March 27, 2015
Comments on the Basel Committee on Banking Supervision’s Consultative Document“Revisions to the Standardised Approach for credit risk”
Japanese Bankers Association
We, the Japanese Bankers Association (JBA), would like to express our gratitude forthis opportunity to comment on the Consultative Document: Revisions to the Standardised
Approach for credit risk issued by the Basel Committee on Banking Supervision (the BCBS).
We respectfully expect that the following comments will contribute to your further
discussion.
<<1: General Comments>>(1) Impacts of these Revisions
The revisions to the standardised approach (SA) for credit risk proposed in thisConsultative Document may have impacts on the risk-weighted asset (RWA) calculation
method employed by all banks including small-sized banks, and even on the real economy
through a material change in individual banks’ portfolios and modification of their businessmodel, depending on the revisions. Possible negative impacts include a concern ofprocyclicality in that a decline in financial institutions’ credit extension ability as a result of anincrease in their capital requirements in times of economic downturn would deepen theeconomic slowdown; and the application of a risk weight calculation method based on risk
drivers (i) would incentivise borrowers to show such risk driver indicators better and (ii)undermine sound lending practice of the lenders. In addition, the risk measurement
methodologies proposed in this Consultative Document are not necessarily appropriate interms of risk sensitivity, as discussed in the Specific Comments section below. Consequently,
re-consideration should be made through the implementation of the second consultation basedon more extensive feedback, including the comments provided in this comment letter.
(2) Adequate calibration
Risk weights under the revised SA approach should be sufficiently verified andcalibrated through a quantitative impact study (QIS) so as not to drastically raise the level ofthe risk weights relative to the current level. The risk weights proposed at this stage are
generally higher for main exposures including banks, corporates, equities and residential realestate. Implementing risk weights as proposed would give rise to a substantial increase incapital charge. Consequently, there is a concern that this may cause credit crunch, for example,
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prompting banks to collect their loans from small and medium-sized entities (SMEs) with ahigher risk weight. With regard to the proposed level, therefore, it is requested for BCBS to
demonstrate data supported by analysis.
Further, in finalising the calibration of risk weights, if the proposed treatment to use theSA approach as a floor for banks using the IRB approach would be implemented, calibration
for floors should be established in a manner to avoid situations where banks would result inbreaching the floor despite they are calculating risk-weighted assets using an appropriate
internal ratings-based (IRB) approach (i.e. cases where risk-weighted assets are not being
underestimated). In such case, deliberate discussions taking into account the impact of thefloor are required as to how a floor should be established and what should be the “adequatelevel” of a floor, after thoroughly comparing average risk weights under the IRB approach or
historical allowance rates and loss rates across financial institutions and jurisdictions,.
(3) Implementation of lead time and transitional arrangement
In introducing the revised standardised approach, a sufficient lead time and an
appropriate transitional arrangement should be implemented. A sufficient lead time should beensured after its finalisation, taking into account that systems development and modification
to collect and calculate data on new risk drivers require certain period of time and that therevisions have a significant impact on small-sized financial institutions which may have somedifficulties in complying with the revised framework Further, appropriate transitionalarrangement, such as exclusion of existing credit exposures, is needed, given an effect of a
sharp increase in the level of capital requirement on financial institutions’ behaviour and an
impact on existing credit exposures whose risk drivers are difficult to be obtained.
(4) Use of external ratings
This Consultative Document questions mechanistic reliance on external ratings andproposes to reduce such reliance. In fact, excessive reliance on external ratings in identifying
risks of securitized products might have led to expansion of the financial crisis. On the other
hand, external ratings for financial institutions and corporates that are granted using many
disclosed information and used as part of credit risk assessment for financial institutions andcorporates are considered to have certain reliability, and hence reasonable to include theseratings in the calculation of regulatory capital.
Additionally, a method for calculating risk weights according to the matrix based on two
risk drivers for exposures to banks and corporates proposed in this Consultative Document
does not appropriately reflect high creditworthiness of banks and corporates with high credit
standing.
We therefore suggest that, for exposures to banks and corporates, risk weights
referencing the external rating should be assigned to obligors with external ratings, while risk
weights using the matrix based on the two risk drivers should be apply to obligors with no2

