Basel II and the Capital Requirements Directive: Updates

Revisions to the Standardised Approach for credit risk

According to the Basel Committee on Banking Supervision, Basel 2 is premised on a three level approach which permits banks to select from the following models, namely: the basic standardized model, the IRB foundation approach and the advanced ratings approach. According to the Consultative Document on Standard Approach to Credit Risk, capital requirements under the standardized approach are considered to be more synchronised and in harmony with the principal elements of banking risk – owing to the introduction of more differentiated risk weights and a broader recognition of techniques which are applied in mitigating risk whilst such techniques attempt to avoid undue complexity. Further, it is highlighted that as a result, capital ratios generated through the standardized approach, should adapt more to present and actual risks encountered by banks, than was the case previously. See: https://www.bis.org/publ/bcbsca04 See the revised version of the above mentioned resource, BCBS "Standards Revisions to the Standardised Approach for Credit Risk" December 2015