BIPRU 3.6 Use of rating agencies' credit assessments for the determination of risk weights under the standardised approach to credit risk
Where the FSA's recognition of an ECAI is not limited to its solicited credit assessments, a firm may use an unsolicited credit assessment of an eligible ECAI for the calculation of a firm's risk weighted exposure amounts.
[Note: BCD Article 83(2)]
The FSA's recognition of an ECAI may be limited to its solicited credit assessments. Where this is the case a firm should not use unsolicited assessments. The FSA may indicate that the unsolicited ratings of an eligible ECAI are not to be used for the purposes of BIPRU 3 if those assessments are considered to be inferior in quality to the general quality of solicited assessments or if it considers that the ECAI's strategy in relation to the issuing of unsolicited assessments is founded in the placing of undue pressure on the rated entity to pay for a rating.
Treatment
A firm may nominate one or more eligible ECAIs to be used for the determination of risk weights to be assigned to asset and off-balance sheet items.
[Note: BCD Annex VI Part 3 point 1]
A firm which decides to use the credit assessments produced by an eligible ECAI for a certain class of items must use those credit assessments consistently for all exposures belonging to that class.
[Note: BCD Annex VI Part 3 point 2]
A firm which decides to use the credit assessments produced by an eligible ECAI must use them in a continuous and consistent way over time.
[Note: BCD Annex VI Part 3 point 3]
If only one credit assessment is available from a nominated ECAI for a rated item, that credit assessment must be used to determine the risk weight for that item.
[Note: BCD Annex VI Part 3 point 5]
If two credit assessments are available from nominated ECAIs and the two correspond to different risk weights for a rated item, the higher risk weight must be applied.
[Note: BCD Annex VI Part 3 point 6]
If more than two credit assessments are available from nominated ECAIs for a rated item, the two assessments generating the two lowest risk weights must be referred to. If the two lowest risk weights are different, the higher risk weight must be assigned. If the two lowest risk weights are the same, that risk weight must be assigned.
[Note: BCD Annex VI Part 3 point 7]
- (1)
If a firm has decided to make use of the credit assessments of export credit agencies, when risk weighting exposures to central governments or central banks, if two or more credit assessments are available to a firm from export credit agencies or if credit assessments are available to a firm from both nominated ECAIs and export credit agencies, the firm must adopt the approach in this rule.
- (2)
If two credit assessments are available and correspond to different risk weights for a rated item, the higher risk weight must be applied.
- (3)
If more than two credit assessments are available for a rated item, the assessments generating the two lowest risk weights must be referred to:
- (a)
if the two lowest risk weights are the same, that risk weight must be applied; or
- (b)
if the two lowest risk weights are different, the higher of the two must be applied.
- (a)
- (4)
If a firm does not for the purposes of BIPRU 3 make any use of the consensus risk scores referred to in BIPRU 3.4.7 R (1) it may treat those scores as not being available to it for the purpose of this rule. Likewise, if a firm does not for the purposes of BIPRU 3 make any use of the credit assessments of a particular export credit agency as referred to in BIPRU 3.4.7 R (2) it may treat those assessments as not being available to it for the purpose of this rule.
Issuer and issue credit assessment
Where a credit assessment exists for a specific issuing program or facility to which the item constituting the exposure belongs, this credit assessment must be used to determine the risk weight to be assigned to that item.
[Note: BCD Annex VI Part 3 point 8]
Where no directly applicable credit assessment exists for a certain item, but a credit assessment exists for a specific issuing program or facility to which the item constituting the exposure does not belong or a general credit assessment exists for the issuer, then that credit assessment must be used if it produces a higher risk weight than would otherwise be the case or if it produces a lower risk weight and the exposure in question ranks pari passu or senior in all respects to the specific issuing program or facility or to senior unsecured exposures of that issuer as relevant.
[Note: BCD Annex VI Part 3 point 9]
BIPRU 3.6.12 R and BIPRU 3.6.13 R are not to prevent the application of BIPRU 3.4.107 R to BIPRU 3.4.110 R (Exposures in the form of covered bonds).
[Note:BCD Annex VI Part 3 point 10]
Long-term and short-term credit assessments
Short-term credit assessments may only be used for short-term asset and off-balance sheet items constituting exposures to institutions and corporates.
[Note: BCD Annex VI Part 3 point 12]
Any short-term credit assessment may only apply to the item the short-term credit assessment refers to, and it must not be used to derive risk weights for any other item.
[Note: BCD Annex VI Part 3 point 13]
Notwithstanding BIPRU 3.6.17 R, if a short-term rated facility is assigned a 150% risk weight, then all unrated unsecured exposures on that obligor whether short-term or long-term must also be assigned a 150% risk weight.
[Note: BCD Annex VI Part 3 point 14]
Notwithstanding BIPRU 3.6.17 R, if a short-term rated facility is assigned a 50% risk weight, no unrated short-term exposure may be assigned a risk weight lower than 100%.
[Note: BCD Annex VI Part 3 point 15]
Domestic and foreign currency items
A credit assessment that refers to an item denominated in the obligor's domestic currency cannot be used to derive a risk weight for another exposure on that same obligor that is denominated in a foreign currency.
[Note: BCD Annex VI Part 3 point 16]
Notwithstanding BIPRU 3.6.20 R, when an exposure arises through a firm's participation in a loan that has been extended by a multilateral development bank whose preferred creditor status is recognised in the market, the credit assessment on the obligors' domestic currency item may be used for risk weighting purposes.
[Note: BCD Annex VI Part 3 point 17]