external rating, as stated in specific comments. In addition, it is suggested to also take certain
measures to enhance the eligibility criteria for credit rating agencies to improve externalratings’ reliability, in order to ensure the adequacy of reliance on external ratings.
(5) Local calibration
Since many of firms that directly use the SA approach are relatively small-sizedfinancial institutions rooted in respective regions of jurisdictions, it is necessary to give due
consideration to impacts on these financial institutions and on financial systems in respective
regions and jurisdictions.
Financial institutions have developed their own business models under respective law
regime and financial economy/market environment that vary across jurisdictions. Requiring
financial institutions to apply a uniform approach may have an unexpected and a huge impact
on financial institutions in certain jurisdictions and unstabilise regional financial systems. For
example, residential loan markets vary in nature across jurisdictions. Some markets, including
Japan, focus on borrowers’ ability to repay a loan and other markets focus on collateral value.
It is not considered appropriate to ignore such difference and introduce a uniform approach.
We therefore suggest a framework permitting local calibration in relation to risk weights
under certain conditions, for example, cases where the application of uniform risk weights has
a significant impact on domestic financial institutions and financial systems.
<<2: Specific comments and our responses to the questions>>
1. Exposure to banks
Our responses to the questions
Q1. What are respondents’ views on the selection of the capital adequacy ratio? In particular,
is the CET1 ratio superior to the Tier 1 ratio or the Leverage ratio? Do respondents agree that
it is necessary to require calculations in accordance with Basel III in order to ensure a
consistent implementation?
We support the use of the Basel III capital adequacy ratio.
However, a measure which is readily available should be used as an element todetermine risk weights. Banks in the jurisdictions that have not yet implemented Basel III do
not calculate the CET1 ratio, while not all financial institutions in the jurisdictions that havealready implemented disclose this ratio. It is therefore proposed to use the “total capital
adequacy ratio” which is more readily available as an alternative measure.

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Q2. Do respondents believe the net NPA ratio is an effective measure for distinguishing abank exposure’s credit risk? What alternative asset quality measure, if any, should beconsidered by the Committee?
As with the CET1 ratio, the net NPA ratio is not necessarily disclosed by all banks andis not readily available. In addition, the definition of default varies across jurisdictions andhence the net NPA ratio is not appropriate in terms of comparability. It is suggested that, forexample, a readily-available measure “allowance for credit losses/total assets in balance sheet”
be used. Even in this case, it should be noted that the definition varies across jurisdictions. In
addition, it is desirable to carry out quantitative analysis based on QIS.
Q3. Do respondents have views on the proposed treatment for short-term interbank claims?
We concur with the treatment of lowering a risk weight assigned to short-term interbank
claims. However, it is considered to be more appropriate to define the application criterion as
one year or less, not three months or less of original maturity, and not to set a risk weight floor,
for the following reasons:(1) Reason for the application criterion of one year or less
We understand that, under the current IRB approach, a 1 year floor is generally applied
to maturity, while for certain interbank transactions, a floor is not set and a 1 year is employed
as a threshold when short-term claims for banks are exceptionally treated. Accordingly, it isconsidered appropriate to ensure consistency of buckets between the SA approach and the
IRB approach.
Further, a threshold typically used to distinguish long term and short term is one year
and this is consistent with the accounting and practical treatment of financial institutions.
(2) Reason for appropriateness for not setting a floor
Risk weights of credit exposures for banks based on actual data under certain member
bank’s IRB approach are as shown in the table below according to maturity, and are largely
different from the proposed floor of 30%. Setting a floor does not therefore reflect an actual
state.
Period3 months

