treatment
Past Due
 Unsecured portion of exposure past due for more than 90 days, net of specific provisions,
risk weighted as follows:
- 150% when specific provisions less than 20% of outstanding amount of exposure
- 100% when specific provisions 20% or more of outstanding amount of exposure
- 100% when the specific provisions 50% or more of outstanding amount of exposure,
with supervisory discretion to reduce risk weight to 50% in such case
Essentials:
 Non-performing loan under Basel II is any loan that is past due for more than 90 days, but
subject to national variation
 For purposes of defining secured portion of non-performing loan, eligible collateral and
guarantees will be recognised as under CRM rules for performing loans
 Capital charges depend on level of specific provisions held against loan
Eligible collaterals and standard supervisory
haircut
Haircuts
 Assuming daily remargining and 10 day holding period
 Currency mismatch – 8 %
 Zero haircut on repo transactions for core market participants under certain conditions
 Maturity mismatch P=P*(t-0.25)/(T-0.25)
P---adjusted collateral
P*---actual collateral value
t-- min (T, residual maturity of the credit protection arrangement) expressed in
years
T-- min (5, residual maturity of the exposure) expressed in years
Thank you
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