23.For the purpose of applying ECAI ratings to derive risk-weights for exposures, banks should apply the following process:

1. (i)Identify an ECAI (the “nominated ECAI”) whose assigned ratings the bank intends to use to derive risk weights for some type of exposure that is subject to an external ratings-based approach under Central Bank standards;
2. (ii)Confirm that the nominated ECAIs can provide reasonable coverage of the bank’s exposures in terms of the types of counterparties and the geographical regions covered;
3. (iii)Document the selection of the ECAI and the analysis demonstrating that the ratings of ECAI are appropriate for the specific use;
4. (iv)Notify the Central Bank of the nominated ECAI and of the intended application of the ratings of that ECAI to the bank’s external ratings-based calculations; and
5. (v)Use the ratings of the ECAI within external ratings-based calculations consistently.

24.Banks must use the chosen ECAIs and their ratings consistently for each type of claim for which the ECAI and its ratings are approved, and must seek the consent of the Central Bank on any subsequent changes to the application of those ratings. Banks may not “cherry-pick” the ratings provided by different ECAIs, and must maintain records of which ECAIs they use for various purposes within capital adequacy calculations. Banks may not use unsolicited ratings that may be provided by any ECAI.

25.When banks use external ratings to assign risk weight to securitisation exposures under the Central Bank’s Standards on Capital for Securitisation Exposures, additional operational requirements apply to the ratings and the ECAI that is the source of the ratings.

26.If there is only one rating by a nominated ECAI for a particular claim, that rating should be used to determine the risk weight of the exposure.

27.If there are two ratings by nominated ECAIs that map to different risk weights, the higher risk weight must be applied.

28.If there are three or more ratings with different risk weights, the ratings corresponding to the two lowest risk weights should be referred to. If these give rise to the same risk weight, that risk weight should be applied. If different, the higher risk weight should be applied.

29.External ratings for one entity within a corporate group cannot be used to risk weight other entities within the same group.

30.A bank must treat a relevant exposure or the person to whom the bank has a relevant exposure as “unrated” for risk weighting purposes if that exposure or that person does not have a rating assigned to it by the ECAI otherwise used by the bank.

31.Where a bank is applying external ratings to an exposure that corresponds to a particular issue with an issue-specific rating, the risk weight of the claim must be based on this issue-specific rating. In other cases, the following requirements apply:

1. (i)In circumstances where the borrower has a specific rating for an issued debt claim, but the bank’s exposure does not relate to this particular rated claim, a high-quality credit rating (that is, one that maps to a risk weight lower than the risk weight that would apply to an unrated claim) on that specific issue may only be applied to the bank’s un-assessed exposure if the exposure ranks pari passu with or senior to the rated issue in all respects. If not, the credit rating cannot be used, and the un-assessed claim exposure should receive the risk weight for unrated claims.
2. (ii)In circumstances where the borrower has an issuer rating, this rating typically applies to senior unsecured claims on that issuer. Consequently, only senior claims on that issuer will benefit from a high-quality issuer rating if one exists. Other un-assessed claims of a highly assessed issuer will be treated as unrated. If either the issuer, or a particular issue from that issuer, has a low-quality rating (that is, one that would map to a risk weight equal to or higher than would apply to an unrated exposure), then a bank with an unrated exposure to the same counterparty that ranks pari passu with or is subordinated to senior unsecured (in the case of an issuer rating) or to the specific issue (in the case of an issue-specific rating) should risk-weight that exposure using the low-quality rating.

32.Where a bank intends to rely on an issuer or an issue-specific rating, the rating must take into account and reflect the entire amount of credit risk exposure a bank has with regard to all amounts owed to it.

33.Where exposures are risk-weighted based on the rating of an equivalent exposure to that borrower, foreign currency ratings should be used for exposures in foreign currency. If there is a separate domestic currency rating, it should be used only to risk-weight exposures denominated in the domestic currency.

34.In order to avoid double counting of credit enhancement factors, no supervisory recognition of credit risk mitigation techniques will be taken into account if the credit enhancement is already reflected in the rating of a specific issue.