Directive 7/2008: Mapping of Fitch and Moody's Ratings to Prescribed Risk Weights

South African Reserve Bank  
From the Office of  
the Registrar of Banks  

D7/08  
2008-09-01  

To: Banks, controlling companies, eligible institutions and auditors of banks or controlling companies  

Directive 7/2008 issued in terms of section 6(6) of the Banks Act, 1990  

Mapping of the international scale rating symbols of Fitch Ratings and Moody’s Investors Service to the prescribed risk weights available in terms of regulation 23 of the Regulations relating to banks  

## Executive summary

Regulation 23 of the Regulations relating to Banks (the Regulations) prescribes, among other things, the risk weights that relate to the assessments (ratings) on an international scale issued by Standard & Poor’s Rating Services (S&P). For instance, a loan to a corporate entity rated A+ to A- by S&P attracts a 50-per-cent prescribed risk weight.  

As stated in the Regulations, the ratings used throughout the Regulations to determine the appropriate risk weights to be applied by banks and banking groups that adopted the standardised approach (STA) for credit risk and for the treatment of securitisation exposures relate to the ratings symbols on an international scale issued by S&P. The rating scales of other external credit assessment institutions recognised as eligible institutions in South Africa, could have been used instead.  

This directive requires that all banks and/or affected parties map the international scale ratings of Fitch Ratings (Fitch) and Moody’s Investors Service (Moody’s) to the prescribed risk weights specified in regulation 23 of the Regulations in the manner outlined below.  

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## 1. Purpose

### 1.1  
The purpose of this directive is to advise banks and/or affected parties of the mapping of the international scale ratings of Fitch and Moody’s to the prescribed risk weights in regulation 23 of the Regulations.  

## 2. References in the Regulations

### 2.1  
Regulation 23 of the Regulations allows a bank to, among other things, choose between the internal ratings-based (IRB) approach and the STA for calculating its minimum required capital and reserve funds related to credit risk. The STA makes extensive use of the ratings issued by external credit assessment institutions (ECAIs) for determining the prescribed risk weights of exposures, and ultimately the calculation of the minimum required capital and reserve funds related to credit risk.  

### 2.2  
International scale ratings issued by eligible ECAIs are also used to calculate the capital requirements in respect of securitisation exposures. Regulation 23 of the Regulations prescribes, *inter alia*, risk weights that relate to the ratings on an international scale issued by S&P. As stated in the Regulations, the rating scales of other external credit assessment institutions recognised as eligible institutions in South Africa, could have been used instead.  

## 3. References in the Banks Act, 1990

### 3.1  
Section 4(5) of the Banks Act, 1990 stipulates that “in order to ensure the appropriate usage by a bank, a controlling company or a branch, of an external credit assessment issued by an eligible institution, the Registrar:  
(a) shall assign such external credit ratings to such risk weights as may be prescribed from time to time; and  
(b) shall publicly disclose which external credit assessment or rating issued by an eligible external credit assessment institution relates to which prescribed risk weight”.  

## 4. Other relevant references

### 4.1  
Paragraph 1 of Annexure 2 of the “International Convergence of Capital Measurement and Capital Standards – A Revised Framework” (Basel II), issued in June 2006 indicates that supervisors will be responsible for assigning credit risk assessments issued by eligible ECAIs to the risk weights available under the STA.  

### 4.2  
In addition to research conducted by this Office, work already undertaken in this area by other regulatory authorities was also considered, notably the mapping tables of the Committee of European Banking Supervisors and the Financial Services Authority of the United Kingdom.  

## 5. International scale ratings of Fitch and Moody’s assigned to prescribed risk weights

### 5.1  
This Office hereby wishes to advise that the international scale ratings of Fitch and Moody’s shall be mapped in the manner outlined below.  

### 5.1.1  
Figure 1 below sets out the mapping of the corresponding long-term credit assessments of Fitch and Moody’s, respectively, to the relevant risk weights specified under the STA as outlined in Table 9 in regulation 23(8)(a) of the Regulations.  

#### Figure 1: Long-term credit assessments

| Institution | Claims in respect of: |
|-------------|------------------------|
|             | Sovereigns (including the Central Bank of that particular country) | Public-sector entities | Banks | Securities Firms | Banks: short-term claims | Securities Firms: short term claims |
| **Fitch assessments** | **Moody’s assessments** | **S & P assessments** | | | | | |
| AAA to AA- | Aaa to Aa3 | AAA to AA- | 0% | 20% | 20% | 20% | 20% |
| A+ to A- | A1 to A3 | A+ to A- | 20% | 50% | 50% | 50% | 20% |
| BBB+ to BBB- | Baa1 to Baa3 | BBB+ to BBB- | 50% | 50% | 50% | 50% | 20% |
| BB+ to B- | Ba1 to B3 | BB+ to B- | 100% | 100% | 100% | 100% | 50% |
| Below B- | Below B3 | Below B- | 150% | 150% | 150% | 150% | 150% |
| Unrated | Unrated | Unrated | 100% | 50% | 50% | 50% | 20% |

#### Claims in respect of corporate entities

| Fitch assessments | Moody’s assessments | S & P assessments | Risk weights |
|-------------------|---------------------|-------------------|--------------|
| AAA to AA- | Aaa to Aa3 | AAA to AA- | 20% |
| A+ to A- | A1 to A3 | A+ to A- | 50% |
| BBB+ to BB- | Baa1 to Ba3 | BBB+ to BB- | 100% |
| Below BB- | Below Ba3 | Below BB- | 150% |
| Unrated | Unrated | Unrated | 100% |

