Standardised Approach (Credit Risk)

The Standardised Approach is a method used by banks to calculate their credit risk exposure for regulatory capital requirements under the Basel III framework. This approach assigns fixed risk weights to different categories of assets based on the asset’s risk profile. These risk weights determine how much capital a bank must hold to cover potential losses. The Standardised Approach is simpler than the Internal Ratings-Based (IRB) approach, which allows banks to use their internal risk models.

Example

A bank using the Standardised Approach may apply a 50% risk weight to residential mortgages, meaning it must hold capital equal to 50% of the loan’s value to cover potential losses.