6 months

1 year(Ref) 2.5 years

RW

7.1%

7.4%

7.8%

11.6%

Also, this rule should explicitly define that liquid deposits such as “Current deposits”,“Ordinary deposits” and “Due from foreign banks (our current account)” may be treated as
short-term claims.
4Q4. Do respondents have suggestions on how to address these concerns on the treatment of
exposures to banks? In particular, do respondents have views on how to treat exposures tobanks not subject to Basel III in a consistent and risk-sensitive manner?
We suggest calculating risk weights by reference to external ratings for obligors withexternal ratings and by using the matrix based on risk drivers, as proposed in the responses to
Q1 and Q2, only for obligors with no external ratings.
External ratings reflect benchmarks specific to financial institutions, such as Common
Equity Tier 1 (CET1), a net non-performing loan ratio, profitability indicators, leverage,
liquidity, a loan-deposit ratio, involvement in governance by government, domestic share,
regulatory developments, and the nature of business, and thus are believed to have certain
reliability. However, under an approach to calculate risk weights by employing two risk
drivers, as proposed in this Consultative Document, risk weights do not completely reflect
high creditworthiness of especially an obligor group with high credit standing and therefore
should not prevail over external ratings.
Assigning a punitive risk weight of 300% to a bank that has not yet adopted Basel III or
has not published relevant information under disclosure requirements should be avoided
because it does not reflect actual risks and may have an adverse impact on the real economy
through contraction in the interbank market.
Other requests and comments(1) Level of risk weights
Risk weights under the revised SA approach range from 30 to 300%, but proposes to set
the range from 20% to 150%, same with current SA approach through QIS, along with thepreferential treatment for those exposures having an original maturity of one year or lessbeing treated as short-term claims, as suggest in the response to Q3.
(2) Treatment of exposures to securities firms and other financial institutions
Under the treatments envisaged in this Consultative Document, if exposures tosecurities firms and other financial institutions are subject to prudential standards and the risk
drivers are disclosed, such exposures are treated in the same manner as banks, and if not, theexposures are treated in the same manner as corporates. These treatments should be
re-considered for the following reasons:
If the determination of using either CET1 and net NPA ratios, or revenue and leverage isdependent on whether an counterparty is subject to prudential standards and whether risk
drivers are disclosed, inconsistent risk weight calculation will be defined for one businesscategory “securities firms”, and this is not an appropriate framework. It is also doubtful
whether such risk drivers are reasonable for exposures to securities firms and other financial
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institutions and whether it is appropriate to require those institutions to disclose the CET1 andnet NPA ratios based on Basel III.
(3) Other requests and comments for exposures to banks are described below:(i) The treatment to require use of solo-based ratios of the legal entity against which theexposure is held in preference to consolidated level ratios should be avoided because thecurrent treatment under the IRB approach uses the consolidated financial statements todetermine which large-sized financial institutions are subject to a higher risk weight, andhence this treatment is not consistent with the IRB approach; many banks form a
consolidated group and a solo basis may largely differ from a consolidated basis; and adetermination on whether to use either solo or consolidated basis based on availability
may provide an arbitrary opportunity.
(ii) It is requested to clarify whether the referenced CET1 ratio (or total capital adequacy
ratio as suggested in this comment letter as an alternative measure) is applied either on atransitional arrangement or full implementation basis.
2. Exposures to corporates
Our responses to the questions
Q5. Do respondents have views on the selection of risk drivers and their definition, inparticular as regards leverage and the incorporation of off-balance sheet exposures within theratio? Would other risk drivers better reflect the credit risk of corporate exposures?
We suggest calculating risk weights by reference to external ratings for obligors withexternal ratings and using the matrix based on risk drivers only for obligors with no externalratings.
External ratings reflect profitability indicators, leverage, liquidity, parent company’s
creditworthiness, domestic share, and the nature of business, and thus are believed to havecertain reliability. However, under an approach to calculate risk weights by employing two
risk drivers, as proposed in this Consultative Document, risk weights do not completelyreflect high creditworthiness of particularly an obligor group with high credit standing. For
example, the proposed minimum risk weight of 60% corresponds to a risk weight for aborrower with PD of approximately 0.36% under the IRB approach, assuming a loss given
default (LGD) of 45% and maturity of 2.5 years. This PD is equivalent to the probability ofdefault (PD) for a borrower with S&P BB to BBB ratings and hence is not considered to
sufficiently reflect the creditworthiness of a borrower with investment grade or higher.
Possible issues with the proposed two risk drivers are as discussed below. To addressthese issues, the BCBS is requested to provide the rationale for the selected risk drivers aswell to discuss various alternative approaches.
6(1) Revenue(i) Risk weights for SMEs and early-stage enterprises will be higher and there may be an
adverse impact on credit creation function of a bank and on financing by good-standing
SMEs. SMEs accounts for 99.7% of all entities in Japan. 95.6% of SMEs and almost all ofsole proprietors demonstrate revenue of JPY 0.5 billion or less. The revenue buckets
proposed under this Consultative Document that treat this type of entities together as one
type of entities and assign a higher risk weight than the current 100% is not considered toappropriately reflect risks of such entities. For details, see the response to Q6.
(ii) It is understood that revenue is selected as an indicator to reflect a size, but it has a
disadvantage that it does not represent profitability of an entity, particularly in the casewhere an entity demonstrating negative earnings does not result in negative assessment.
(2) Leverage(i) It is understood that leverage is selected as a metric to measure financial soundness, but thefact that the level of leverage may significantly differ depending on industry features is notconsidered. As a consequence, with respect to industries with a low default rate but a highleverage due to their industry characteristics, such as railway and electricity, a risk weight
may be unduly raised. A sales finance company of manufacturing industry and a groupfinance company also have a high leverage. However, such companies should be assessed
based on their parent company’s creditworthiness by deeming that their business and theirparent company’s business are substantially united. Consequently, evaluation of leverage
on a solo basis would underestimate the actual creditworthiness.
(ii) We oppose to the inclusion of off-balance sheet exposures since accounting practices anddisclosure standards vary across jurisdictions, thereby expanding variation in measurement
outcome and increasing the complexity of measurement.
Additionally, if the figures reported in financial statements are generally treated as risk
drivers, there are following concerns: differences in accounting and taxation system acrossjurisdictions are reflected in risk weights; industry characteristics are not reflected in risk
weights; and this may become a factor causing fraudulent accounting of unlisted entities.
Q6. Do respondents have views on the appropriateness of the proposed treatment, especiallywith regard to SMEs? And about the more lenient treatment for start-up companies?
Under the SA approach that is less risk-sensitive, there may exists a situation whereby arisk is deemed to be high for regulatory purposes although a bank determines a risk to be low.
In this case, capital regulation takes precedence over the bank’s determination. In particular,
in cases where an indicator of size, such as “revenue”, is deemed as a risk driver, it may have7

