Institution Exposures¶
Institution exposures are claims on banks, investment firms, and other regulated financial institutions.
Definition¶
Institution exposures include:
| Entity Type | Description |
|---|---|
| Credit institutions | Banks, building societies |
| Investment firms | Broker-dealers, asset managers |
| Central counterparties (CCPs) | Clearing houses |
| Financial holding companies | Bank holding companies |
| Insurance companies | Subject to certain conditions |
Risk Weights (SA)¶
Institution risk weights range from 20% (CQS 1) to 150% (CQS 6). Under CRR Art. 120 Table 3, CQS 2 receives 50%. Basel 3.1 ECRA (PRA PS1/26 Art. 120 Table 3) reduces CQS 2 to 30%.
Under CRR, unrated institutions receive 100% (Art. 120(2)). Under Basel 3.1, unrated institutions use the Standardised Credit Risk Assessment Approach (SCRA) based on capital adequacy (Grade A: 40%, Grade A enhanced: 30%, Grade B: 75%, Grade C: 150%). Grade A enhanced requires CET1 ≥ 14% and leverage ratio ≥ 5%.
SCRA Disclosure Barring Ladder (Art. 121(1)(a), (1)(b))
SCRA classification depends on what the counterparty institution publicly discloses about its prudential requirements. Missing disclosures bar grades asymmetrically:
- Buffers undisclosed (requirements disclosed) → barred from Grade A, Grade B (75%) at best.
- Minimum requirements undisclosed → forced to Grade C (150%).
scra_grade is a firm-supplied input; disclosure evaluation sits upstream of the
calculator. See
B31 SA spec — Disclosure Barring Rules
for the full barring table, Art. 121(1A)/(1B) disclosure-scope definitions, and
the near-final → final drafting reversal.
SCRA Sovereign Floor (Art. 121(6))
Where an unrated institution exposure is denominated in a foreign currency (other
than the local currency of the institution's jurisdiction of incorporation), its
risk weight cannot fall below the home sovereign's RW: RW = max(SCRA_grade_RW,
sovereign_RW). Self-liquidating trade-related contingent items arising from the
movement of goods with original maturity < 1 year are carved out and retain the
underlying SCRA grade weight. See
B31 SA Risk Weights — Art. 121(6).
ECRA Due Diligence CQS Step-Up (Art. 120(4)) — Basel 3.1 only
Where a rated institution exposure is risk-weighted from Table 3 (or Table 4 / Table 4A
for short-term exposures), Basel 3.1 Art. 120(4) requires firms to conduct due diligence
on the ECAI rating. If DD reveals higher risk than the assigned CQS implies, the firm
must assign at least one CQS step higher. Currently routed through the Art. 110A
due_diligence_override_rw input (no dedicated Art. 120(4) branch in the calculator).
Parallels Art. 122(4) for rated corporates and Art. 129(4A) for covered bonds; no CRR
equivalent. See
B31 SA Risk Weights — Art. 120(4)
for the full trigger/effect table.
Details: See Key Differences — Institution Exposures for the complete ECRA/SCRA comparison tables.
IRB Treatment¶
F-IRB uses supervisory LGD (45% senior, 75% subordinated) with PD floors of 0.03% (CRR) / 0.05% (Basel 3.1). Institution correlation uses the corporate formula.
Basel 3.1
A-IRB is no longer permitted for institution exposures under Basel 3.1. Only SA or F-IRB may be used.
Details: See IRB Approach for the full formula and parameter details.
Short-Term Exposures¶
Table 4 — General Short-Term Preferential (Art. 120(2))¶
Rated institution exposures with original maturity ≤ 3 months receive preferential treatment under Table 4.
| CQS | Standard RW (>3m) | Table 4 RW (≤3m) |
|---|---|---|
| CQS 1 | 20% | 20% |
| CQS 2 | 30% | 20% |
| CQS 3 | 50% | 20% |
| CQS 4-5 | 100% | 50% |
| CQS 6 | 150% | 150% |
Art. 120(2A) Trade Finance ≤ 6m Extension — Basel 3.1 only
Trade-finance exposures arising from the movement of goods qualify for Table 4
weights when original maturity ≤ 6 months (not the general 3-month window).
Both limbs must hold: is_short_term_trade_lc = True and original_maturity_years ≤ 0.5.
A 5-month documentary credit to a CQS 3 rated bank therefore receives Table 4's 20%
rather than Table 3's 50%.
