Basel
ii in the United States of America
From the
Basel ii
Compliance Professionals Association (BCPA),
the largest association of Basel ii Professionals in the
world
Final Rule, USA: Risk-Based Capital Standards
Advanced Capital Adequacy Framework —
Basel II
Rating
philosophy
A
bank’s internal risk rating policy for wholesale
exposures must describe the bank’s rating philosophy,
which is how the bank’s wholesale obligor rating
assignments are affected by the bank’s choice of the
range of economic, business, and industry conditions
that are considered in the obligor rating process.
The
philosophical basis of a bank’s rating system is
important because, when combined with the credit quality
of individual obligors, it will determine the frequency
of obligor rating changes in a changing economic
environment.
Rating
systems that rate obligors based on their ability to
perform over a wide range of economic, business, and
industry conditions, sometimes described as
“through-the-cycle” systems,
tend to have ratings that
migrate more slowly as conditions change.
Banks
that rate obligors based on a more narrow range of
likely expected conditions (primarily on recent
conditions), sometimes called “point-in-time” systems,
tend to have ratings that migrate more frequently.
Many
banks will rate obligors using an approach that
considers a combination of the current conditions and a
wider range of other likely conditions.
In any
case, the bank must specify the rating philosophy used
and establish a policy for the migration of obligors
from one rating grade to another in response to
economic cycles.
A bank
should understand the effects of ratings migration on
its risk-based capital requirements and ensure that
sufficient capital is maintained during all phases of
the economic cycle.
Rating
and segmentation reviews and updates
Each
wholesale obligor rating and (if applicable) wholesale
exposure loss severity rating must reflect current
information. A bank’s internal risk rating system for
wholesale exposures must provide for the review and
update (as appropriate) of each obligor rating and (if
applicable) loss severity rating whenever the bank
receives new material information, but no less
frequently than annually.
Under
the proposed rule, a bank’s retail exposure segmentation
system would provide for the review and update (as
appropriate) of assignments of retail exposures to
segments whenever the bank received new
material information.
The
proposed rule specified that the review would be
required no less frequently than quarterly.
One
commenter noted that quarterly reviews may not be
appropriate for high quality retail portfolios, such as
retail exposures associated with a bank’s wealth
management or private banking businesses.
The
commenter suggested that banks should have the
flexibility to review and update segmentation
assignments for such portfolios on a less frequent basis
appropriate to the credit quality of the portfolios.
The
agencies agree that it may be appropriate for a bank to
review and update segmentation assignments for certain
high-quality retail exposures on a less frequent basis
than quarterly, provided a bank is following sound risk
management practices.
Therefore, the final rule generally requires a quarterly
review and update, as appropriate, of retail exposure
segmentation assignments, allowing some flexibility to
accommodate sound internal risk management practices.
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