The standardised approach: corporates, banks and sovereigns · RiskAtoms Academy

By the end you will be able to

1Assign standardised risk weights to sovereigns, banks and corporates from their external ratings, and grade unrated banks under the SCRA.
2Explain the due diligence requirement and why it can raise a risk weight but never lower it.
3Treat unrated corporates and SMEs (100%, 85%, and 65% where ratings are not used), and say where national discretion enters.
4Compute RiskAtoms Bank plc's corporate RWA under the standardised approach, line by line.

Why it matters

Lend £100m to a AA-rated company and the standardised rules count £20m of risk-weighted assets. Lend it to a company rated B and they count £150m. Lend it to a company with no rating at all and they count £100m, whether it is a sound engineering firm or a struggling one. RiskAtoms Bank plc runs its corporates on internal models, at £8,934.7m of RWA. Under the standardised approach the same loans count £13,412.2m, and from 2027 that second figure matters, because the output floor is built from it.

Core explanation

A rating, a table, a weight

How the standardised approach works

Under the standardised approach (SA) each exposure gets a risk weight from a table, and RWA are the weight times the exposure at default. The bank first places the exposure in a class (sovereign, bank, corporate, retail, real estate and so on), then reads the weight from that class's table, usually by external rating. Exposures are weighted net of specific provisions (CRE20.1). L3.3.05: External ratings in practice promised this: agency ratings still set capital, with due diligence on top. L4.1.04: Risk-weighted assets showed the totals; this lesson and the next two show where they come from.

Illustrative dataRiskAtoms Bank plc's capital book

The same made-up UK bank as Level 3: £67bn of assets and £4bn of equity at 31 December 2025, in £ millions. Module 4.1 adds its regulatory layer: own funds, deductions, risk-weighted assets by risk type, buffers, the leverage exposure and MREL, computed from the Level 3 credit, trading, derivatives and operational risk books. Every figure is illustrative, not any bank's data.

Pro forma. The book applies Basel 3.1, the 2017 finalisation of Basel III, to the 31 December 2025 balance sheet. On that date the bank still reported under the old UK CRR. The UK applies Basel 3.1 from 1 January 2027, and the internal model approach for market risk from 1 January 2028 (PRA PS1/26, paras 1.23 and 1.24). So the book shows the bank as it would look under the new rules.

Credit RWA in Module 4.2. Corporates on foundation IRB £8,934.7m (standardised £13,412.2m), mortgages on retail IRB £3,526.3m (standardised £8,949.6m), and the portfolios that stay on the standardised approach £5,277.0m. With everything standardised, credit RWA would be £27,638.9m: the credit part of the standardised total that the output floor works from.

Sovereigns

Claims on governments and central banks follow the government's rating (CRE20.7, Table 1). At national discretion a lower weight may apply to a bank's claims on its own sovereign in that sovereign's currency, funded in that currency (CRE20.8). Some institutions may weigh 0%: the BIS, the IMF, the ECB and the EU among them (CRE20.10), and multilateral development banks that meet strict criteria (CRE20.14).

Rating	AAA to AA−	A+ to A−	BBB+ to BBB−	BB+ to B−	Below B−	Unrated
Sovereign (CRE20.7)	0%	20%	50%	100%	150%	100%

The bank holds £5,900m of reserves at the Bank of England and £6,901.2m of gilts in its banking book. Both weigh 0%, so the largest assets on its balance sheet after loans add nothing to RWA.

Banks

Where a jurisdiction allows ratings, rated banks use the external credit risk assessment approach (ECRA, CRE20.18, Table 6). The rating may not include assumed government support. Claims with an original maturity of three months or less get a lower short-term weight (CRE20.19). Unrated banks, and all banks where ratings are not allowed, use the standardised credit risk assessment approach (SCRA): the lender grades the bank itself.

Grade A: adequate capacity to meet its commitments through the cycle, and it meets or exceeds its published minimum requirements and buffers (CRE20.22–20.23).
Grade B: substantial credit risk; it meets its minimum requirements but not necessarily its buffers (CRE20.25–20.26).
Grade C: material default risk, or it fails a grade B minimum, or its auditor has raised a going-concern doubt in the past 12 months (CRE20.28–20.30).

