CRD Standardised Approach

The Standardised Approach for Credit Risk (SA-CR) is the method prescribed in Art. 111–141 CRR for calculating risk-weighted assets (RWA) for credit risk. Institutions assign each exposure to a supervisory exposure class (e.g. sovereigns, institutions, corporates, retail) and determine the risk weight based on external credit ratings from recognised rating agencies (ECAI). The risk-weighted exposure amount equals the exposure value multiplied by the applicable risk weight. The SA-CR is the default method for all CRR institutions that do not use a supervisory-approved IRB approach.

Art. 112 CRR defines the following exposure classes for the Standardised Approach: central governments and central banks, regional governments and local authorities, public sector entities, multilateral development banks, international organisations, institutions, corporates, retail, exposures secured by real estate, defaulted exposures, high-risk items, covered bonds, securitisation positions, equity exposures and other items. CRR III adds new classes for specialised lending: project finance, object finance and commodities finance.

SA-CR risk weights range from 0% to 1,250%. Typical values: sovereigns rated credit quality step 1 receive 0%, institutions 20–50% depending on rating, corporates 20–150%, retail exposures a flat 75%, residential real estate 35%, equity 100–250%. CRR III introduces more granular weights: real estate exposures are differentiated by loan-to-value (LTV) ratio, specialised lending receives dedicated weight bands (e.g. project finance in operational phase 80%, construction phase 130%), and subordinated exposures increase to 150%.

CRR III introduces major changes to the SA-CR: First, new exposure classes for specialised lending (project, object, commodities finance). Second, increased risk sensitivity through LTV-dependent risk weights for real estate and more differentiated corporate weights. Third, a phased output floor rising from 50% (2025) to 72.5% (2030), requiring IRB institutions to benchmark capital against the SA-CR result. Fourth, revised credit conversion factors (CCF) for off-balance sheet exposures, with new tiers of 10% and 40%.

RWA calculation under the Standardised Approach follows three steps: First, determine the exposure value (Exposure at Default, EAD) — for on-balance sheet items the carrying amount net of provisions, for off-balance sheet items by applying credit conversion factors (CCF). Second, assign the exposure to an exposure class per Art. 112 CRR. Third, determine the risk weight based on external ratings or supervisory prescriptions. RWA equals EAD multiplied by risk weight. The minimum capital requirement is 8% of total RWA.

External ratings from ESMA-recognised External Credit Assessment Institutions (ECAI) are central to SA-CR risk weighting. Institutions may only use ratings from supervisory-approved agencies and must consistently apply the mapping to credit quality steps (CQS 1–6) in accordance with EBA guidelines. Where no external rating is available, flat risk weights apply. CRR III reduces mechanistic reliance on ratings and introduces rating-independent weighting methods for certain exposure classes, based on due diligence requirements.

The output floor limits the capital benefit of internal models (IRB) relative to the Standardised Approach. From 2025, IRB capital requirements must not fall below a specified percentage of the SA-CR result. The floor rises in steps: 50% from January 2025, 55% from 2026, 60% from 2027, 65% from 2028, 70% from 2029 and 72.5% from 2030. For pure SA-CR institutions nothing changes operationally. For IRB institutions the floor means higher capital requirements and greater dependence on the quality of the SA-CR calculation.

ADVISORI provides end-to-end SA-CR implementation support under CRR III: review of existing exposure class mapping and risk weighting, gap analysis against CRR III requirements (new exposure classes, LTV differentiation, CCF adjustments), implementation of updated RWA calculation processes, adaptation of regulatory reporting (COREP), output floor preparedness and capital planning calibration. Our consultants have extensive experience across institution types — from large banks to specialised lenders.

The CRR requires own funds coverage of 8% of risk-weighted assets for credit risk (Art. 92 CRR). Additional capital buffers apply: the capital conservation buffer (2.5%), the countercyclical buffer (0–2.5%) and, where applicable, systemic risk buffers. Own funds must comprise Common Equity Tier 1 (CET1), Additional Tier 1 (AT1) and Tier 2 (T2) capital. The total capital ratio — including buffers — typically ranges between 10.5% and 13% of RWA.

The Standardised Approach offers several advantages over the IRB approach: lower implementation effort without proprietary rating models, reduced ongoing validation costs, more transparent and comparable RWA calculation, no supervisory approval requirement, and faster adoption of regulatory changes. For smaller and mid-sized institutions the SA-CR is often the more cost-effective choice. With the rising output floor under CRR III, the capital advantage of the IRB approach narrows, making the SA-CR increasingly attractive for many institutions.