Finally, banks that do not meet the requirements for the estimation of PD under the corporate foundation approach for their specialized lending assets are required to map their internal risk grades into five supervisory categories. Each category has a specific risk weight. This version is termed the “supervisory slotting criteria approach”.
The supervisory slotting criteria approach (SSCA) is a qualitative method. It is a simplified rating method. Banks must assign credit to one of the following levels: strong, good, satisfactory, weak and default. The supervisory authority provides a scheme through which banks can analyze risk factors of the project, and then classify exposures into 5 levels (a specific risk weight is associated to each level). Risk weights for unexpected losses that are associated with each supervisory category are described in table 1. Each supervisory category broadly corresponds to a range of external credit assessments, as outlined in table 2.
At national level, supervisors may allow banks to assign preferential risk weights of 50% to “strong” exposures, and 70% to “good” exposures, when they have a remaining maturity of less than 2.5 years or the supervisor determines that banks’ underwriting and other risk characteristics are substantially stronger than specified in the slotting criteria for the relevant supervisory risk category.
For project finance exposures subject to the supervisory slotting criteria, the expected losses amount are
determined by multiplying 8%, the risk-weighted assets (using the appropriate risk weights), and the EAD. Risk weights for project finance are outlined in table 3. Banks must assign exposures to their internal rating grades based on their own criteria, systems and processes, subject to compliance with minimum requirements. Banks must then map the internal rating grades into five supervisory rating categories. In other words, the outcome of the slotting approach (expected loss) is mapped into a slotting category. The general assessment factors and characteristics exhibited by exposures in every supervisory category are provided by the Basle Committee on Banking Supervision (2006).
The Committee recognizes that the criteria that banks use to assign exposures to internal grades will not perfectly align with criteria that define supervisory categories. However, banks must demonstrate that their mapping process has resulted in an alignment of grades consistent with the characteristics of supervisory categories. Banks should take special care to ensure that any overrides of their internal criteria do not render the mapping process ineffective.
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