Banks	AAA to AA−	A+ to A−	BBB+ to BBB−	BB+ to B−	Below B−
ECRA, base (CRE20.18)	20%	30%	50%	100%	150%
ECRA, three months or less	20%	20%	20%	50%	150%

SCRA grade (CRE20.21)	A	B	C
Base	40%	75%	150%
Three months or less	20%	50%	150%

A grade A bank with a CET1 ratio of at least 14% and a leverage ratio of at least 5% may weigh 30% (footnote to CRE20.21). And a sovereign floor stops an unrated bank in a weak country looking safer than its own government when the claim is in a foreign currency (CRE20.32).

The bank's claims on banks, all on A-rated counterparties:

Exposure	Amount	EAD	Weight	RWA
Reverse repos with banks, secured on gilts	3,000.0	3,000.0	0%	0.0
Interbank placements, three months or less	1,300.0	1,300.0	20%	260.0
Interbank placements, over three months	200.0	200.0	30%	60.0
Undrawn facilities to banks	300.0	120.0	30%	36.0
Banks		4,620.0		356.0

The reverse repos are secured on gilts worth £3,060m: after the collateral haircut the exposure E* is zero, which is credit risk mitigation (L4.2.08: Credit risk mitigation). The undrawn facilities use the 40% commitment CCF (L4.2.03: Off-balance sheet items and other exposures).

Due diligence: ratings are a floor, not a verdict

After 2008, standard setters asked banks not to rely mechanically on ratings (L3.3.05: External ratings in practice). The SA keeps them but adds due diligence: the lender must understand the counterparty's risk at origination and at least once a year (CRE20.4), assess it at the solo entity where it can (CRE20.5), and show its supervisor the analysis is sound (CRE20.6). If due diligence shows more risk than the rating implies, a rated bank or corporate gets a weight at least one bucket higher (CRE20.20 for banks, the due diligence rule in CRE20.42 for corporates). Due diligence never lowers a weight below what the rating gives.

What does due diligence do here? Guess, then open.

Corporates

Rated corporates follow Table 10 (CRE20.42). Unrated corporates weigh 100% (CRE20.43): no reward for a sound business that never bought a rating, no penalty for a weak one. Two exceptions soften this. In jurisdictions that do not allow ratings, an investment-grade corporate with securities listed on a recognised exchange may weigh 65% (CRE20.44, CRE20.46). And an unrated SME, with consolidated sales of €50m or less, weighs 85% (CRE20.47); one that meets the regulatory retail criteria goes to the retail class at 75% (L4.2.02: The standardised approach: retail and real estate).

Corporates	AAA to AA−	A+ to A−	BBB+ to BBB−	BB+ to BB−	Below BB−	Unrated
Rated (CRE20.42)	20%	50%	75%	100%	150%	100%
Unrated SME (CRE20.47)						85%

Specialised lending (project, object and commodities finance, CRE20.48–20.52) uses issue ratings where they exist and otherwise fixed weights: 100% for object and commodities finance, 130% for project finance before it operates, 100% once it does and 80% for high-quality operating projects. Lending against real estate is its own class (L4.2.02: The standardised approach: retail and real estate). The bank's bond portfolio uses Table 10 too: £800m of AA bonds at 20% (£160m) and £520m of BBB bonds at 75% (£390m), the rated bonds L1.4.07: Credit ratings and credit spreads pointed to.

Sort itWhich risk weight?

Put each exposure in its bucket under the Basel SA. Assume the jurisdiction allows ratings.

UK gilts held by a UK bank, in sterling
A two-month deposit with an A-rated bank
A two-year loan to an A-rated bank
A one-year loan to an unrated bank graded A under the SCRA
A loan to an A-rated manufacturer
A loan to an unrated firm with €30m of sales
A loan to an unrated firm with £400m of turnover
A loan to a BB-rated bank that due diligence finds riskier than its rating

The bank's corporates under the SA

The bank's £12,000m of corporate loans and £8,500m of undrawn commitments are twelve slices, each standing for many borrowers like one of the twelve in L3.3.04: Internal ratings and master scales. The book takes borrowers with turnover of £500m or more to have an agency rating equal to their internal grade, and the rest to be unrated. The undrawn amounts carry the 40% commitment CCF.

