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Credit risk

In accordance with the provisions of the Solvency Regulation (Solvabilitätsverordnung), two different approaches are used to quantify credit and counterparty credit risk, the Credit Risk Standardised Approach (CRSA) and the Internal Ratings-Based Approach (IRBA). Given the importance of credit risk mitigation techniques and netting agreements, the Solvency Regulation contains special rules for them. The same applies to rules for capturing risks arising from securitisations.

In order to calculate the credit equivalent amounts of risk exposures in derivatives, the Solvency Regulation provides for four procedures: the more simply structured original maturity method and marking-to-market method as well as the more complex approaches of the Standardised Method (SM) and the Internal Model Method (IMM). The SM can also be described as a standardised IMM which recognises certain core elements of the IMM and thus reflects credit risk considerably more precisely than the simpler procedures, but is less complicated to implement. With the IMM, credit equivalent amounts are calculated using an internal risk model that assesses the distribution of future positive market values of derivatives based on modelled market price movements. Since institutions have considerable discretion when using the IMM, this method, unlike the other aforementioned procedures, may only be used upon approval by supervisors.

Moreover, trading book institutions have to recognise the settlement risk from trading book positions when calculating the total capital charges for counterparty credit risk. Since here, unlike in the case of counterparty credit risk exposures, the focus is not on the risk of a counterparty defaulting but on technical risks, the total capital charge for such settlement risks is dependent on how long the settlement is delayed and on the amount of the difference between the settlement price and the underlying instruments' current market price in favour of the institution.

Additional information

Capital Requirements Regulation

EUR-Lex: European Union law

The CRR chiefly contains the quantitative requirements for banks, such as the rules on capital adequacy, on large exposure limits and on liquidity levels.

www.eur-lex.europa.eu