European Commission proposals published in October 2021 have significant implications for credit risk and the “aggregate output floor”. This has been a contentious area since the Basel guidelines were updated in 2017, with market participants warning that the higher risk weights for high quality unrated corporates – which crucially includes funds – will lead to a dramatic increase in bank capital requirements and a reduction in lending.
Under the pending Basel rules, high quality credits with no external rating will be assigned a risk weight of 100% – a significant jump from the typical range of PD/LGD model-based estimates previously. Currently, the vast majority of corporates along with nearly all of the tens of thousands of high quality funds do not have an external rating; in part due to the cost of retaining a traditional credit rating agency (“CRA”) rating.
Figure 1 shows the proportion of 26,000 EU Corporates and Funds that have a rating from global banks1 but no rating from any of the three major CRAs [please continue below to access full report].
1 Provided by 11 global banks with significant exposure to EU entities (defined as 700 and more entities). The universe breaks down to 34% traditional Corporates and 66% Funds.
In the current low yield environment, many Sovereign bonds issued by different countries are priced at similar levels. However, this Read more
Credit Benchmark is a market-led response to three of the most critical issues facing credit risk professionals: 1) The need to Read more
This paper examines the use cases for Credit Benchmark’s Consensus Probabilities of Default (Consensus PDs), in the context of more Read more
The Basel Committee on Banking Supervision recently published wide-reaching proposals for reducing variation in Credit Risk Weighted Assets, with a Read more
