2.1 The Standardization Approach
In the eyes of the BCBS, the standardized approach is meant for those banks that are not sufficiently sophisticated to use the internal-rating based approaches.
What does “sophisticated” means?
It simply means that the STA approach is generally used by medium-small banks, which do not have the opportunity of investing (too much) money in research, in order to develop their own models, or in buying expensive industry solutions, typically sold by international consulting companies or larger banks.
As we will see in the second lesson of this week, banks aiming at using internal-rating based approaches have to meet some minimum requirements. If they don’t, they are supposed to use the standardized approach. This is not the case of US banks, where the standardized approach is not completely applicable, because of a Fed decision (in the USA, the Basel II accord was initially only applicable to large banks, which were completely able to develop internal-rating based methods; the other banks were allowed to use a slightly modified version of Basel I; however, since this is an international course, we do not enter into country-specific details).
All in all, the standardized approach requires banks to use some simple (and boring) formulas to determine the RWA and other related quantities.
The RWA, or risk-weighted assets, are the set of a bank’s assets (or off-balance sheet exposures), which are weighted according to some risk coefficients. In the STA, these coefficients are provided by the regulator.
In the standardized approach, banks make a large use of external credit ratings. You probably already have an idea about credit ratings (you know, those AAA, BB+, etc.). In lecture 4 we will discuss them in more detail.
The Standardized Approach
Sorry but there don't seem to be any downloads..
Subtitles (captions) in other languages than provided can be viewed at YouTube. Select your language in the CC-button of YouTube.
Introduction to Credit Risk Management by TU Delft OpenCourseWare is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.
Based on a work at https://ocw.tudelft.nl/courses/introduction-credit-risk-management/.