Borrower	Turnover £m	SA treatment	Rule	EAD	Weight	RWA	F-IRB RWA
Thornvale Engineering Ltdgrade 4 (BBB+ to BBB)	420	unrated	CRE20.43	1,372.5	100%	1,372.5	560.7
Bramwick Stores plcgrade 6 (BB+ to BB)	1,100	rated BB+ to BB-	CRE20.42	1,926.6	100%	1,926.6	1,650.1
Pellcourt Properties Ltdgrade 5 (BBB−)	35	real estate	CRE20.87	3,034.8	90%	2,731.3	1,043.2
Ostreth Energie GmbHgrade 3 (A to A−)	2,400	rated A+ to A-	CRE20.42	1,949.5	50%	974.8	623.7
Larkhollow Freight Ltdgrade 7 (BB− to B+)	210	unrated	CRE20.43	720.1	100%	720.1	652.3
Mirefield Care Homes Ltdgrade 6 (BB+ to BB)	95	unrated	CRE20.43	1,109.1	100%	1,109.1	625.0
Quorrel Systems BVgrade 5 (BBB−)	380	unrated	CRE20.43	878.2	100%	878.2	576.1
Hastemoor Construction Ltdgrade 8 (B)	160	unrated	CRE20.43	603.3	100%	603.3	778.1
Vellacourt Hôtels SASgrade 7 (BB− to B+)	70	real estate	CRE20.87	992.3	110%	1,091.5	679.4
Cindral Pharma Incgrade 2 (AA− to A+)	3,100	rated A+ to A-	CRE20.42	1,317.3	50%	658.6	281.4
Graybeck Plastics Ltdgrade 9 (B− to CCC+)	48	subordinated	CRE20.60	298.6	150%	448.0	1,005.0
Sallowmere Logistics GmbHgrade 4 (BBB+ to BBB)	640	rated BBB+ to BBB-	CRE20.42	1,197.8	75%	898.3	459.7
Corporates				15,400.0	87.1%	13,412.2	8,934.7

Two lines belong to other lessons: Pellcourt and Vellacourt are income-producing real estate, weighted by loan-to-value (L4.2.02: The standardised approach: retail and real estate), and Graybeck's subordinated loan weighs 150% (L4.2.03: Off-balance sheet items and other exposures). Notice what is missing: no slice is at 85%. Only Pellcourt has sales under €50m (€40.3m), and as a property lender its weight comes from the real estate tables. Across the book the SA weighs corporates at 87.1% of EAD, against 58.0% under foundation IRB.

The formal version

For each exposure i in class c, with rating bucket b(i) in that class's table T_c and d(i) = 1 if due diligence finds more risk than the rating (0 otherwise):

\begin{aligned} \text{EAD}_i &= \text{drawn}_i + \text{CCF}_i \times \text{undrawn}_i \quad(\text{net of specific provisions; CRE20.1, CRE20.98}) \\ \text{RW}_i &= T_c\big(b(i) + d(i)\big) \ \ge\ T_c\big(b(i)\big) \quad(\text{CRE20.20, CRE20.42}) \\ \text{RWA}_{\text{SA}} &= \sum_i \text{RW}_i \times \text{EAD}_i, \qquad \text{capital} = 8\% \times \text{RWA}_{\text{SA}} \end{aligned}

Unrated exposures use a fixed weight instead of T_c: 100% for corporates (CRE20.43), 85% for SMEs (CRE20.47), 40%, 75% or 150% for SCRA grades A, B and C (CRE20.21). Only percentages are involved (M-A01: Percentages); the work is in classifying the exposure.

