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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:

Entity Type Examples
Central governments UK HM Treasury, US Treasury
Central banks (central_bank) Bank of England, Federal Reserve
The ECB (central_bank_ecb) European Central Bank — unconditional 0%, Art. 114(3)
Multilateral development banks (eligible) IMF, World Bank, EIB
International organisations BIS, EU institutions
Regional governments (treated as sovereign) Devolved UK administrations

Risk Weights (SA)

Sovereign risk weights range from 0% (CQS 1) to 150% (CQS 6), with 100% for unrated. UK Government exposures in GBP always receive 0%.

Details: See SA Risk Weights for the complete risk weight tables by CQS.

IRB Treatment

Sovereign exposures use the corporate correlation formula. F-IRB uses supervisory LGD (45% senior); A-IRB uses bank estimates.

Details: See IRB Approach for the full formula, correlation, and maturity adjustment details. See Key Differences for Basel 3.1 restrictions (sovereigns are mandatorily SA).

Domestic Sovereign

UK Domestic Currency Treatment (Art. 114(4))

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.

ECB Treatment (Art. 114(3))

Exposures to the European Central Bank receive a 0% risk weight unconditionally, per Art. 114(3). This provision is identical in both CRR and PRA PS1/26, so the treatment is not regime-gated: it applies no currency test and no rating test, and it overrides the Art. 114(2) Table 1 CQS ladder.

Input convention — tag the ECB with entity_type = "central_bank_ecb"

The ECB is supranational, so it cannot be identified from country_code (it has no ISO entry, and using a member state's code would wrongly pull it into the Art. 114(7) EU-domestic-currency branch), and a plain central_bank cannot be told apart from the Bank of England or the Federal Reserve. Set entity_type = "central_bank_ecb" on the counterparty row — the same convention as mdb_named for Art. 117(2) named MDBs. Any other central bank keeps entity_type = "central_bank".

Do not confuse Art. 114(3) with Art. 114(4), which gives 0% to the UK central government and the Bank of England denominated and funded in sterling — that branch is currency-conditional and does not reach a EUR-denominated ECB exposure.

EU Domestic Currency Treatment (Art. 114(7))

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.

Regulatory Basis — Third-Country Reciprocity

In the UK-onshored CRR, Art. 114(4) was narrowed from the original EU CRR (which covered all member states) to apply only to the UK central government and Bank of England in sterling. Post-Brexit, the 0% treatment for EU member state domestic-currency sovereign exposures is provided by Art. 114(7) — the third-country reciprocity provision, which allows UK firms to apply 0% where the third country's supervisory regime is deemed equivalent. PRA PS1/26 Art. 114(7) is not re-enacted in the PRA Rulebook but is preserved by cross-reference to CRR Art. 114(7) via PS1/26 Art. 114(1)(b).

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

The ladder below shows the precedence the engine actually applies. Note that the Art. 114(3) ECB branch comes first and is unconditional — it is not a domestic-currency treatment, so it does not belong under this heading, but it outranks everything here and is shown for precedence. See European Central Bank above.

if counterparty.entity_type == "central_bank_ecb":
    risk_weight = 0.00  # Art. 114(3) ECB — unconditional, both regimes, no currency test
elif counterparty.country_code == "GB" and exposure.currency == "GBP":
    risk_weight = 0.00  # Art. 114(4) 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(7) EU domestic currency 0% RW
    approach = "SA"     # Forced to standardised approach
elif counterparty.cqs is None and counterparty.sovereign_cqs is not None and is_basel_3_1:
    # PS1/26 Art. 114(2A): an unrated central bank takes its government's CQS.
    # Basel 3.1 only — CRR Art. 114 has no paragraph 2A.
    risk_weight = cqs_lookup(counterparty.sovereign_cqs)
else:
    risk_weight = cqs_lookup(counterparty.cqs)  # Standard CQS table; 100% when unrated

Foreign Sovereigns

G10 Sovereigns

Country Typical Rating Typical RW
United States AA+ 0-20%
Germany AAA 0%
France AA 0-20%
Japan A+ 20%

Emerging Market Sovereigns

Rating Category Examples Typical RW
Investment Grade China, India 20-100%
Non-Investment Grade Various 100-150%
High Risk Distressed 150%

Central Bank Exposures

Treatment

Central bank exposures receive the same treatment as their sovereign:

Central Bank Sovereign Link Risk Weight Basis
Bank of England UK Government 0% Art. 114(4) — domestic currency
European Central Bank N/A 0% Art. 114(3) — unconditional
Federal Reserve US Government 0-20% Art. 114(2) — sovereign CQS

Basel 3.1 — Unrated Central Banks (Art. 114(2A))

PRA PS1/26 introduces Art. 114(2A): where a central bank has no ECAI rating but its central government does, the central bank exposure shall be treated under Art. 114(2) using the central government's credit assessment. CRR has no equivalent paragraph — its Art. 114 runs 1, 2, 3, 4 and 7 — so the read-across is gated to Basel 3.1 by the central_bank_uses_sovereign_cqs pack Feature and an unrated central bank stays at 100% under CRR.

Input requirement: supply the government's credit quality step as sovereign_cqs on the central bank's counterparty row. Precedence is: the central bank's own cqs where it has one (Art. 114(2A) applies only where an assessment "is not available"), then sovereign_cqs, then the Art. 114(1) 100% fallback if neither is present — nothing is inferred when both are absent.

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)

Institution Abbreviation
International Bank for Reconstruction and Development IBRD
International Finance Corporation IFC
Inter-American Development Bank IADB
Asian Development Bank ADB
African Development Bank AfDB
European Bank for Reconstruction and Development EBRD
European Investment Bank EIB
European Investment Fund EIF
Nordic Investment Bank NIB
Council of Europe Development Bank CEB
Islamic Development Bank IsDB
Asian Infrastructure Investment Bank AIIB

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 (0.5%–4% for CQS 1 depending on residual maturity).

Details: See Credit Risk Mitigation for the complete haircut tables.

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

Topic CRR Article BCBS CRE
Sovereign definition Art. 114 CRE20.7-10
Risk weights (ECAI) Art. 114(2) CRE20.11
ECB 0% RW Art. 114(3) —
UK domestic currency 0% RW Art. 114(4) CRE20.9
Third-country domestic currency Art. 114(7) CRE20.9
Central bank = sovereign Art. 114; PS1/26 Art. 114(2A) CRE20.8
MDB treatment Art. 117 CRE20.12-14

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