Basel Committee on

Banking Supervision

CRE
Calculation of RWA for
credit risk
CRE33
IRB approach: supervisory
slotting approach for
specialised lending

Version effective as of
15 Dec 2019
FAQs on climate related financial risks added on
8 December 2022.
This document has been generated on 04/04/2024 based on the Basel Framework data available on
the BIS website (www.bis.org).

© Bank for International Settlements 2024. All rights reserved.

Introduction

33.1 This chapter sets out the calculation of risk weighted assets and expected losses for
specialised lending (SL) exposures subject to the supervisory slotting approach. The method
for determining the difference between expected losses and provisions is set out in CRE35.

Risk weights for specialised lending (PF, OF, CF and IPRE)

33.2 For project finance (PF), object finance (OF), commodities finance (CF) and income producing
real estate (IPRE) exposures, banks that do not meet the requirements for the estimation of
probability of default (PD) under the corporate internal ratings-based (IRB) approach will be
required to map their internal grades to five supervisory categories, each of which is
associated with a specific risk weight. The slotting criteria on which this mapping must be
based are provided in CRE33.13 for PF exposures, CRE33.15 for OF exposures, CRE33.16 for
CF exposures and CRE33.14 for IPRE exposures. The risk weights for unexpected losses (UL)
associated with each supervisory category are:
Supervisory categories and unexpected loss (UL) risk weights for other SL exposures

Strong Good Satisfactory Weak Default

70% 90% 115% 250% 0%

33.3 Although banks are expected to map their internal ratings to the supervisory categories for
specialised lending using the slotting criteria, each supervisory category broadly corresponds
to a range of external credit assessments as outlined below.
Strong Good Satisfactory Weak Default

BBB- or better BB+ or BB BB- or B+ B to C- Not applicable

33.4 At national discretion, supervisors may allow banks to assign preferential risk weights of
50% to “strong” exposures, and 70% to “good” exposures, provided they have a remaining
maturity of less than 2.5 years or the supervisor determines that banks’ underwriting and
other risk characteristics are substantially stronger than specified in the slotting criteria for
the relevant supervisory risk category.

Risk weights for specialised lending (HVCRE)

33.5 For high-volatility commercial real estate (HVCRE) exposures, banks that do not meet the
requirements for estimation of PD, or whose supervisor has chosen not to implement the
foundation or advanced approaches to HVCRE, must map their internal grades to five
supervisory categories, each of which is associated with a specific risk weight. The slotting
criteria on which this mapping must be based are the same as those for IPRE, as provided in
CRE33.14. The risk weights associated with each supervisory category are:
Supervisory categories and UL risk weights for high-volatility commercial real estate

Strong Good Satisfactory Weak Default

95% 120% 140% 250% 0%

33.6 As indicated in CRE33.3, each supervisory category broadly corresponds to a range of

external credit assessments.

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33.7 At national discretion, supervisors may allow banks to assign preferential risk weights of
70% to “strong” exposures, and 95% to “good” exposures, provided they have a remaining
maturity of less than 2.5 years or the supervisor determines that banks’ underwriting and
other risk characteristics are substantially stronger than specified in the slotting criteria for
the relevant supervisory risk category.

Expected loss for specialised lending (SL) exposures subject to the supervisory slotting
criteria

33.8 For SL exposures subject to the supervisory slotting criteria, the expected loss (EL) amount
is determined by multiplying 8% by the risk-weighted assets produced from the appropriate
risk weights, as specified below, multiplied by exposure at default.

33.9 The risk weights for SL, other than HVCRE, are as follows:
Strong Good Satisfactory Weak Default

5% 10% 35% 100% 625%

33.10 Where, at national discretion, supervisors allow banks to assign preferential risk weights to
non-HVCRE SL exposures falling into the “strong” and “good” supervisory categories as
outlined in CRE33.4, the corresponding expected loss (EL) risk weight is 0% for “strong”
exposures, and 5% for “good” exposures.

