The standardised approach: retail and real estate · RiskAtoms Academy

By the end you will be able to

1Classify retail exposures as regulatory retail, transactor or other retail, and weigh them.
2Weigh residential mortgages by loan-to-value under the whole-loan table and under loan-splitting, and explain why the two differ.
3Treat commercial and income-producing real estate, land development, and the currency mismatch multiplier with its cap.
4Explain why covered bonds weigh less than the issuing bank's own debt, and weigh the bank's holdings.

Why it matters

RiskAtoms Bank plc lends £30,000m on homes, its largest asset. Its models weigh the book at £3,526.3m. The Basel standardised approach gives two answers, because it offers jurisdictions two methods: £8,949.6m with one weight per loan, or £9,793.0m if each loan is split in two. The UK chose the second. The difference, £843.4m, sits in the standardised total that the output floor is built from.

Core explanation

Small loans and bricks and mortar

Retail

The retail class holds loans to individuals and small firms, other than real estate (CRE20.63). It has three sets (CRE20.64). Regulatory retail must pass three tests (CRE20.65):

Product: revolving credit, personal loans and leases, small business facilities. Mortgages, derivatives and securities are out.
Low value: at most €1m to one counterparty.
Granularity: no counterparty above 0.2% of the regulatory retail portfolio, unless the supervisor sets another method.

Regulatory retail weighs 75%. Transactors weigh 45%: they pay off their card every month, so the balance is a payment float rather than borrowing. Everything else to individuals is other retail at 100% (CRE20.67–20.68). An SME that meets the three tests can be retail at 75% instead of a corporate at 85%.

On the book, the consumer lending of L3.3.14: Retail credit portfolios stays on the SA. The granularity limit is 0.2% × £3,740m = £7.48m per borrower, far above any personal loan.

Consumer lending	Amount	Weight	RWA
Personal loans	2,500.0	75%	1,875.0
Card balances, transactors	285.7	45%	128.6
Card balances, revolvers	714.3	75%	535.7
Undrawn card and overdraft limits, at the 10% CCF (L4.2.03)			136.7
Consumer	3,500.0		2,676.0

Card balances are split as in m3-3's sample, 52,000 transactor accounts against 38,000 revolvers. Without the transactor weight the cards would cost £129.0m more RWA. On retail IRB the same book is in L4.2.06: IRB for retail and specialised lending.

Real estate: which table applies

A loan secured on property gets the low, LTV-based weights only if it is regulatory real estate: finished property, an enforceable first charge, underwriting on the borrower's ability to repay, a prudent value and full documentation (CRE20.71). The loan-to-value uses the value at origination: rising house prices do not lower it, though a supervisor can require a cut and a permanent loss in value must be recognised (CRE20.74). Then one question splits the class: is the loan materially dependent on the property's cash flows? A home loan to its owner-occupier never is, and nor is one to an individual with only a few let properties (CRE20.81).

Residential LTV	≤ 50%	50–60%	60–80%	80–90%	90–100%	> 100%
Not dependent: whole loan (Table 11)	20%	25%	30%	40%	50%	70%
Dependent on rents (Table 12)	30%	35%	45%	60%	75%	105%

Instead of Table 11 a jurisdiction may choose loan-splitting: the part of the loan up to 55% of the property value weighs 20%, and the rest weighs what an unsecured loan to the borrower would, 75% for an individual (CRE20.83, CRE20.89). Loan-splitting is kinder at low LTVs and harsher in the middle: at 80% LTV it gives 37.19% against Table 11's 30%.

Commercial	LTV ≤ 60%	60–80%	> 80%
Not dependent (Table 13)	min(60%, borrower's)	borrower's	borrower's
Income-producing (Table 14)	70%	90%	110%

The bank's two property lenders are income-producing: their loans are repaid from rents and hotel income (CRE20.87). In m3-3's sample, Pellcourt borrows £120m against £180m of let property and Vellacourt £40m against £46m of hotels.