an adverse impact on loans to prudent SMEs that underpins the real economy. We therefore
strongly suggest assigning a lower risk weight to SMEs, considering factors shown below.
(1) A credit portfolio comprising of small-sized borrowers, primarily SMEs, has dispersion
effect, with lower correlation with systemic risk factors as taken into account under the IRB
framework. Thus, a risk weight of such portfolio as a whole would be at a lower level:(2) Generally, the percentage of loans for SMEs secured by collateral is high. At somemember banks, the LGD of exposures to SMEs is approximately 10% lower than that of
exposures to corporates, and therefore exposures to SMEs tends to be more secured. The
effect of collateral however is not reflected in the matrix based on two risk drivers.
(3) SMEs have limited funding tools and depend heavily on loans from banks. If the above is
not taken into account, and a lower risk weight is not applied to SMEs, smooth funds
supply by banks to SMEs will be inhibited and there may be an adverse impact on theoverall real economy.
Besides SMEs and early-stage entities, there exist entities whose financial information
cannot be acquired easily, such as obligors of purchased receivable, small lease receivables,
entities issuing public and corporate bonds, and underlying assets of a fund, as well as entities
to which risk drivers similar to corporates do not suit, such as non-profit organizations, trusts,
associations and schools. It is not appropriate to use one matrix in a uniform manner todetermine risk weights for such entities. In particular, assigning a 300% risk weight becauseof unavailability of such entities’ financial information lacks an appropriate balance in light ofrisk sensitivity. This assignment may undermine the financial intermediary function andtherefore should be avoided.
Q7. Do respondents think that the risk sensitivity of the proposal can be further increased
without introducing excessive complexity?
For measuring corporate exposures, simplicity and risk sensitivity is in a trade-off
relation and therefore it is difficult to enhance risk sensitivity without increasing simplicity.
This comment letter proposes to strengthen risk sensitivity by calculating risk weights using
external ratings first if external rating are available and the matrix based on risk drivers only ifnot.
Q8. Do respondents agree that introducing the specialised lending category enhances the risk
sensitivity of the standardised approach and its alignment with IRB?
We agree with introducing the specialised lending category, but oppose to the use of thesame risk drivers as corporate exposures to determine risk weights for specialised lending.
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Since specialised lending is a claim backed by cash flows, which differs from the corporate
exposure where “going concern” is assumed. Thus using “revenue” and “leverage” to measurecredit risk does not reflect actual state. Therefore, either measures typically used in thefinancial institutions’ practice, such as LTV and DSCR, or a risk weight of 100% under thecurrent SA approach should be applied.
Other requests and comments(1) Level of risk weights
Consideration should be made to ensure that the risk weights for exposures tocorporates are within the range (20-150%) of the risk weights under the current SA approach.
We understand that this Consultative Document does not intend to raise overall capitalrequirements under the SA approach, but are concerned that the proposed treatments may
sharply raise the level of capital charge (for example, the amount of RWA will increase about
1.3 times based on the estimation made using the database that primarily covers banks using
the standardised approach), and credit contraction may have an adverse impact on real
economy. Further, where a floor under the SA approach is applied at a level that exceeds risk
assets under the IRB approach, it may weaken risk management activities, for example, banks
may make credit decisions solely on the basis of revenue and leverage.
Also, assigning a 300% risk weight to cases where data necessary to calculate revenue
and leverage which are risk drivers for corporates is not available should be reconsidered
because the 300% risk weight is the same level as borrowers with negative equity and isexcessively conservative.
(2) Risk weights for entities with negative equity
Uniformly applying a 300% risk weight to all borrowers with negative equity isexcessively conservative, compared with a 150% risk weight for borrowers in delinquency
under the current SA approach. The appropriate treatment would be to, for example, assign alower risk weight for a borrower that demonstrates net profit despite being in negative equity
than a borrower that incurs net loss.
3. Subordinated debt and equity exposures
Requests(1) Risk weights for subordinated debt
Uniform application of a 250% risk weight is not considered to be reasonable, andhence a risk weight that reflects each credit risk for each borrower should be applied. It is
proposed to determine risk weights by using risk weights for corporate exposures reflecting a
difference in the LGD between subordinated and unsubordinated debts.