Try it

Load Bramwick and tick the due diligence box: the weight jumps a bucket. Then load Thornvale, an unrated BBB-quality firm, and compare 100% with the 65% a no-ratings jurisdiction or a UK permission would allow.

Try itWeigh an exposure

Load one of the bank's exposures

Counterparty

External rating

Due diligence finds more risk than the rating shows

Exposure at default (£m)£1,000m

Risk weight75%

RWA£750.0m

Capital at 8%£60.0m

RuleCRE20.42, Table 10

BBB+ to BBB−.

Corporate risk weights by rating
AA20%	A50%	BBB75%	BB100%	B150%	< B−150%

Ratings grouped as AAA to AA−, A+ to A− and so on. Sovereigns and banks share one bucket from BB+ to B−; corporates split it at BB−. Due diligence moves a rated bank or corporate one bucket up, never down. Illustrative amounts, £ millions.

Worked example

The corporate book under the SA

£ millions, from the bank's book.

From facilities to SA RWA

Step 1 of 7

1
Exposure
$\text{EAD} = 12{,}000 + 40\% \times 8{,}500 = 15{,}400$

Regulatory lens

The Basel text is CRE20, in force since 1 January 2023 in the Basel timetable. Each jurisdiction applies it with its own choices. Status as at 3 November 2026 as at 3 Nov 2026.

In the UK

From 1 January 2027 the PRA's Credit Risk: Standardised Approach (CRR) Part applies (PS1/26, para 1.23). Unrated corporates weigh 100%, or, with PRA permission, 65% if investment grade and 135% if not (Article 122(5) and (6)); an IRB firm may use either for the output floor (Article 122(8)). Unrated SMEs weigh 85% (Article 122(11)), and the UK defines an SME by turnover of not more than £44m. On this book the 65%/135% option would raise the unrated slices from £4,683.1m to £4,746.7m (+£63.6m), so the bank keeps 100%. Sterling claims on the UK government and the Bank of England weigh 0% (Article 114(4), in the UK CRR and in the PRA's Part from 2027).

In the EU

The CRR as amended by CRR3 (Regulation (EU) 2024/1623; dates in L4.1.08: Basel 3.1 from 2027: UK, EU and US) applies the same tables and defines an SME by annual turnover of not more than €50m (Article 5(9)). For the output floor only, banks may weigh unrated corporates whose PD is at most 0.5% at 65% until 31 December 2032 (Article 465(3); L4.2.11: Credit risk capital: what changes from 2027).

In the US

The US standardised approach does not use external ratings (L3.3.05: External ratings in practice). Corporates weigh 100% whatever their quality (12 CFR 217.32(f)), foreign sovereigns follow the OECD's country risk classifications (217.32(a)), and US depository institutions weigh 20% (217.32(d)). The agencies' proposals of March 2026 are in L4.1.08: Basel 3.1 from 2027: UK, EU and US.

Spark Atoms

Spark AtomThe 1988 club rule

Basel I sorted most loans into four weights. Claims on OECD governments weighed 0%, on banks in the OECD 20%, residential mortgages 50%, and every claim on the private sector 100%, from the strongest multinational to a corner shop. Today's tables split those 100% claims by rating and add compulsory due diligence (CRE20.4).

Spark AtomWhat a missing rating costs

Thornvale is a grade 4 borrower, BBB+ to BBB on the bank's master scale, with £420m of turnover and no agency rating. It weighs 100%. A matching rating would give 75% and cut its RWA by £343.1m. The UK's 65%/135% option targets this gap: the PRA calls it a more risk-sensitive treatment for unrated corporates (PS9/24, para 2.2).

Key takeaways

Under the SA, RWA = risk weight × EAD, with the weight read from the exposure class's table, by external rating where the jurisdiction allows ratings.
Sovereigns weigh 0% to 150% by rating, with a national discretion for own-currency debt; banks use ECRA if rated and the SCRA grades A, B and C if not, with lower weights for three months or less.
Due diligence is compulsory and one-way: more risk than the rating shows means at least one bucket up, never down.
Unrated corporates weigh 100%, unrated SMEs (sales ≤ €50m) 85%, and investment-grade corporates 65% only where ratings are not used. The UK offers 65%/135% with permission.
The bank's corporates weigh £13,412.2m under the SA, 87.1% of EAD, against £8,934.7m on foundation IRB.