33.11 The risk weights for HVCRE are as follows:

Strong Good Satisfactory Weak Default

5% 5% 35% 100% 625%

33.12 Even where, at national discretion, supervisors allow banks to assign preferential risk
weights to HVCRE exposures falling into the “strong” and “good” supervisory categories as
outlined in CRE33.7, the corresponding EL risk weight will remain at 5% for both “strong”
and “good” exposures.

Supervisory slotting criteria for specialised lending

33.13 The following table sets out the supervisory rating grades for project finance exposures
subject to the supervisory slotting approach.
Strong Good Satisfactory Weak

Financial strength

Market conditions Few competing Few competing Project has no Project has worse
suppliers or suppliers or better advantage in than average
substantial and than average location, cost, or location, cost, or
durable advantage location, cost, or technology. Demand technology.
in location, cost, or technology but this is adequate and Demand is weak
technology. situation may not stable and declining
Demand is strong last. Demand is
and growing strong and stable

Financial ratios (eg debt service Strong financial Strong to Standard financial Aggressive financial
coverage ratio (DSCR), loan life ratios considering acceptable financial ratios considering the ratios considering
coverage ratio, project life coverage the level of project ratios considering level of project risk the level of project
ratio, and debt-to-equity ratio) risk; very robust the level of project risk
economic risk; robust project
assumptions economic

2/12
 assumptions

Stress analysis The project can The project can The project is The project is likely
meet its financial meet its financial vulnerable to to default unless
obligations under obligations under stresses that are not conditions improve
sustained, severely normal stressed uncommon through soon
stressed economic economic or an economic cycle,
or sectoral sectoral conditions. and may default in a
conditions The project is only normal downturn
likely to default
under severe
economic
conditions

Financial structure

Duration of the credit compared to Useful life of the Useful life of the Useful life of the Useful life of the
the duration of the project project significantly project exceeds project exceeds tenor project may not
exceeds tenor of tenor of the loan of the loan exceed tenor of the
the loan loan

Amortisation schedule Amortising debt Amortising debt Amortising debt Bullet repayment or
repayments with amortising debt
limited bullet repayments with
payment high bullet
repayment

Political and legal environment

Political risk, including transfer risk, Very low exposure; Low exposure; Moderate exposure; High exposure; no
considering project type and strong mitigation satisfactory fair mitigation or weak mitigation
mitigants instruments, if mitigation instruments instruments
needed instruments, if
needed

Force majeure risk (war, civil unrest, Low exposure Acceptable Standard protection Significant risks, not
etc), exposure fully mitigated

Government support and project's Project of strategic Project considered Project may not be Project not key to
importance for the country over the importance for the important for the strategic but brings the country. No or
long term country (preferably country. Good level unquestionable weak support from
export-oriented). of support from benefits for the Government
Strong support Government country. Support
from Government from Government
may not be explicit

Stability of legal and regulatory Favourable and Favourable and Regulatory changes Current or future
environment (risk of change in law) stable regulatory stable regulatory can be predicted with regulatory issues
environment over environment over a fair level of may affect the
the long term the medium term certainty project

Acquisition of all necessary supports Strong Satisfactory Fair Weak

and approvals for such relief from
local content laws

Enforceability of contracts, collateral Contracts, collateral Contracts, collateral Contracts, collateral There are
and security and security are and security are and security are unresolved key
enforceable enforceable considered issues in respect if
enforceable even if actual enforcement
certain non-key of contracts,
issues may exist collateral and
security

Transaction characteristics

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Design and technology risk Fully proven Fully proven Proven technology Unproven
technology and technology and and design - start-up technology and
design design issues are mitigated design; technology
by a strong issues exist and/or
completion package complex design

Construction risk

Permitting and siting All permits have Some permits are Some permits are still Key permits still
been obtained still outstanding but outstanding but the need to be
their receipt is permitting process is obtained and are
considered very well defined and they not considered
likely are considered routine. Significant
routine conditions may be
attached

Type of construction contract Fixed-price date- Fixed-price date- Fixed-price date- No or partial fixed-
certain turnkey certain turnkey certain turnkey price turnkey
construction construction EPC construction contract contract and/or
engineering and with one or several interfacing issues
procurement contractors with multiple
contract (EPC) contractors

Completion guarantees Substantial Significant Adequate liquidated Inadequate

liquidated damages liquidated damages damages supported liquidated damages
supported by supported by by financial or not supported
financial substance financial substance substance and/or by financial
and/or strong and/or completion completion substance or weak
completion guarantee from guarantee from completion
guarantee from sponsors with good sponsors with good guarantees
sponsors with financial standing financial standing
excellent financial
standing

Track record and financial strength Strong Good Satisfactory Weak

of contractor in constructing similar
projects.

