Sector Report RAS - Overview of risk weights under Basel II, Basel III finalized, CRR and Solvency II

Risk weight (Basel II and CRR) Under Basel II and its European equivalent, the Capital Requirements Regulation (CRR), banks are required to assign a risk weight to their exposure to assets (both on and off balance sheet) in order to cover credit-default risk. The quantity of the risk weights mainly depends on the type of issuer; the issuer’s rating and credit-risk mitigations, if applicable. Liquidity coverage ratio (Basel III and CRR) In the context of the regulatory reform that arose from the financial crisis 2007/08, a new liquidity measure was implemented in the regulatory frameworks (Basel III and CRR): the liquidity coverage ratio (LCR). The LCR is equal to the ratio of a bank’s liquid assets to its net liquidity outflows over a 30-calendar-day stress period, expressed as a percentage. The LCR must be at least 100% as of 2018. Stress factors(Solvency II) On 1 January 2016, the new regulatory regime for insurance companies (Solvency II) became mandatory for insurers based in the European Union. Under Solvency II, every asset must be assigned to various market risk categories. The relevant market risk categories for exposures to banks, covered bonds, corporates and insurers are the spread risk, the concentration risk, the interest rate risk and the currency risk, if applicable. Basel III finalized In December 2017, the planned post-crisis reforms to the Basel II framework (which resulted in Basel III finalized) were finalized. The new framework should become effective on 1 January 2023. However, the new framework has to be adopted into national laws. In the EU, the first step is to amend the European frameworks (CRD and CRR), which will then have to be adopted into the respective laws of the member state.

Most Viewed See latest

This publication is being distributed by Tellimer solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not con...

Full Tellimer disclaimers