This is the rated counterpart of the SCRA Art. 121(4) carve-out below; both were introduced in Basel 3.1 to align with BCBS CRE20.20. No CRR analogue — CRR Art. 120(2) has no trade-goods extension, so a 5-month trade-finance exposure to a rated CRR bank reverts to Table 3's long-term weight. See B31 SA Risk Weights — Art. 120(2A) for worked examples, interaction with Art. 120(2B) Table 4A, and the side-by-side comparison with Art. 121(4).
Table 4A — Short-Term ECAI Assessment (Art. 120(2B))¶
Where an institution has a specific short-term credit assessment from a nominated ECAI (as opposed to a long-term rating applied to a short-term exposure), Table 4A applies:
| Short-Term CQS | Risk Weight |
|---|---|
| CQS 1 | 20% |
| CQS 2 | 50% |
| CQS 3 | 100% |
| Others | 150% |
How to attach a Table 4A short-term ECAI assessment
Short-term ECAI assessments are issue-specific. Add a row to the ratings
table with is_short_term=True, scope_type='facility' (or 'loan' /
'contingent'), and scope_id pointing at the target exposure. The
HierarchyResolver overrides the counterparty long-term CQS for that
exposure and the SA engine routes via Table 4A — see the
B31 SA Risk Weights spec.
Art. 120(3) — Interaction Rules¶
The interaction between Table 4 and Table 4A is governed by Art. 120(3):
- (a) No short-term assessment → Table 4 applies
- (b) Short-term assessment yields more favourable or equal RW → Table 4A for that exposure only; other short-term exposures still use Table 4
- (c) Short-term assessment yields less favourable RW → Table 4 preferential treatment withdrawn; all unrated short-term claims against that obligor receive the Table 4A weight
Implicit Government Support Higher-of Rule (Art. 138(1)(g), Art. 139(6))¶
Basel 3.1 introduces two new provisions governing how ECAI ratings that incorporate implicit government support may be used to risk-weight institution exposures. Both apply only where the obligor is an institution and only on the ECRA (rated) path:
- Art. 138(1)(g) prohibits using a credit assessment that incorporates assumptions of implicit government support, unless the rated institution is owned by or set up and sponsored by central, regional, or local government (the government-owned / government-sponsored exemption).
- Art. 139(6) is a residual "higher-of" floor: where no "clean" issue-specific rating exists but an implicit-support issue-specific rating does, the firm must assign the higher of (i) the baseline RW derived from Art. 138 with implicit- support assessments suppressed, and (ii) the RW from the issue-specific rating disregarding Art. 138(1)(g).
Not Yet Implemented — Use Art. 110A Override as Workaround
The calculator does not distinguish issue-specific from general-issuer ratings and has no flag for implicit-support assumption — so the Art. 139(6) higher-of comparison cannot be computed automatically. Firms with material rated-institution exposures whose ratings embed implicit support should either:
- Pre-adjust
external_cqsoffline to reflect the Art. 139(6) higher-of result before loading, or - Set
due_diligence_override_rwto the required floor via the framework-wide Art. 110A pathway (see Art. 110A discussion).
Firms must also independently determine whether the rated institution falls within the Art. 138(1)(g) exemption (government-owned / government-sponsored) — this is a firm governance question, not a calculator input. See B31 SA Risk Weights — Art. 138(1)(g), Art. 139(6) for the full trigger, worked example, exemption scope, and distinction from the Art. 121(6) SCRA sovereign floor.
No CRR equivalent — CRR Art. 138 has only sub-points (a)–(f), and CRR Art. 139 has only paragraphs (1)–(4). CRR firms apply implicit-support ratings directly.
CRR Art. 119(2)/(3) National-Currency Preferential — Removed under Basel 3.1
Under CRR, an institution exposure of residual maturity ≤ 3 months denominated and
funded in the borrower's national currency received a risk weight "one category
less favourable than the preferential risk weight, as described in Article 114(4) to
(7), assigned to exposures to the central government in which the institution is
incorporated" (Art. 119(2)), floored at 20% by Art. 119(3). PS1/26 Appendix 1 p. 40
marks Art. 119(2), (3), and (4) all as [Note: Provision left blank] — the
national-currency short-term preferential path is not retained in Basel 3.1.
Under Basel 3.1, all short-term institution exposures flow through Table 4 (Art. 120(2), rated — 20% at CQS 1–3) or Art. 121(3) (unrated, 20% at ≤ 3 months). UK-domestic sterling-funded exposures are neutral; cross-border exposures to institutions incorporated in jurisdictions benefiting from Art. 114(6)/(7) preferential sovereign treatment lose the national-currency override and take the full Art. 120/121 grade. See CRR SA spec — Art. 119(2), 119(3) for the removed mechanism and worked examples.