Operating risk

Scope and nature of operations and Strong long-term Long-term O&M Limited O&M No O&M contract:
maintenance (O & M) contracts O&M contract, contract, and/or contract or O&M risk of high
preferably with O&M reserve reserve account operational cost
contractual accounts overruns beyond
performance mitigants
incentives, and/or
O&M reserve
accounts

Operator's expertise, track record, Very strong, or Strong Acceptable Limited/weak, or

and financial strength committed local operator
technical assistance dependent on local
of the sponsors authorities

Off-take risk

(a) If there is a take-or-pay or fixed- Excellent Good Acceptable financial Weak off-taker;
price off-take contract: creditworthiness of creditworthiness of standing of off-taker; weak termination
off-taker; strong off-taker; strong normal termination clauses; tenor of
termination termination clauses; tenor of contract does not
clauses; tenor of clauses; tenor of contract generally exceed the maturity
contract contract exceeds matches the maturity of the debt
comfortably the maturity of the of the debt
exceeds the debt
maturity of the

4/12
 debt

(b) If there is no take-or-pay or fixed- Project produces Project produces Commodity is sold on Project output is
price off-take contract: essential services essential services a limited market that demanded by only
or a commodity or a commodity may absorb it only at one or a few buyers
sold widely on a sold widely on a lower than projected or is not generally
world market; regional market prices sold on an
output can readily that will absorb it at organised market
be absorbed at projected prices at
projected prices historical growth
even at lower than rates
historic market
growth rates

Supply risk

Price, volume and transportation risk Long-term supply Long-term supply Long-term supply Short-term supply
of feed-stocks; supplier's track contract with contract with contract with supplier contract or long-
record and financial strength supplier of supplier of good of good financial term supply
excellent financial financial standing standing - a degree of contract with
standing price risk may remain financially weak
supplier - a degree
of price risk
definitely remains

Reserve risks (e.g. natural resource Independently Independently Proven reserves can Project relies to
development) audited, proven audited, proven supply the project some extent on
and developed and developed adequately through potential and
reserves well in reserves in excess the maturity of the undeveloped
excess of of requirements debt reserves
requirements over over lifetime of the
lifetime of the project
project

Strength of Sponsor

Sponsor's track record, financial Strong sponsor Good sponsor with Adequate sponsor Weak sponsor with
strength, and country/sector with excellent track satisfactory track with adequate track no or questionable
experience record and high record and good record and good track record and/or
financial standing financial standing financial standing financial
weaknesses

Sponsor support, as evidenced by Strong. Project is Good. Project is Acceptable. Project is Limited. Project is
equity, ownership clause and highly strategic for strategic for the considered important not key to
incentive to inject additional cash if the sponsor (core sponsor (core for the sponsor (core sponsor's long-
necessary business - long- business - long- business) term strategy or
term strategy) term strategy) core business

Security Package

Assignment of contracts and Fully Comprehensive Acceptable Weak

accounts comprehensive

Pledge of assets, taking into account First perfected Perfected security Acceptable security Little security or
quality, value and liquidity of assets security interest in interest in all interest in all project collateral for
all project assets, project assets, assets, contracts, lenders; weak
contracts, permits contracts, permits permits and accounts negative pledge
and accounts and accounts necessary to run the clause
necessary to run necessary to run project
the project the project

Lender's control over cash flow (eg Strong Satisfactory Fair Weak
cash sweeps, independent escrow
accounts)

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 Strength of the covenant package Covenant package Covenant package Covenant package is Covenant package
(mandatory prepayments, payment is strong for this is satisfactory for fair for this type of is Insufficient for
deferrals, payment cascade, type of project this type of project project Project may this type of project
dividend restrictions-) Project may issue Project may issue issue limited Project may issue
no additional debt extremely limited additional debt unlimited
additional debt additional debt

