Credit Suisse nets 37% sovereign RWA cut

At end-2019, 75% of its government portfolio was under the standardised approach, up from 14% the year prior

Credit Suisse disclosed a a Sfr1 billion ($1 billion) drop in risk-weighted assets (RWAs) linked to its sovereign portfolio in 2019. Over the course of last year, it also moved the majority of its sovereign debt holdings under the standardised approach for calculating capital charges in 2019.

Sovereign exposures dropped just 2% over the period, whereas RWAs fell a whopping 37%. It is understood the decrease was related to the offloading of certain high-risk exposures. The risk density of Credit Suisse’s sovereign portfolio – RWAs divided by total exposures – was about 1.8% at end-2019, compared to 2.9% the year prior.

At end-2018, sovereign exposures modelled using the advanced internal ratings-based (A-IRB) approach totalled Sfr83.7 billion, against just Sfr14 billion assessed using the standardised approach. But a year on, A-IRB exposures numbered just Sfr23.5 billion, while standardised assets had swollen to over Sfr72.4 billion.


At end-2018, 93% of sovereign exposures under the standardised approach attracted a 0% risk-weighting, and 98% of those under the A-IRB approach had a probability of default of 0.15% or lower. A year on, the shares were 99% and 97%, respectively.

Credit Suisse continued to move credit exposures out from its internal models in the first quarter of this year, disclosing in its most recent Pillar 3 report that it had moved Sfr3.1 billion RWAs-worth of “particular exposures” under the standardised approach.


What is it?

Basel Committee rules allow credit risk capital to be calculated using standardised and IRB approaches.

Under the standardised approach, credit exposures are assessed using standard industry-wide risk weightings.

There are two IRB approaches. Foundation IRB (F-IRB) allows banks to provide their own estimates of the probabilities of default of their credit exposures, but uses regulator-set schema for other risk components, such as loss-given default measures, to generate the ultimate RWA amount. The advanced IRB (A-IRB) approach uses banks’ own data, internal models and conversion factors to calculate RWAs.

Why it matters

The zero risk-weighting bucket for sovereign exposures under the standardised approach means a large chunk of Credit Suisse’s sovereign portfolio does not attract a capital charge. This may have been one motivating factor behind the shift out of the A-IRB approach, as even those exposures with the lowest risk-weighting, with a less than 0.15% probability of default, generate RWAs using the models method.

It may also be the case that Credit Suisse wants to reduce the proportion of its total portfolio under the internal models approach. Under incoming Basel III rules, required capital will be floored at a 72.5% of the standardised approach, meaning a bank with a high share of its RWAs generated using internal models could find its overall charge increase dramatically under the new regime.

Credit Suisse did not respond to a request for comment by press time.

Update, July 30: This article was amended after Credit Suisse clarified that the cause of the RWA drop for sovereign exposures was the offloading of certain holdings and not related to the change in calculation approaches. The headline has been changed to reflect this.

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