Borrower	LTV	Weight	EAD	RWA	F-IRB RWA
Pellcourt Properties Ltd	66.7%	90%	3,034.8	2,731.3	1,043.2
Vellacourt Hôtels SAS	87.0%	110%	992.3	1,091.5	679.4
Income-producing real estate			4,027.0	3,822.8

Property that fails the regulatory criteria is “other real estate”: the borrower's own weight if not dependent on the property, 150% if dependent (CRE20.89). Land acquisition, development and construction weighs 150%, or 100% for residential projects with prudent underwriting and substantial pre-sales or equity at risk (CRE20.90–20.91). And a currency mismatch multiplies a retail or residential weight by 1.5, up to 150%, unless a hedge covers at least 90% of each instalment (CRE20.92–20.93).

Sort itWhich table?

Each loan is secured on property. Which treatment applies under the Basel SA?

A mortgage on the borrower's own home, fully documented, first charge
A loan to a company that owns 60 let flats and repays from their rents
A loan to an individual who lets out two flats
A loan on a let office block, repaid from the rents
A loan to buy a field and build 40 houses on it
A home loan whose valuation was never documented

The bank's mortgages

m4-1 splits each mortgage segment over the LTV bands, and the £600m of mortgage offers sit in the 60–80% segment at 80% LTV with a 40% CCF (L4.2.03: Off-balance sheet items and other exposures).

Segment	EAD	Whole loan RWA	Whole-loan weight	Loan-split RWA	Split weight	IRB RWA
LTV up to 60%	11,544.5	2,597.5	22.5%	2,573.5	22.3%	312.1
LTV 60–80%	13,119.6	3,935.9	30.0%	4,878.8	37.2%	1,394.1
LTV 80–95%	5,575.9	2,416.2	43.3%	2,340.7	42.0%	1,820.1
Mortgages	30,240.0	8,949.6	29.6%	9,793.0	32.4%	3,526.3

The book uses Table 11, the Basel default, for its standardised figure: £8,949.6m. Under the UK's loan-splitting it would be £9,793.0m, mostly because the large 60–80% segment moves from 30% to 37.2%.

Covered bonds

L1.4.02: Types of bonds said covered bonds get lower risk weights. Here is how. The cover pool must hold eligible assets, such as residential mortgages up to 80% LTV and claims on sovereigns, with claims on banks capped at 15% of the bonds (CRE20.34). It must exceed the bonds' nominal value by at least 10% (CRE20.35), and the issuer must give investors portfolio information at least every six months (CRE20.37). Then a rated covered bond weighs by its own rating, from 10% at AA− or better (Table 8), and an unrated one by its issuer's weight, roughly halved (Table 9). As elsewhere, due diligence can only push the weight up (CRE20.39).

Issuer's weight	20%	30%	40%	50%	75%	100%	150%
Unrated covered bond (Table 9)	10%	15%	20%	25%	35%	50%	100%

The bank holds £1,200m of covered bonds rated AA− or better, at 10%: £120m of RWA, against £240m if they were senior bonds of AA-rated banks.

The formal version

Loan-splitting is a min and a max (M-A11: Min, max, floors and caps). Per £1 of loan, with RW_cp the borrower's own weight (CRE20.83):

\begin{aligned} \text{RW}_{\text{whole}}(\text{LTV}) &= \begin{cases} 20\% & \text{LTV} \le 50\% \\ 25\% & 50\% < \text{LTV} \le 60\% \\ 30\% & 60\% < \text{LTV} \le 80\% \\ 40\% & 80\% < \text{LTV} \le 90\% \\ 50\% & 90\% < \text{LTV} \le 100\% \\ 70\% & \text{LTV} > 100\% \end{cases} \quad(\text{CRE20.82}) \\[4pt] \text{RW}_{\text{split}}(\text{LTV}) &= \frac{20\% \times \min(\text{LTV}, 55\%) + \text{RW}_{\text{cp}} \times \max(\text{LTV} - 55\%, 0)}{\text{LTV}} \quad(\text{CRE20.83}) \\[4pt] \text{RW}_{\text{CRE}}(\text{LTV} \le 60\%) &= \min(60\%,\ \text{RW}_{\text{cp}}) \quad(\text{CRE20.85, Table 13}) \\[4pt] \text{RW}_{\text{mismatch}} &= \min(1.5 \times \text{RW},\ 150\%) \quad(\text{CRE20.92}) \end{aligned}

A cap binds when the formula would exceed it: a Table 12 loan above 100% LTV weighs 105%, and 1.5 × 105% = 157.5% is capped at 150%.