Reserve funds (debt service, O&M, Longer than Average coverage Average coverage Shorter than
renewal and replacement, average coverage period, all reserve period, all reserve average coverage
unforeseen events, etc) period, all reserve funds fully funded funds fully funded period, reserve
funds fully funded funds funded from
in cash or letters of operating cash
credit from highly flows
rated bank

FAQ
FAQ1 How can banks reflect climate-related financial risks in the Supervisory slotting criteria
for specialised lending?
When performing the assessment of the category of the subfactor components, banks
should analyse how climate-related financial risks could negatively impact the
assignment into a category. This includes any potential impact on the financial
strength (eg estimations of the future demand, economic assumption and stressed
economic conditions used for stress analysis), the political and legal environment (eg
transition risk into “stability of legal and regulatory environment (risk of change in
law)”, physical risk into “Force majeure risk (war, civil unrest, etc)” and the asset
characteristic in the case of object finance. When performing this assessment, banks
should take into consideration whether climate-related financial risks have been
adequately mitigated (eg improving adaptation or taking insurance coverage against
physical climate risks).

33.14 The following table sets out the supervisory rating grades for income producing real estate exposures and
high-volatility commercial real estate exposures subject to the supervisory slotting approach.
Strong Good Weak
Satisfactor
y

Financial strength

Market conditions
The supply and demand
for the project’s type and
location are currently in
equilibrium. The number
of competitive properties
coming to market is equal
or lower than forecasted
demand
The supply and demand Market conditions are roughly Market conditions are
for the project’s type and in equilibrium. Competitive weak. It is uncertain wh
location are currently in properties are coming on the conditions will improve
equilibrium. The number market and others are in the return to equilibrium. Th
of competitive properties planning stages. The project’s project is losing tenants
coming to market is design and capabilities may not lease expiration. New le
roughly equal to be state of the art compared to terms are less favourab
forecasted demand new projects compared to those expi

Financial ratios and advance
rate
The property’s DSCR is
considered strong (DSCR
is not relevant for the
construction phase) and
its loan-to-value ratio
(LTV) is considered low
given its property type.
Where a secondary
market exists, the
transaction is
underwritten to market
The DSCR (not relevant The property’s DSCR has The property’s DSCR has
for development real deteriorated and its value has deteriorated significantl
estate) and LTV are fallen, increasing its LTV and its LTV is well above
satisfactory. Where a underwriting standards
secondary market exists, new loans
the transaction is
underwritten to market
standards

