Institution Exposures¶

Institution exposures are claims on banks, investment firms, and other regulated financial institutions.

Definition¶

Institution exposures include:

Risk Weights (SA)¶

External Credit Risk Assessment Approach (ECRA)¶

*UK deviation: CQS 2 receives 30% RW instead of standard Basel 50%

Unrated Institutions¶

CRR: Apply due diligence assessment Basel 3.1: Use Standardised Credit Risk Assessment Approach (SCRA)

SCRA (Basel 3.1)¶

# SCRA classification
if cet1_ratio > 0.14 and leverage_ratio > 0.05:
    scra_grade = "A"
    risk_weight = 0.40
elif cet1_ratio > 0.055 and leverage_ratio > 0.03:
    scra_grade = "B"
    risk_weight = 0.75
else:
    scra_grade = "C"
    risk_weight = 1.50

IRB Treatment¶

F-IRB Parameters¶

A-IRB Restrictions¶

Correlation¶

# Institution correlation (same as corporate)
R = 0.12 × (1 - exp(-50 × PD)) / (1 - exp(-50)) +
    0.24 × [1 - (1 - exp(-50 × PD)) / (1 - exp(-50))]

Short-Term Exposures¶

Exposures with original maturity ≤ 3 months may receive preferential treatment:

Eligibility: - Original maturity ≤ 3 months - Funded in domestic currency - Cleared through domestic payments system

Interbank Exposures¶

Due From Banks¶

Trade Finance¶

Covered Bonds¶

Covered bonds issued by institutions receive preferential treatment:

Eligibility criteria: - Issued by eligible credit institution - Subject to special public supervision - Backed by qualifying assets (mortgages, PSE exposures) - Overcollateralization requirements met

Central Counterparties (CCPs)¶

Qualifying CCPs (QCCPs)¶

Non-QCCPs¶

CRM for Institutions¶

Bank Guarantees¶

Exposures guaranteed by better-rated institutions:

if guarantee.type == "INSTITUTION" and guarantee.cqs < counterparty.cqs:
    # Substitution approach
    guaranteed_rw = institution_risk_weight(guarantee.cqs)

Bank Collateral¶

Bonds issued by institutions as collateral:

Calculation Examples¶

Example 1: Rated Bank - £25m placement with Deutsche Bank - Rating: A+ (CQS 2) - Maturity: 6 months

# CQS 2 institution under CRR
Risk_Weight = 30%  # UK deviation
EAD = £25,000,000
RWA = £25,000,000 × 30% = £7,500,000

Example 2: Unrated Bank (Basel 3.1) - £10m loan to regional bank - No external rating - SCRA assessment: CET1 = 16%, Leverage = 6%

# SCRA Grade A
Risk_Weight = 40%
RWA = £10,000,000 × 40% = £4,000,000

Example 3: Short-Term - £50m overnight placement - Counterparty: CQS 3 bank - Original maturity: 1 day

# Short-term preferential treatment
Risk_Weight = 20%  # vs. standard 50%
RWA = £50,000,000 × 20% = £10,000,000

Subordinated Debt¶

Exposures to subordinated debt of institutions:

Regulatory References¶

Next Steps¶

• Corporate Exposures
• Standardised Approach
• Credit Risk Mitigation