Basel II

Standardised Approach for credit risk: external rating

According to the Basel II Framework for the International Convergence of Capital Measurement and Capital Standards (Basel II), banks can use the credit assessments (ratings) of external rating agencies when determining the risk weights in the Standardised Approach (including securitisation positions) as long as the rating agencies are recognised by the national banking supervisors. The national supervisory authorities must assign the ratings of the recognised rating agencies to the risk weight categories (rating grades) in the Standardised Approach (“mapping process”). The criteria for recognising rating agencies, the usability of external ratings and the mapping process are described in paragraphs 91 to 108 of the Basel Framework.

At the EU level, the Basel recommendations for recognising external rating agencies and the usability of external ratings have been implemented in Articles 81 to 83 of the Banking Directive (2006/48/EC). In addition, on 20 January 2006, CEBS published its Guidelines on the recognition of External Credit Assessment Institutions (ECAIs) in order to achieve a maximum of consistency in the interpretation of the Directive in this regard. The Guidelines also lay down which standards are to be used to assess whether the recognition criteria are fulfilled.

In the case of rating agencies seeking recognition in several EU member states, a joint assessment process is carried out among the EU member states concerned. A central contact and coordinator (the “process facilitator”) is appointed within this informal process. The joint evaluation and coordination in the joint assessment of the application by all of the supervisory authorities involved is intended to ensure that a shared view is reached across member states while at the same time reducing the bureaucracy involved for the applicant. Three international rating agencies (Moody’s, Standard and Poor’s and Fitch) were already assessed in a trial run of the recognition process in 2006 (see CEBS press release of 4 August 2006; includes mapping tables). For the rating agency DBRS, it was possible to conclude this informal procedure in April 2007 (see CEBS press release from 25 April 2007 including mapping tables). It is referred to as a “trial run” as it was a purely informal process. The decision on the recognition of the rating agencies still lies with the relevant national supervisory authority. Moreover, the Banking Directive and the corresponding national transposition provisions (in Germany, the Solvency Regulation (Solvabilitätsverordnung)) did not enter into force until 1 January 2007 and could therefore not yet be applied with legal effect when the abovementioned first assessment process was carried out in 2006.

In Germany, section 41 of the Solvency Regulation states that a rating agency must be recognised by the supervisory authority before institutions can use credit ratings prepared by the agency when determining the risk weights of counterparty risk positions for the Credit Risk Standardised Approach. In this respect, it is necessary to make a distinction between the recognition of a rating agency and the usability of credit ratings as not all of the credit ratings created by a rating agency may be used unconditionally as a basis for calculating supervisory risk weights. Section 46 sentence 1 of the Solvency Regulation lays down which of an agency’s credit ratings may actually be used. Pursuant to section 46 sentences 2 and 3 of the Solvency Regulation, the use of ratings not commissioned by a borrower requires separate approval from BaFin.

The procedure for applications by rating agencies for risk weighting purposes, the recognition criteria and the assignment of credit assessment categories to credit rating grades (“mapping”) is laid down in sections 52 to 54 of the Solvency Regulation. The rating agency must file the application for recognition itself. The application must be accompanied by evidence that at least one institution intends to use the rating agency’s credit assessments for determining risk weights. Details regarding the application process can be found in a notice issued by BaFin on 26 November 2007. The Deutsche Bundesbank and the BaFin jointly examine whether the requirements have been met on the basis of the CEBS Guidelines. The external credit assessment institutions (ECAIs) that have already been recognised for prudential risk weighting purposes pursuant to Sections 52 and 53 of the Solvency Regulation are listed at the bottom of this page. The corresponding mapping tables have been published (in German only).

If an institution intends to use certain methods to determine the risk weight of a position within the framework of the Solvency Regulation, it must first provide BaFin, in writing, with the names of one or more ECAIs or export credit agencies recognised as eligible for risk-weighting purposes. The nomination modalities are laid down in section 41 and section 235 of the Solvency Regulation (see also the notice issued by BaFin on 20 February 2008 (available only in German)).