9Unreasonableness of the revised SA approach proposed (a 250% risk weight for subordinateddebtThis proposal applies a similar requirement set out in treatment of significant
investments in the common shares of unconsolidated financial institutions (capital deduction
or 250%)” (only application of 250%) under Basel III.
The treatment of significant investments in the common shares of unconsolidated
financial institutions aims to prevent unstabilization of financial systems due to double
gearing. It is therefore unreasonable to apply this treatment to corporate exposures.
Proposal on lowering risk weights
In reflecting credit risk, given that subordinated debt is subordinated to unsubordinateddebt in respect of collection, it is reasonable to determine risk weights by using risk weightfor corporate exposure reflecting a difference in LGD between subordinated andunsubordinated debts. Specifically, supervisory LGD ratios under the foundation internalratings-based approach (FIRB) are 75% and 45% for subordinated and unsubordinated debts,
respectively. Consequently, it is suggested to set a risk weight for subordinated debt at 1.67
times of corporate exposures for subordinated debt (=75% / 45%) by using these ratios.
(2) Risk weights for equity
A risk weight based on “credit risk” should be applied to equity that meets the definition
set out in Basel II paragraph 352, differentiating from equity investments which are expected
to generate capital gains.
It is proposed to define risk weights based on credit risk by using risk weight forcorporate exposures reflecting a difference in the LGD between equity and unsubordinateddebt in risk weights.
Equity held for a long term with no anticipation of capital gains totally differs in natureand underlying risk from equity investment with expectation for capital gain.
Therefore, in calculating RWAs for equity held for a long term, a risk weight reflecting
credit risk, not price risk, should be applied.
Unreasonableness of the revised SA approach proposed (300% and 400% risk weights forlisted and unlisted equities, respectively
This Consultative Document proposes risk weights which are calculated according to“price risk” used by the simple market-based approach under Basel II internal rating-based
approach. Basel Rule (Revised Text paragraph 352) permits risk weights for equity held for along term, to be calculated in a manner different from equity investment for other purposes.
Therefore, which risk should be focused on varies depending on the nature of investment. In
determining the value of equity held for purposes of a short-term sale, it is appropriate toapply a risk weight that focuses on price risk because movements in the overall market has
10more impact than issuer’s creditworthiness. On the other hand, with regard to equity held for along term, it is more appropriate to determine a risk weight by focusing on issuer’s credit riskrather than price risk because the determination of the value would be largely affected by theissuer’s creditworthiness rather than short-term movements in the market.
Proposal on risk weights based on credit risk
In reflecting credit risk, given that equity is subordinated to unsubordinated debt inrespect of collection, it is reasonable to determine risk weights by using risk weight forcorporate exposure reflecting a difference in LGD between equity and unsubordinated debt.
Specifically, supervisory LGD ratios under the foundation internal ratings-based approach(FIRB) are 90% and 45% for equity and unsubordinated debt, respectively. Using these ratios,
it is suggested to set a risk weight at 2 times of corporate exposures (=90% / 45%).
However, price fluctuation risk may exist in equity held for a long term. To reflect this,
it is considered reasonable to also set a certain floor for a risk weight of equity held of a longterm.
(3) Treatment of ETFs
The types of products invested by ETFs range widely, such as equity, bond and loan. In
addition to treating ETFs as listed equity, we would like to confirm whether the look-throughapproach be applied by treating ETFs as a fund.
4. Retail exposures
Our response to the question
Q9. Can respondents suggest, and provide evidence on, how to increase the risk sensitivity of
the regulatory retail exposures treatment, either by differentiating certain productsubcategories for which a specific risk weight may be appropriate; or by suggesting simple
risk drivers that could be used to assess the risk of all retail exposures?
Retail exposures incur from mass products, and hence it is impracticable to identify
respective borrowers’ creditworthiness. Therefore, there would be no issue in uniformly
applying 75% risk weight under the current SA approach. However, if 10% CCF is uniformly
allocated to unconditional cancellable commitments, it is proposed to apply a lower risk
weight to the balance of undrawn line of credit cards (and card loans), because since there aremany inactive credit cards (and card loans) and probability of default (PD) for those holders isextremely low, it is reasonable to assign a lower risk weight.