6/12
 standards
Stress analysis The property’s resources,
contingencies and liability
structure allow it to meet
its financial obligations
during a period of severe
financial stress (eg
interest rates, economic
growth)
Cash-flow predictability
(a) For complete and The property’s leases are
stabilised property. long-term with
creditworthy tenants and
their maturity dates are
scattered. The property
has a track record of
tenant retention upon
lease expiration. Its
vacancy rate is low.
Expenses (maintenance,
insurance, security, and
property taxes) are
predictable
(b) For complete but not Leasing activity meets or
stabilised property exceeds projections. The
project should achieve
stabilisation in the near
future
(c) For construction phase The property is entirely
pre-leased through the
tenor of the loan or pre-
sold to an investment
grade tenant or buyer, or
the bank has a binding
commitment for take-out
financing from an
investment grade lender
Asset characteristics
Location Property is located in
highly desirable location
that is convenient to
services that tenants
desire
Design and condition Property is favoured due
to its design,
configuration, and
maintenance, and is
highly competitive with
new properties
Property is under Construction budget is
construction conservative and
technical hazards are
7/12
The property can meet its During an economic downturn, The property’s financial
financial obligations the property would suffer a condition is strained and
under a sustained period decline in revenue that would likely to default unless
of financial stress (eg limit its ability to fund capital conditions improve in th
interest rates, economic expenditures and significantly near term
growth). The property is increase the risk of default
likely to default only
under severe economic
conditions
Most of the property’s Most of the property’s leases The property’s leases ar
leases are long-term, with are medium rather than long- various terms with tena
tenants that range in term with tenants that range in that range in
creditworthiness. The creditworthiness. The property creditworthiness. The
property experiences a experiences a moderate level property experiences a
normal level of tenant of tenant turnover upon lease high level of tenant
turnover upon lease expiration. Its vacancy rate is turnover upon lease
expiration. Its vacancy moderate. Expenses are expiration. Its vacancy r
rate is low. Expenses are relatively predictable but vary is high. Significant expen
predictable in relation to revenue are incurred preparing
space for new tenants
Leasing activity meets or Most leasing activity is within Market rents do not me
exceeds projections. The projections; however, expectations. Despite
project should achieve stabilisation will not occur for achieving target occupa
stabilisation in the near some time rate, cash flow coverage
future tight due to disappointin
revenue
The property is entirely Leasing activity is within The property is
pre-leased or pre-sold to projections but the building deteriorating due to cos
a creditworthy tenant or may not be pre-leased and overruns, market
buyer, or the bank has a there may not exist a take-out deterioration, tenant
binding commitment for financing. The bank may be the cancellations or other
permanent financing permanent lender factors. There may be a
from a creditworthy dispute with the party
lender providing the permanen
financing
Property is located in The property location lacks a The property’s location,
desirable location that is competitive advantage configuration, design an
convenient to services maintenance have
that tenants desire contributed to the
property’s difficulties
Property is appropriate in Property is adequate in terms Weaknesses exist in the
terms of its design, of its configuration, design and property’s
configuration and maintenance configuration, design or
maintenance. The maintenance
property’s design and
capabilities are
competitive with new
properties
Construction budget is Construction budget is Project is over budget
conservative and adequate and contractors are or unrealistic given its
technical hazards are ordinarily qualified technical hazards.

Strength of Sponsor/
Developer
Financial capacity and
willingness to support the
property.
Reputation and track record
with similar properties.
Relationships with relevant
real estate actors
Security Package
Nature of lien
Assignment of rents (for
projects leased to long-term
tenants)
Quality of the insurance
coverage
33.15 The following table sets out the supervisory rating grades for object finance exposures
subject to the supervisory slotting approach.
limited. Contractors are
highly qualified
The sponsor/developer
made a substantial cash
contribution to the
construction or purchase
of the property. The
sponsor/developer has
substantial resources and
limited direct and
contingent liabilities. The
sponsor/developer’s
properties are diversified
geographically and by
property type
Experienced management
and high sponsors’
quality. Strong reputation
and lengthy and
successful record with
similar properties
Strong relationships with
leading actors such as
leasing agents
Perfected first lien
The lender has obtained
an assignment. They
maintain current tenant
information that would
facilitate providing notice
to remit rents directly to
the lender, such as a
current rent roll and
copies of the project’s
leases
Appropriate
8/12
limited. Contractors are
highly qualified
The sponsor/developer
made a material cash
contribution to the
construction or purchase
of the property. The
sponsor/developer’s
financial condition allows
it to support the property
in the event of a cash flow
shortfall. The sponsor/
developer’s properties
are located in several
geographic regions
Appropriate management
and sponsors’ quality. The
sponsor or management
has a successful record
with similar properties
Proven relationships with
leading actors such as
leasing agents
Perfected first lien.
Lenders in some markets
extensively use loan
structures that include
junior liens. Junior liens
may be indicative of this
level of risk if the total
LTV inclusive of all senior
positions does not exceed
a typical first loan LTV.
The lender has obtained
an assignment. They
maintain current tenant
information that would
facilitate providing notice
to the tenants to remit
rents directly to the
lender, such as current
rent roll and copies of the
project’s leases
Appropriate
The sponsor/developer’s
contribution may be immaterial
or non-cash. The sponsor/
developer is average to below
average in financial resources
Moderate management and
sponsors’ quality. Management
or sponsor track record does
not raise serious concerns
Adequate relationships with
leasing agents and other
parties providing important
real estate services
Perfected first lien. Lenders in
some markets extensively use
loan structures that include
junior liens. Junior liens may be
indicative of this level of risk if
the total LTV inclusive of all
senior positions does not
exceed a typical first loan LTV.
The lender has obtained an
assignment. They maintain
current tenant information that
would facilitate providing
notice to the tenants to remit
rents directly to the lender,
such as current rent roll and
copies of the project’s leases
Appropriate
Contractors may be
under qualified
The sponsor/developer
lacks capacity or
willingness to support
the property
Ineffective
management and
substandard sponsors’
quality. Management
and sponsor difficulties
have contributed to
difficulties in managing
properties in the past
Poor relationships with
leasing agents and/or ot
parties providing impor
real estate services
Ability of lender to
foreclose is constrained
The lender has not
obtained an assignment
the leases or has not
maintained the informa
necessary to readily
provide notice to the
building’s tenants
Substandard
 Strong Good Satisfactory Weak

