Basel’s Revision Of The Standardized Approach To Credit Risk: One Step Closer To Squaring The Circle?
We believe the Basel Committee on Banking Supervision’s (BCBS) latest proposal to revise the standardized approach (SA) for assessing banks’ credit risk is an improvement on the initial version. In our opinion, these revisions, which the BCBS released for comments in December 2015, will better address the conundrum of risk-sensitivity and simplicity in standardized capital requirements. We also note some improvements in the granularity of capital requirements compared with the existing approach, although we believe it could still benefit from a few additional enhancements. The overall impact on banks’ creditworthiness will in our view be limited; but it will also depend on other consultations currently under way, such as the proposed introduction of standardized floors for banks using internal models. A very strict calibration of these floors could de-emphasize internal models in favor of standardized approaches