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5. Exposures secured by residential real estates
Our responses to the questions
Q10. Do respondents agree that LTV and/or DSC ratios (as defined in Annex 1 paragraphs 40
and 41) have sufficient predictive power of loan default and/or loss incurred for exposures
secured on residential real estate?
In general terms, we support that LTV and DSC ratios are useful as indicators tomeasure credit risk.
However, the following comments should be noted.
Regional differences in real estate markets and lending practice should be considered.
That is, different treatments should be considered for recourse loans that focus on the
borrowers’ ability to repay a loan (typical in a jurisdiction where purchase of new property isparticularly preferred and liquidity of used property is not high, as with Japan) andnon-recourse loans that are dependent on collateral value.
With regard to recourse loans that require borrowers to repay debts, the significance ofcollateral value in determining the soundness of claims is relatively low than non-recourse
loans, and the LTV is higher than that of non-recourse loans. Further, the DSC ratio is
considered to be more important. Considering such product characteristics, two types of risk
weights tables should be set separately for recourse and non-recourse loans. In addition, theDSC ratios of 35% or less should be sub-divided to apply a lower risk weight to an exposure
with a low DSC ratio.
Q11. Do respondents have views about the measurement of the LTV and DSC ratios? (Inparticular, as regards keeping the value of the property constant as measured at origination in
the calculation of the LTV ratio; and not updating the DSC ratio over time.)
With regard to income constituting the DSC ratio, the use of data before tax should beallowed. Even if a tax burden rate is the same, the level of income after tax would be higher ina jurisdiction that primarily applies indirect taxes than in a jurisdiction that primarily applies
direct taxes. Annual income before tax, not after tax, should therefore be used to uniformly
measure the borrowers’ ability to pay loans beyond jurisdictions. Further, the definition ofconcept of after tax is unclear (i.e. whether it covers national taxes, local taxes, social
insurance or premiums).