Try it

Slide the LTV through 55%: the loan-splitting curve leaves 20% and climbs towards 75%, while the whole-loan table steps. Find where loan-splitting is the cheaper method, then tick the currency mismatch box and push the LTV over 100% under the rental table.

Try itA mortgage's risk weight, by loan-to-value

Approach

Loan-to-value (home worth £400k at origination)80%: loan £320k

Loan in a currency the borrower does not earn, unhedged (× 1.5, capped at 150%)

Whole loan (Table 11)Loan-splittingDepends on rents (Table 12)

Risk weight30%

RWA on the loan£96.0k

Loan-splitting37.19%

Depends on rents (Table 12)45%

Loan-split: part up to 55% of value, at 20%£220.0k

Loan-split: the rest, at 75%£100.0k

One weight for the whole loan, stepping up at 50%, 60%, 80%, 90% and 100% LTV.

LTV uses the property value at origination (CRE20.74). Loan-splitting assumes no other lender ranks ahead and a borrower who is an individual (75%). Illustrative amounts.

Worked example

The mortgage book, two ways

£ millions, from the bank's book.

Whole loan against loan-splitting

Step 1 of 6

1
Exposure
$\text{EAD} = 30{,}000 + 40\% \times 600 = 30{,}240$

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.

Regulatory lens

Status as at 3 November 2026 as at 3 Nov 2026.

In the UK

From 1 January 2027 the PRA applies loan-splitting to regulatory residential real estate that is not dependent on the property's cash flows (Article 124F). Its supervisory statement SS10/13 (July 2026, para 5.13) works the same 80% case: £80,000 on a £100,000 home gives RWA of £29,750 and a weight of 37.19%. On the UK rule the bank's standardised mortgages are £9,793.0m, not £8,949.6m, before the UK's own factor for mortgage offers. UK residential mortgage commitments carry a 50% conversion factor (L4.2.03: Off-balance sheet items and other exposures).

In the EU

The CRR also splits the loan: 20% on the part up to 55% of the property value (Article 125(1)). For the output floor only, Article 465(5) allows lower weights on residential mortgages for a transitional period (L4.2.11: Credit risk capital: what changes from 2027).

In the US

No LTV table: a prudently underwritten first-lien residential mortgage weighs 50%, and other residential mortgages, including junior liens, 100% (12 CFR 217.32(g)).

Spark Atoms

Spark AtomFrom 50% to an LTV table

Basel I in 1988 weighed every residential mortgage at 50%, whatever its size against the house. Until 31 December 2026 the UK weighs the part of a mortgage up to 80% of the property's value at 35% (UK CRR Article 125). Basel 3.1's tables finally make the weight depend on how much equity the borrower has.

Spark AtomOne loan, three weights

An 80% LTV home loan weighs 30% under Table 11, 37.19% under loan-splitting, and 45% if a landlord company repays it from rents (Table 12). Lent in euros to a homeowner paid in pounds, unhedged, the 30% would become 45%.

Key takeaways

Regulatory retail (retail product, at most €1m, at most 0.2% of the portfolio) weighs 75%; transactors 45%; other retail 100%.
Only regulatory real estate gets the LTV tables, with the property valued at origination. Loans repaid from the property's own rents weigh more.
Residential: Table 11 by LTV band, or loan-splitting (20% up to 55% of value, the borrower's weight above). The bank's mortgages: £8,949.6m against £9,793.0m; the UK uses loan-splitting.
Income-producing commercial property weighs 70% to 110% by LTV; land development 150% (100% for qualifying housing); a currency mismatch multiplies by 1.5, capped at 150%.
Covered bonds weigh by their own rating from 10%, or about half their issuer's weight if unrated, because the cover pool stands behind them.