Interbank Exposures¶
Due From Banks¶
| Exposure Type | Treatment |
|---|---|
| Nostro balances | Standard institution RW |
| Interbank loans | Standard institution RW |
| Money market placements | May qualify for short-term |
| Repo/reverse repo | CRM treatment may apply |
Trade Finance¶
| Item | CCF | Risk Weight |
|---|---|---|
| Documentary credits | 20% | Institution RW |
| Standby LCs | 50-100% | Institution RW |
| Guarantees | 100% | Institution RW |
Covered Bonds¶
Covered bonds issued by institutions receive preferential treatment under Art. 129. Rated bonds range from 10% (CQS 1) to 100% (CQS 6) per Table 6A/Table 7. Unrated bonds derive their RW from the issuing institution's senior unsecured RW via Art. 129(5), producing values from 10% to 100%. PRA PS1/26 retains the same rated table — the BCBS CRE20 reductions (CQS 2→15%, CQS 4–6→50%) were not adopted.
Details: See Key Differences — Covered Bonds for the full CQS table and CRR vs Basel 3.1 comparison.
Art. 129(4A) Due Diligence CQS Step-Up — Basel 3.1 only
Where a rated covered bond is risk-weighted from Table 7, Basel 3.1 Art. 129(4A) requires
firms to conduct due diligence on the ECAI assessment. If DD reveals higher risk than the
assigned CQS implies, the firm must assign at least one CQS step higher than the
ECAI-implied weight (e.g. CQS 1 → CQS 2 = 10% → 20%, CQS 3 → CQS 4 = 20% → 50%,
CQS 5 → CQS 6 = 50% → 100%). Note that CQS 2 → CQS 3 and CQS 4 → CQS 5 transitions
produce no numerical change (Table 7 assigns identical weights to those adjacent steps);
the reassignment is still mandatory for any downstream CQS-keyed process. Currently
routed through the Art. 110A due_diligence_override_rw input (no dedicated Art. 129(4A)
branch in the calculator). Parallels Art. 120(4) for rated institutions and Art. 122(4)
for rated corporates; no CRR equivalent. See
B31 SA Risk Weights — Art. 129(4A)
for the full trigger/effect table.
Central Counterparties (CCPs)¶
Qualifying CCPs (QCCPs)¶
| Exposure Type | Risk Weight |
|---|---|
| Trade exposures | 2% |
| Default fund contributions | Risk-sensitive calculation |
Non-QCCPs¶
| Exposure Type | Treatment |
|---|---|
| Trade exposures | Bilateral institution RW |
| Default fund contributions | 1250% (or deduction) |
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:
| Collateral Rating | Haircut (1-5yr) |
|---|---|
| CQS 1-2 | 4% |
| CQS 3 | 6% |
| CQS 4+ | Not eligible |
Calculation Examples¶
Example 1: Rated Bank - £25m placement with Deutsche Bank - Rating: A+ (CQS 2) - Maturity: 6 months
# CQS 2 institution under CRR (Art. 120 Table 3)
Risk_Weight = 50%
EAD = £25,000,000
RWA = £25,000,000 × 50% = £12,500,000
# Under Basel 3.1 ECRA: 30% → RWA = £7,500,000
Example 2: Unrated Bank (Basel 3.1) - £10m loan to regional bank - No external rating - SCRA assessment: CET1 = 16%, Leverage = 6%
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:
| Instrument Type | CRR | Basel 3.1 |
|---|---|---|
| Tier 2 instruments | Institution RW + premium | 150% |
| AT1 instruments | Institution RW + premium | 150% |
| Equity-like | 150% | 250% |
Regulatory References¶
| Topic | CRR Article | BCBS CRE |
|---|---|---|
| Institution definition | Art. 119 | CRE20.15-20 |
| Risk weights | Art. 119-121 | CRE20.21-25 |
| Short-term (general, rated) | Art. 120(2) Table 4 | CRE20.22 |
| Short-term (unrated) | Art. 121(3) | CRE20.23 |
| Short-term (national-currency; CRR only) | Art. 119(2), 119(3) — blanked in PS1/26 | — |
| Covered bonds | Art. 129 | CRE20.27-30 |
| CCPs | Art. 300-311 | CRE54 |