Module 2 Simplified Standardised Approach to Credit Risk Guidance

Summary

This is GFSC guidance explaining how Guernsey licensed banks should complete Module 2 (the Simplified Standardised Approach to Credit Risk section) of the BSL/2 prudential return. It applies to every incorporated licensed bank that uses the simplified standardised approach to calculate its credit risk capital requirement, and covers both balance sheet assets and off-balance sheet exposures, including OTC derivatives.

• Portfolio classification: Balance sheet assets must be classified into mutually exclusive portfolios (sovereigns, PSEs, corporates, banks, securitisations, cash and similar items, retail, residential mortgages, past due exposures, capital deductions, other) and risk-weighted according to the rules for each portfolio.
• Risk weight determination: Risk weights for sovereigns, PSEs and banks are generally derived from consensus ECA country risk scores; other portfolios have fixed or criteria-based weightings (e.g. corporates 100%, regulatory retail 75%, residential mortgages 35% to 100% depending on LTV and criteria in Appendix G).
• Reporting principles: Amounts must be reported net of specific provisions (except OTC derivatives, where provisions are deducted from the credit equivalent amount), and double counting of exposures across balance sheet and off-balance sheet items must be avoided.
• Credit risk mitigation (CRM): Banks may reduce risk-weighted amounts using recognised CRM techniques (collateral, guarantees, credit derivatives), but only where the operational requirements and conditions in Appendix F are satisfied.
• Off-balance sheet and OTC derivatives: Off-balance sheet exposures (excluding and including OTC derivatives) must be categorised and converted using credit conversion factors or add-on factors before risk weighting, with CRM substitution rules applied as set out in Sections 5 and 7.
• Multiple CRM and maturity mismatches: Specific treatment applies where multiple CRM techniques are used on the same exposure or where there is a maturity mismatch between the exposure and the credit protection, as set out in Section 8.

The document is technical completion guidance rather than a standalone rule; it does not itself state a filing deadline but supports completion of the BSL/2 prudential return, which is a recurring regulatory reporting obligation for in-scope banks.

Key obligations

• Every incorporated licensed bank using the simplified standardised approach must complete Module 2 of the BSL/2 prudential return covering balance sheet and off-balance sheet exposures.
• Assets and exposures must be classified into the correct mutually exclusive Portfolio (A through L) with no asset reported in more than one portfolio.
• Amounts must be reported net of specific provisions for balance sheet assets and non-OTC off-balance sheet exposures; specific provisions on OTC derivatives must be deducted from the credit equivalent amount.
• Banks must avoid double counting exposures, including only report undrawn portions of loan commitments as off-balance sheet items and excluding on-balance-sheet-reflected derivative exposures from balance sheet reporting.
• To apply the 75% regulatory retail risk weight, banks must satisfy the orientation, product, granularity and low-value criteria in Appendix G, and must set out and be prepared to justify their granularity criteria to the Commission.
• CRM techniques (collateral, guarantees, credit derivatives) may only be used to reduce capital requirements if they meet the operational requirements and conditions in Appendix F.
• Accruals that cannot be classified with the related claim require the prior consent of the Commission before being categorised in Portfolio L.

Applies to

incorporated licensed banks using the simplified standardised approach to credit risk