Foreign banks trading in the UK through permanent establishments: The approach in determining an adjustment to funding costs - STEP 2: Risk weighting the assets - the Basel II regulatory regime: Pillar 1 - use of external credit assessment institutions
Risk weights must be applied to exposures of all classes unless deducted from capital resources and must be based on the standardised credit risk exposure class to which the exposure is assigned and its credit rating. Credit quality may be determined by reference to the credit assessment given by eligible ECAIs. Dependent on the credit rating of the counterparty to which the bank is exposed, the PRA allocates a percentage risk weight.
For example, a credit risk exposure to a corporate counterparty would be risk weighted as follows:
Where the bank chooses not to use an ECAI or where no credit rating is available the PRA prescribes a standard risk weighting for the class of exposure.