Among them, SMC is regulatory capital, RWA is risk-weighted asset, RW is risk weight, and EAD is exposure in case of default.
Under the standard method proposed by the New Basel Accord, the risk weights are given by the regulatory authorities according to the provisions of the New Basel Accord, which are divided into five grades: 0%, 20%, 50%, 100% and 150%. Under this method, the new Basel Accord basically follows the practice of the 1988 version of the Capital Accord, and the biggest improvement is to introduce external rating when determining the risk level of bank risk assets, so that the external credit rating results play an important role in determining the regulatory capital.
The most important improvement of the new agreement in improving the risk sensitivity of regulatory capital is not the reform and improvement of the external rating standard method introduced in 1988, but the internal rating method (including basic internal rating method and advanced internal rating method) is adopted to determine the regulatory capital requirements on the basis of the internal rating of banks. Under the internal rating method proposed by the new Basel Accord, the basic framework of credit risk supervision capital includes five aspects: risk exposure classification, risk factors, risk weight function, minimum requirements and supervision inspection.
Risk exposure classification refers to the classification of all credit assets and businesses (that is, credit risk exposure) of banks into five categories according to the standards and requirements of regulatory authorities: corporate assets, sovereign assets, bank assets, retail assets and equity assets, and each category of assets can be subdivided into more subcategories.
Risk factors mean that the credit risk level of each asset is determined by four risk factors: loan default rate (PD), default loss (LGD), maturity date and default risk exposure (EAD).
The risk weight function is a function given by the Basel Committee in the new agreement to calculate the risk weight of each risky asset. The independent variable of the function formula is the four (credit) risk elements of the above-mentioned risk assets, the dependent variable is the risk weight (RW) reflecting the credit risk level of the risk assets, and its product with the default risk exposure (EAD) is the risk-weighted assets (RWA) amount of the risk assets. 8% of risk-weighted assets (RWA) is the capital required for banks to invest in such risky assets under the new agreement, that is, the regulatory capital requirements for such assets. The risk weight function is determined according to the nature of different businesses of banks, so different risk exposure categories have different versions of the risk weight function. Determining the risk weight function is the most important and complicated task in the new Basel I. Taking the latest version of the risk weighting function of bank wholesale business (including the risk exposure to companies, banks and sovereignty) as an example, the complexity of this task can be fully proved from the complexity of the function itself and the revision of this version of the function. Because the Basel Committee put forward the original version of this function in the second draft of the new accord 200 1, the two most important revisions are the revision to reduce the loan risk weight of SMEs before the release of the third draft, and the content agreement to deduct the expected loss from the regulatory capital requirements in 1 in 2004.
Finally, for banks that adopt IRB, the new agreement also stipulates the minimum technical and institutional standards that these banks must meet when applying for higher credit risk and regulatory capital measurement methods, and the power of regulatory agencies to conduct regulatory inspections in this regard. Because the standard method does not use the internal rating data of banks, but gives different risk weights to different risk exposures according to the external rating standards recognized by the regulatory authorities, the internal risk management information of banks such as LGD and PD basically does not play a role in the measurement of regulatory capital.
Different from the standard method, the measurement of regulatory capital by basic internal rating method and advanced internal rating method is based on the internal rating information of banks. However, the new agreement requires the basic internal rating method and the advanced internal rating method to provide different internal rating information. The basic internal rating method only allows the internal rating of banks to provide default probability information, while the parameters of LGD, exposure at default and M are given by regulators according to the requirements of the new accord. According to the provisions of the new agreement on the basic internal rating method, LGD rated the unsecured senior creditor's rights of companies, banks and countries as 45%; Unsecured subordinated creditor's rights to companies, banks and countries: LGD = 75%; LGD with secured creditor's rights abides by a complex regulatory formula to reasonably reflect the reduction impact of risk mitigation technologies such as mortgage loans on LGD.
Under the advanced internal rating method, LGD is provided by banks, so banks need to estimate LGD (provided by internal rating system). However, banks must meet the relevant regulations and minimum requirements of the regulatory authorities. It is of great significance for the New Basel Accord to introduce LGD into the regulatory capital framework. Technically speaking, since LGD reflects the essence of credit risk from the aspect of loss severity, the introduction of LGD is more conducive to correctly reflecting the risk level of assets. In addition, LGD also reflects the role played by bank risk management measures. The risk mitigation technologies reflected by LGD include mortgage, guarantee, letter of credit, credit derivatives and credit insurance. Therefore, the application of LGD in the regulatory capital measurement framework not only makes the new regulatory capital measurement framework more accurately reflect the risks actually undertaken by banks (more risk-sensitive), but also recognizes and encourages the constantly developing and innovative bank risk mitigation technology from the perspective of supervision.