12Q12. Do respondents have views on whether the use of a fixed threshold for the DSC ratio is
an appropriate way for differentiating risks and ensuring comparability across jurisdictions? If
not, what reasonably simple alternatives or modifications would respondents propose while
maintaining consistent outcomes?
The proposed thresholds are lacking balance because LTV has 6 buckets, while DSC
has only 2 buckets. The threshold of the latter is at a higher level of 35%, and therefore does
not reflect lower risk profile of high income borrowers. Accordingly, the DSC buckets should
be subdivided into 4 or 5 to reduce the level of risk weights for borrowers with a lower DSC.
Q13. Do respondents propose any alternative/additional risk drivers for the Committee’s
consideration in order to improve the risk sensitivity in this approach without unduly
increasing complexity?
(No comments)
Other requests and comments(1) Level of risk weights
With regard to risk weights of exposures collateralised by residential real estate, thecategory that receives 80% to 100% risk weights should receive risk weights of 75% or lower
which is the current risk weight of retail exposures for the following reason:
We understand that this Consultative Document does not intend to raise overall capitalrequirements under the SA approach, but 35% will be changed to 25% - 80% (average: 47.5%,
medium: 45%) for the LTV of 100% or lower, and 75% will be changed to 80% - 100% for
the LTV of more than 100%, which will lead to an increase in capital charge.
6. Exposures secured by commercial real estate
Our responses to the questions
Q14. Which of the two options above is viewed as the most suitable for determining therisk-weight treatment for exposures secured on commercial real estate?
Q15. What other options might prudently increase the risk sensitivity of the commercial realestate treatment without unduly increasing complexity?
We basically support the option A. Even in the case of credit exposures for commercial
real estate, a recourse loan can require borrowers to repay and source of loan collection does
not rely solely on the value of real estate pledged as collateral. Accordingly, the determinationof risk weights using the LTV should be limited to non-recourse loan. Similarly to exposures
to corporates, recourse loans should receive a risk weight for counterparties, instead oftreating it as an independent bucket. However, risk mitigation effect of collateral should be13reflected.
7. Risk weight add-on for exposures with currency mismatch
Our responses to the questions
Q16. Do respondents agree that a risk weight add-on should be applied to only retail
exposures and exposures secured by residential real estate? What are other options foraddressing this risk in a simple manner?
Since the application of a currency risk add-on only to retail exposures lack fairness, arisk weight add-on for exposures with currency mismatch is not considered necessary.
8. Off-balance sheet exposures
Our responses to the questions
Q17. Do respondents consider the categories for which a CCF is applied under the
standardised approach to be adequately defined?
CCFs for commitments differ between the current SA and the FIRB approach andtherefore we support aligning the CCFs applied under SA with those applied under the FIRB
approach. On the other hand, this gives rise to a one-sided increase in the CCFs (20%,
50%→75%) and therefore the level of CCFs both under the SA and FIRB approaches should
be calibrated through QIS, instead of applying a 75% CCF.
Q18. Do respondents agree that instruments allocated to each of the CCF categories share asimilar probability of being drawn and that the probabilities implied by the CCFs areaccurate? Please provide empirical support for your response.
(1) Unconditional cancellable commitments
Assigning a 10% CCF to unconditional cancellable commitments is excessively
conservative and it is requested to consider a reduction in the CCF. In particular, we proposethat the CCF for retail commitments pertaining to credit card products should be 0.7% basedon actual usage data. If the CCF is uniformly set at 10%, the current 75% risk weight applied
to all retail exposures should be revised to ensure that risk weights vary depending on risk
characteristics of exposures; for example, applying a lower risk weight to a card having nousage records.
Rationale for proposing a lower CCF of 0.7%
Recent 2 years usage data for credit card products issued by certain JBA’s member bank(at the end of each month) shows that the minimum drawn rate of credit lines is 5.73% while
the maximum rate is 6.35%. The difference between the minimum and maximum rates is only
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0.62%, which is considered to be very small. The rate of this difference (0.62%) to the ratio ofunused commitment (94.27% of total credit extension) for the minimum rate is 0.66%(=0.62%/94.27%), which is equivalent to the maximum range of additional drawn rate arisingfrom the amount of undrawn commitment for credit card products. It is therefore proposed to
select this as the CCF.
Rationale for proposing a lower risk weight in case of applying a 10% CCF uniformly
The CCFs under the IRB approach represent an additional draw-down rate in the eventthat a borrower becomes default and risk weights are determined by reflecting the PDs ofrespective borrowers. Under the IRB approach, therefore, if the same CCF is applied to theundrawn amount of all commitments, risk weights are adjusted according to borrowers’ credit