Financial strength

Market conditions Demand is strong and Demand is strong and Demand is adequate Demand is weak and
growing, strong entry stable. Some entry and stable, limited entry declining, vulnerable
barriers, low sensitivity barriers, some barriers, significant to changes in
to changes in sensitivity to changes sensitivity to changes in technology and
technology and in technology and technology and economic outlook,
economic outlook economic outlook economic outlook highly uncertain
environment

Financial ratios (DSCR Strong financial ratios Strong / acceptable Standard financial ratios Aggressive financial
and LTV) considering the type of financial ratios for the asset type ratios considering the
asset. Very robust considering the type of type of asset
economic asset. Robust project
assumptions economic
assumptions

Stress analysis Stable long-term Satisfactory short-term Uncertain short-term Revenues subject to
revenues, capable of revenues. Loan can revenues. Cash flows strong uncertainties;
withstanding severely withstand some are vulnerable to even in normal
stressed conditions financial adversity. stresses that are not economic conditions
through an economic Default is only likely uncommon through an the asset may default,
cycle under severe economic cycle. The unless conditions
economic conditions loan may default in a improve
normal downturn

Market liquidity Market is structured Market is worldwide or Market is regional with Local market and/or
on a worldwide basis; regional; assets are limited prospects in the poor visibility. Low or
assets are highly liquid relatively liquid short term, implying no liquidity,
lower liquidity particularly on niche
markets

Political and legal

environment

Political risk, including Very low; strong Low; satisfactory Moderate; fair High; no or weak
transfer risk mitigation mitigation mitigation instruments mitigation instruments
instruments, if needed instruments, if needed

Legal and regulatory Jurisdiction is Jurisdiction is Jurisdiction is generally Poor or unstable legal
risks favourable to favourable to favourable to and regulatory
repossession and repossession and repossession and environment.
enforcement of enforcement of enforcement of Jurisdiction may make
contracts contracts contracts, even if repossession and
repossession might be enforcement of
long and/or difficult contracts lengthy or
impossible

Transaction
characteristics

Financing term Full payout profile/ Balloon more Important balloon with Repayment in fine or
compared to the minimum balloon. No significant, but still at potentially grace high balloon
economic life of the asset grace period satisfactory levels periods

Operating risk

Permits / licensing All permits have been All permits obtained or Most permits obtained Problems in obtaining
obtained; asset meets in the process of being or in process of being all required permits,
current and obtained; asset meets obtained, outstanding part of the planned
foreseeable safety current and ones considered configuration and/or
regulations foreseeable safety routine, asset meets planned operations
regulations current safety might need to be

9/12
 regulations revised

Scope and nature of O & Strong long-term O&M Long-term O&M Limited O&M contract No O&M contract: risk
M contracts contract, preferably contract, and/or O&M or O&M reserve account of high operational
with contractual reserve accounts (if (if needed) cost overruns beyond
performance needed) mitigants
incentives, and/or
O&M reserve accounts
(if needed)

Operator’s financial Excellent track record Satisfactory track Weak or short track No or unknown track
strength, track record in and strong re- record and re- record and uncertain re- record and inability to
managing the asset type marketing capability marketing capability marketing capability re marketthe asset
and capability to re-
market asset when it
comes off-lease

