EBA · 2013_464 Final Q&A

Standardised Method

Regulation
Regulation (EU) No 575/2013 (CRR)
Article
384, para. 1
Topic
Credit risk
Submitted by
Industry association
Submitted
2013-10-31
Answered
2014-05-16
Answer provided by
ESAs (EBA, ESMA, EIOPA)
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Question

If the derivative exposure is guaranteed, can the weight be determined based on guarantor’s rating instead of counterparty’s rating, i.e. do we use the counterparty’s credit rating or the guarantor’s rating?

Background

Illustrative example: Credit institution ‘A’ trades with the fully owned subsidiary of credit institution ‘B’. The subsidiary does not have an external credit rating and its internal credit rating is lower than that of ‘B’. Credit institution ‘B’ provides guarantee to its subsidiary. If ‘A’ wants to hedge its exposure to the subsidiary of ‘B’, it should buy CDS protection on ‘B’ (since subsidiary is guaranteed by credit institution ‘B’). When ‘A’ calculates CVA capital charge for its exposure to the subsidiary of ‘B’ under the standardised approach, it should use the credit rating of ‘B’. Is it correct to determine the weight based on credit rating of ‘B’ rather than ‘B’’s subsidiary?

Answer

In accordance with Article 384 of Regulation (EU) No.575/2013 (CRR), if a credit assessment by a nominated ECAI for credit institution 'B''s subsidiary is not available, and if credit institution 'A' uses the Standardised Approach for calculating capital requirements for credit risk, it shall assign a weight of wi=1% to the credit institution 'B''s subsidiary, or, if credit institution 'A' uses Article 128 of the CRR to risk weight counterparty credit risk exposures to the credit institution 'B''s subsidiary, a weight of wi =3% shall be assigned. If a credit assessment by a nominated ECAI for credit institution 'B''s subsidiary is not available, and if credit institution 'A' uses the IRB Approach for calculating capital requirements for credit risk, it shall map the internal rating of credit institution 'B''s subsidiary to one of the external credit assessments, which shall be mapped to one of the six weights wi as set out in Table 1 of Article 384 of the CRR.

Original source: European Banking Authority, Q&A ID 2013_464

This Q&A is published by European Banking Authority and is non-binding. It does not constitute legal advice. Updated weekly from official ESA sources.

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