risk. For example, if both borrowers with higher credit standing and lower credit standing
receive the same CCF, this treatment would result in the same amount of exposures for theseborrowers. However, a risk weight for borrowers with higher credit standing should be lower
while that for borrowers with lower credit standing be higher.
On the other hand, under the SA approach, a risk weight of retail exposures is fixed at
75% and does not reflect borrowers’ PDs. In other words, the amount of undrawn
commitments for both borrowers with higher credit standing and lower credit standing would
result in the same amount of risk-weighted assets.
With regard to credit cards, which is a product targeting a mass market, it is difficult to
identify respective borrowers’ creditworthiness after issuing cards. It is however possible toallow a certain difference in setting risk weights, assuming reasonable differences in PDs
taking into account the conditions of transactions.
Actual data for credit card products issued by certain JBA’s member bank shows thatapproximately 30% of total credit extension to the cards issued by this bank is inactive, i.e. nousage records. PDs of such inactive card holders would be significantly lower than that of theactive card holders. However, as described above, the difference between the two is reflectedin risk weights under the IRB approach but is not under the SA approach. Since this is notconsidered to be reasonable treatment, different risk weights should be assigned for credit
cards, depending on the usage and non-usage of the cards.
(2) Normal commitments
Uniform application of a 75% CCF to normal commitments is excessively conservative.
It is therefore proposed to apply a 60% CCF. The proposed CCF of 75% is a ratio applied
based on the draw-down rates at default under the foundation internal ratings-based approach(FIRB). Hence, assigning 75% to the undrawn line is believed to be excessive. On the other
hand, a 60% CCF is considered to be appropriate, based on the result of analysis that certain
member bank’s estimation of the CCFs under the advanced internal rating-based approach(AIRB) was within the range of upper 50%.
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9. Others
Response to the questions
Q19. What are respondents’ views on the alternative treatments currently envisaged forpast-due loans?
Under the current treatment, a risk weight higher than performing loans is applied,taking into account cases where the amount of specific provisions is deemed appropriate.
Therefore, there is no particular issue for this point.
Q20. Do respondents agree with the proposed treatment for MDBs?
(No comments)
Q21. What exposures would be classified under “Other assets”? Is a 100% risk weightappropriate? (Please provide evidence where possible).
In addition to assets recorded in “other assets” for an accounting purpose, “property
plant and equipment” is primarily classified under “Other assets”.
These assets mainly represent property, not claims, and have no borrowers. Risk
weights cannot therefore be determined based on borrowers’ credit risk. However, these assets
are also inherent to a risk of incurring losses due to damage. Although this risk is different
from credit risk, it is reasonable to apply a 100% risk weight which means a risk weightrequiring capital surplus to maintain 8%, a minimum capital ratio achieved by banks subject
to international standards in relation to their assets held.
Q22. What are respondents’ views on the above alternative ways to define eligible financial
collateral?
(No comments)
Q23. What are respondents’ views on the recalibrated supervisory haircuts shown in Table 4?
What are respondents’ views on how to eliminate references to ratings from the supervisory
haircuts table? What could be the implications of eliminating references to external ratings?
Given that external ratings of corporates and banks are robustly determined comparedwith those previously assigned for securitised products, references to external ratings which
are an indicator superior in in terms of simplicity and risk sensitivity should not be eliminated.

16Q24. What are respondents’ views on the proposed corporate guarantor eligibility criteria?
ECA (export credit agency) finance and similar products do not strictly fall under the
category of sovereigns, but may be deemed as public guarantees. They therefore should betreated as eligible guarantee.
10. Other comments and requests from an overall perspective(1) Impact on other regulations
Under the net stable funding ratio (NSFR), a lower required stable funding (RSF) is
assigned to loans that qualify for a 35% or lower risk weight under the SA approach forcredit risk. Since the NSFR figures will be changed being linked with the revision of SA
for credit risk, careful consideration is considered necessary.
(2) Since exposures to which the exception for banks using the IRB approach are applied arethose with immaterial risk-weighted assets, a simplified treatment should be permitted by,for example, assigning a 100% risk weight to all exposures to corporates.
(3) In finalising this rule, it is requested to clarify:
・ Whether differences in accounting standards can be accepted as-is.
・ Which ratio should be used for exposures for corporates, consolidated or solo basis.

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