### 5.1.2  
Figure 2 below sets out the short-term credit assessments and corresponding risk weights.  

#### Figure 2: Short-term credit assessments

| Fitch assessments | Moody’s assessments | S & P assessments | Risk weights |
|-------------------|---------------------|-------------------|--------------|
| F1 | P-1 | A-1 | 20% |
| F2 | P-2 | A-2 | 50% |
| F3 | P-3 | A-3 | 100% |
| All other ratings or unrated | All other ratings or unrated | All other ratings or unrated | 150% |

## 5.2 Securitisation

### 5.2.1  
With reference to Table 3 in regulation 23(6)(h) of the Regulations, Figures 3 and 4 set out the long and short-term ratings categories and corresponding risk-weight categories of securitisation exposures under the STA.  

#### Figure 3: Long-term rating category

| Fitch assessments | Moody’s assessments | S & P assessments | Risk weights |
|-------------------|---------------------|-------------------|--------------|
| AAA to AA- | Aaa to Aa3 | AAA to AA- | 20% |
| A+ to A- | A1 to A3 | A+ to A- | 50% |
| BBB+ to BBB- | Baa1 to Baa3 | BBB+ to BBB- | 100% |
| BB+ to BB- | Ba1 to Ba3 | BB+ to BB- | 350% |
| B+ and below or unrated | B1 and below or unrated | B+ and below or unrated | Deduction |

#### Figure 4: Short-term rating category

| Fitch assessments | Moody’s assessments | S & P assessments | Risk weights |
|-------------------|---------------------|-------------------|--------------|
| F1 | P-1 | A-1 | 20% |
| F2 | P-2 | A-2 | 50% |
| F3 | P-3 | A-3 | 100% |
| All other ratings or unrated | All other ratings or unrated | All other ratings or unrated | Deduction |

### 5.2.2  
Figure 5 below depicts the mapping of long-term credit ratings under the ratings-based approach (also see Table 14 in regulation 23(11)(e) of the Regulations).  

#### Figure 5: Long-term credit rating

| Credit Assessments | Risk weights: |
|--------------------|---------------|
|                    | Most senior tranche | Base | Non-granular pool |
| **Fitch** | **Moody’s** | **S & P** |               |       |             |
| AAA | Aaa | AAA | 7% | 12% | 20% |
| AA | Aa | AA | 8% | 15% | 25% |
| A+ | A1 | A+ | 10% | 18% | 35% |
| A | A2 | A | 12% | 20% | 35% |
| A- | A3 | A- | 20% | 35% | 35% |
| BBB+ | Baa1 | BBB+ | 35% | 50% | 50% |
| BBB | Baa2 | BBB | 60% | 75% | 75% |
| BBB- | Baa3 | BBB- | 100% | 100% | 100% |
| BB+ | Ba1 | BB+ | 250% | 250% | 250% |
| BB | Ba2 | BB | 425% | 425% | 425% |
| BB- | Ba3 | BB- | 650% | 650% | 650% |
| Below BB- and unrated | Below Ba3 and unrated | Below BB- and unrated | Deduction | Deduction | Deduction |

## 5.3 Credit derivative instruments under the STA

### 5.3.1  
In the case of a first-to-default structure, the protection provider shall risk weight its exposures in accordance with the weightings set out in Table 13 in regulation 23(9)(d) of the Regulations. Figures 7 and 8 below outline the corresponding long and short-term ratings of Fitch and Moody’s.  

#### Figure 7: Long-term rating

| Fitch assessments | Moody’s assessments | S & P assessments | Risk weights |
|-------------------|---------------------|-------------------|--------------|
| AAA to AA- | Aaa to Aa3 | AAA to AA- | 20% |
| A+ to A- | A1 to A3 | A+ to A- | 50% |
| BBB+ to BBB- | Baa1 to Baa3 | BBB+ to BBB- | 100% |
| BB+ to BB- | Ba1 to Ba3 | BB+ to BB- | 350% |
| B+ and below or unrated | B1 and below or unrated | B+ and below or unrated | Deduction |

#### Figure 8: Short-term rating

| Fitch assessments | Moody’s assessments | S & P assessments | Risk weights |
|-------------------|---------------------|-------------------|--------------|
| F1 | P-1 | A-1 | 20% |
| F2 | P-2 | A-2 | 50% |
| F3 | P-3 | A-3 | 100% |
| All other | All other | All other | Deduction |

## 6. Directive

### 6.1  
All banks and controlling companies shall apply the mapping tables outlined above in the calculation of their minimum required capital and reserve funds related to credit risk in terms of regulation 23 of the Regulations.  

### 6.2  
The mapping of the international scale ratings issued by eligible ECAIs to the risk weights prescribed in regulation 23 of the Regulations will be monitored by this Office and revised as appropriate.  

## 7. Acknowledgement of receipt

Two additional copies of this directive are enclosed for the use of your institution’s independent auditors. The attached acknowledgement of receipt, duly completed and signed by both the chief executive officer of the institution and the said auditors, should be returned to this Office at the earliest convenience of the aforementioned signatories.  

E M Kruger  
Registrar of Banks  

The previous directive issued was Directive 6/2008 dated 7 May 2008.  

P.O Box 8432 Pretoria 0001 · 370 Church Street Pretoria 0002 · South Africa · Tel +27 12 3133911/0861 12 7272 · Fax +27 12 3133758 · www.reservebank.co.za