Reaction

Check what stuck

Question 1 · objective 2

A £300,000 mortgage on a home valued at £400,000 at origination meets every regulatory real estate criterion. Under the whole-loan table, what are its RWA, in £?

£

Question 2 · objective 2

The same mortgage under loan-splitting, with a 75% weight for the borrower. What is its risk weight, in %?

%

Question 3 · objective 3

A 40% LTV mortgage is in euros, but the borrower earns pounds and has no hedge. Under the whole-loan table, what is its risk weight, in %?

%

Question 4 · objective 1

Which card balance qualifies for the 45% transactor weight?

AOne repaid in full at every due date for the past 12 monthsBOne whose holder pays at least the minimum every monthCAny balance under €1mDAny balance on a card that can be cancelled at any time

Question 5 · objective 4

An unrated covered bond is issued by a bank that itself weighs 50%. What does the covered bond weigh?

A25%B10%C50%D20%

Glossary

Regulatory retail: Regulatory retail: lending to individuals or small firms that is a retail product, at most €1m to one counterparty, and no more than 0.2% of the portfolio to any one (CRE20.65). Weighs 75%.
Transactor: Transactor: a card or charge-card borrower who has repaid in full at every due date for the past 12 months, or an overdraft not drawn in that time (CRE20.66). Weighs 45%.
Loan-to-value (LTV): Loan-to-value: the loan divided by the property's value, the value held at its origination figure unless the supervisor requires a cut (CRE20.74).
Regulatory real estate: Regulatory real estate: a loan on finished property, legally enforceable, with a first charge, underwritten on the borrower's ability to repay, prudently valued and fully documented (CRE20.71). Only these get the LTV tables.
Materially dependent on cash flows: Materially dependent on the property's cash flows: repayment and recovery rely mainly on rents or sale proceeds from the property itself, for example when more than half the income used to assess the loan comes from it (CRE20.79–20.80).
Whole-loan approach: Whole-loan approach: one risk weight for the whole mortgage, read from a table by LTV band (CRE20.82, Table 11).
Loan-splitting: Loan-splitting: 20% on the part of the loan up to 55% of the property value, the borrower's own weight on the rest (CRE20.83). A national choice.
ADC exposure: Land acquisition, development and construction (ADC): loans to buy land or build on it, where repayment depends on future sale or letting. 150%, or 100% for qualifying residential projects (CRE20.90–20.91).
Currency mismatch: Currency mismatch: a retail or residential loan in a currency other than the borrower's income, not hedged. The weight is multiplied by 1.5, up to 150% (CRE20.92).
Covered bond: Covered bond: a bond issued by a bank and backed by a ring-fenced pool of assets (the cover pool), usually mortgages, on top of the issuer's own promise to pay.

Deep Dives & Origins

Deep Dives

Basel Committee on Banking Supervision, CRE20, paras 20.63–20.93: the retail and real estate classes in full, with the criteria for regulatory real estate. Intermediate.
Prudential Regulation Authority, SS10/13 Standardised approach, July 2026, chapter 5: worked examples of the UK's loan-splitting, including undrawn loans and other charges. Advanced.

Origins

Basel Committee on Banking Supervision, CRE20, paras 20.33–20.39 and 20.63–20.93 (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, SS10/13 Standardised approach, July 2026, paras 5.12–5.13.
UK CRR (Regulation (EU) No 575/2013 as it applies in the UK), Article 125, legislation.gov.uk.
CRR Articles 125(1) and 465(5), consolidated text as amended by Regulation (EU) 2024/1623.
12 CFR 217.32(g), Residential mortgage exposures, US Code of Federal Regulations.

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