Reaction

Check what stuck

Question 1 · objective 1

A corporate rated A has drawn £200m of a facility and has £100m undrawn. Under the SA, what are its RWA, in £m?

£m

Question 2 · objective 1

An unrated bank is graded B under the SCRA. What are the RWA on a £50m loan to it for six months, in £m?

£m

Question 3 · objective 2

A bank's due diligence finds an A-rated borrower stronger than its rating suggests. What may it do with the risk weight?

ANothing: due diligence can raise the weight but never lower it below the rating'sBUse the AA weight, one bucket betterCUse the SCRA grade instead of the ratingDApply 65% as for an investment-grade corporate

Question 4 · objective 4

Sallowmere Logistics is rated BBB. It has drawn £885.1m and has £781.6m undrawn. What are its SA RWA, in £m?

£m

Question 5 · objective 3

A German engineering firm with €40m of annual sales and no rating borrows from a bank in a country that allows ratings. Which weight applies?

A85%, as an unrated SMEB100%, as an unrated corporateC65%, if it is investment gradeD75%, as retail

Glossary

Standardised approach (SA): Standardised approach: risk weights set by the rules, by exposure class and by rating or other simple features, rather than by the bank's own models.
ECRA: External credit risk assessment approach: risk weights for banks set by their external rating (CRE20.18). Used where the jurisdiction allows ratings.
SCRA: Standardised credit risk assessment approach: for unrated banks, or where ratings are not allowed, the lender grades the bank A, B or C against published criteria (CRE20.21).
Due diligence: Due diligence: the lender's own analysis of a counterparty's risk, at origination and at least once a year. If it shows more risk than the rating, the weight goes at least one bucket up (CRE20.4, CRE20.20).
National discretion: National discretion: a choice the Basel Framework leaves to each jurisdiction, such as a lower weight on a government's debt in its own currency (CRE20.8).
Sovereign floor: Sovereign floor: a claim on an unrated bank in a foreign currency may not have a lower weight than a claim on the bank's own sovereign (CRE20.32).
SME (for the SA): Small or medium-sized entity: under the SA, a corporate whose consolidated group has annual sales of €50m or less (CRE20.47).
Investment grade: Investment grade: a borrower judged to have adequate capacity to meet its financial commitments, broadly BBB− or better.
Exposure at default (EAD): Exposure at default: the drawn amount plus a credit conversion factor (CCF) times the undrawn commitment; 40% for ordinary commitments (CRE20.98).

Deep Dives & Origins

Deep Dives

Basel Committee on Banking Supervision, CRE20: Standardised approach: individual exposures, paras 20.1–20.52: every table in this lesson, with the SCRA grade criteria in full. Intermediate.
Prudential Regulation Authority, SS10/13 Standardised approach, July 2026: how the PRA expects firms to apply the UK rules, including the unrated corporate permission. Advanced.

Origins

Basel Committee on Banking Supervision, CRE20, paras 20.1, 20.4–20.10, 20.14, 20.16–20.32, 20.42–20.52 (version in force from 1 January 2023, and the chapter PDF labelled effective 1 January 2028), bis.org.
Basel Committee on Banking Supervision, International convergence of capital measurement and capital standards, July 1988, Annex 2.
Prudential Regulation Authority, PS1/26, 20 January 2026, para 1.23, and the rule instrument PRA2026/1 (Article 122 and the Glossary definition of SME).
UK CRR (Regulation (EU) No 575/2013 as it applies in the UK), Article 114, legislation.gov.uk.
Prudential Regulation Authority, PS9/24, 12 September 2024, para 2.2.
Regulation (EU) 2024/1623 (CRR3), Official Journal, 19 June 2024, Article 1 (Article 5(9) CRR); CRR Article 465 as amended.
12 CFR 217.32, General risk weights, US Code of Federal Regulations.

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