Central Government and Central Bank Exposures¶

Central government and central bank exposures are claims on governments, central banks, and certain public sector entities treated as sovereigns.

Definition¶

Sovereign exposures include:

Risk Weights (SA)¶

External Rating Approach¶

Preferential Treatment¶

Certain sovereigns receive preferential risk weights:

IRB Treatment¶

F-IRB Parameters¶

A-IRB Parameters¶

Correlation¶

Sovereign correlation uses the corporate formula:

R = 0.12 × (1 - exp(-50 × PD)) / (1 - exp(-50)) +
    0.24 × [1 - (1 - exp(-50 × PD)) / (1 - exp(-50))]

Domestic Sovereign¶

UK Domestic Currency Treatment (Art. 114(3))¶

Exposures to the UK central government and central bank denominated and funded in GBP receive a 0% risk weight, regardless of external credit rating or CQS.

This applies to: - Treasury bonds (Gilts) denominated in GBP - National Savings products - Loans to HM Treasury in GBP - Bank of England reserves in GBP

The override requires both: 1. Counterparty country_code = "GB" (UK sovereign or central bank) 2. Exposure currency = "GBP" (denominated in sterling)

Exposures to UK sovereign entities in foreign currencies (e.g. USD-denominated Gilts) fall back to the standard CQS-based risk weight table.

EU Domestic Currency Treatment (Art. 114(4))¶

Exposures to EU member state central governments and central banks denominated in that member state's domestic currency receive a 0% risk weight, regardless of external credit rating or CQS.

This applies to all 27 EU member states:

• Eurozone members (AT, BE, CY, DE, EE, ES, FI, FR, GR, HR, IE, IT, LT, LU, LV, MT, NL, PT, SI, SK): domestic currency is EUR
• Non-euro EU members: BG (BGN), CZ (CZK), DK (DKK), HU (HUF), PL (PLN), RO (RON), SE (SEK)

Each member state's domestic currency must match — e.g., a Polish sovereign exposure in EUR does not qualify (EUR is not Poland's domestic currency), but a Polish sovereign exposure in PLN does.

EU domestic sovereign exposures are also forced to the Standardised Approach (SA), even if the firm has IRB permissions for the CGCB exposure class. This ensures the regulatory 0% RW is applied rather than an internal model estimate.

Treatment¶

if counterparty.country_code == "GB" and exposure.currency == "GBP":
    risk_weight = 0.00  # Art. 114(3) UK domestic currency 0% RW
elif is_eu_member(counterparty.country_code) and exposure.currency == domestic_currency(counterparty.country_code):
    risk_weight = 0.00  # Art. 114(4) EU domestic currency 0% RW
    approach = "SA"     # Forced to standardised approach
else:
    risk_weight = cqs_lookup(counterparty.cqs)  # Standard CQS table

Foreign Sovereigns¶

G10 Sovereigns¶

Emerging Market Sovereigns¶

Central Bank Exposures¶

Treatment¶

Central bank exposures receive the same treatment as their sovereign:

Reserves Held¶

Reserves held with central banks:

if exposure.type == "CENTRAL_BANK_RESERVE":
    risk_weight = sovereign_risk_weight  # Same as sovereign

Multilateral Development Banks¶

Eligible MDBs (0% RW)¶

Other MDBs¶

Non-eligible MDBs treated as institutions:

if mdb in ELIGIBLE_MDB_LIST:
    risk_weight = 0.00
else:
    # Treat as institution
    risk_weight = institution_risk_weight(cqs)

CRM for Sovereign Exposures¶

Sovereign Guarantees¶

Exposures guaranteed by eligible sovereigns use substitution:

# Guaranteed portion at guarantor sovereign RW
if guarantee.type == "SOVEREIGN" and guarantee.cqs <= 3:
    guaranteed_rw = sovereign_risk_weight(guarantee.cqs)

Sovereign Collateral¶

Government bonds as collateral receive low haircuts:

Calculation Example¶

Exposure: - £100m UK Gilt holding - UK Government (CQS 1)

SA Calculation:

# Sovereign CQS 1 = 0% RW
Risk_Weight = 0%
EAD = £100,000,000
RWA = £100,000,000 × 0% = £0

Foreign Sovereign Example: - £50m German Bund - Germany (AAA, CQS 1)

Risk_Weight = 0%
RWA = £50,000,000 × 0% = £0

Lower-rated Sovereign: - £20m Brazil bonds - Brazil (BB-, CQS 4)

Risk_Weight = 100%
RWA = £20,000,000 × 100% = £20,000,000

Regulatory References¶

Next Steps¶

• Institution Exposures
• Standardised Approach
• IRB Approach