This chapter describes aspects of credit risk not fully captured under Pillar 1 that should be considered under Pillar 2, including counterparty credit risk and securitisation.

Version effective as of 01 Jan 2023

Cross references updated to take account of the revised credit risk standards that come into effect due to the December 2017 Basel III publication, including the revised implementation date announced on 27 March 2020.

Stress tests under the internal ratings-based approaches

32.1 A bank should ensure that it has sufficient capital to meet the Pillar 1 requirements and the results (where a deficiency has been indicated) of the credit risk stress test performed as part of the Pillar 1 internal ratings-based (IRB) minimum requirements CRE36.50 to CRE36.53. Supervisors may wish to review how the stress test has been carried out. The results of the stress test will thus contribute directly to the expectation that a bank will operate above the Pillar 1 minimum regulatory capital ratios. Supervisors will consider whether a bank has sufficient capital for these purposes. To the extent that there is a shortfall, the supervisor will react appropriately. This will usually involve requiring the bank to reduce its risks and/or to hold additional capital/provisions, so that existing capital resources could cover the Pillar 1 requirements plus the result of a recalculated stress test.

Definition of default