Asset characteristics

Configuration, size, Strong advantage in Above average design Average design and Below average design
design and maintenance design and and maintenance. maintenance. and maintenance.
(ie age, size for a plane) maintenance. Standard Configuration is Asset is near the end
compared to other Configuration is configuration, maybe somewhat specific, and of its economic life.
assets on the same standard such that the with very limited thus might cause a Configuration is very
market object meets a liquid exceptions — such narrower market for the specific; the market for
market that the object meets object the object is very
a liquid market narrow

Resale value Current resale value is Resale value is Resale value is slightly Resale value is below
well above debt value moderately above above debt value debt value
debt value

Sensitivity of the asset Asset value and Asset value and Asset value and liquidity Asset value and
value and liquidity to liquidity are relatively liquidity are sensitive are quite sensitive to liquidity are highly
economic cycles insensitive to to economic cycles economic cycles sensitive to economic
economic cycles cycles

Strength of sponsor

Operator’s financial Excellent track record Satisfactory track Weak or short track No or unknown track
strength, track record in and strong re- record and re- record and uncertain re- record and inability to
managing the asset type marketing capability marketing capability marketing capability re-market the asset
and capability to re-
market asset when it
comes off-lease

Sponsors’ track record Sponsors with Sponsors with good Sponsors with adequate Sponsors with no or
and financial strength excellent track record track record and good track record and good questionable track
and high financial financial standing financial standing record and/or financial
standing weaknesses

Security Package

Asset control Legal documentation Legal documentation Legal documentation The contract provides
provides the lender provides the lender provides the lender little security to the
effective control (e.g. a effective control (e.g. a effective control (e.g. a lender and leaves
first perfected security perfected security perfected security room to some risk of
interest, or a leasing interest, or a leasing interest, or a leasing losing control on the
structure including structure including structure including such asset
such security) on the such security) on the security) on the asset, or
asset, or on the asset, or on the on the company owning
company owning it company owning it it

10/12
 Rights and means at the The lender is able to The lender is able to The lender is able to The lender is able to
lender's disposal to monitor the location monitor the location monitor the location monitor the location
monitor the location and and condition of the and condition of the and condition of the and condition of the
condition of the asset asset, at any time and asset, almost at any asset, almost at any asset are limited
place (regular reports, time and place time and place
possibility to lead
inspections)

Insurance against Strong insurance Satisfactory insurance Fair insurance coverage Weak insurance
damages coverage including coverage (not (not including collateral coverage (not
collateral damages including collateral damages) with including collateral
with top quality damages) with good acceptable quality damages) or with
insurance companies quality insurance insurance companies weak quality insurance
companies companies

33.16 The following table sets out the supervisory rating grades for commodities finance exposures
subject to the supervisory slotting approach.
Strong Good Satisfactory Weak

Financial strength

Degree of over- Strong Good Satisfactory Weak

collateralisation of trade

Political and legal

environment

Country risk No country risk Limited exposure to Exposure to country risk Strong exposure to
country risk (in (in particular, offshore country risk (in
particular, offshore location of reserves in particular, inland
location of reserves in an emerging country) reserves in an
an emerging country) emerging country)

Mitigation of country Very strong mitigation: Strong mitigation: Acceptable mitigation: Only partial mitigation:
risks Strong offshore Offshore mechanisms Offshore mechanisms No offshore
mechanisms mechanisms
Strategic commodity Less strategic
Strategic commodity
1st class buyer commodity Non-strategic
Strong buyer
commodity
Acceptable buyer
Weak buyer

Asset characteristics

Liquidity and Commodity is quoted Commodity is quoted Commodity is not Commodity is not
susceptibility to damage and can be hedged and can be hedged quoted but is liquid. quoted. Liquidity is
through futures or through OTC There is uncertainty limited given the size
over-the-counter (OTC) instruments. about the possibility of and depth of the
instruments. Commodity is not hedging. Commodity is market. No
Commodity is not susceptible to damage not susceptible to appropriate hedging
susceptible to damage damage instruments.
Commodity is
susceptible to damage

Strength of sponsor

Financial strength of Very strong, relative to Strong Adequate Weak

trader trading philosophy
and risks

11/12
Track record, including Extensive experience Sufficient experience Limited experience with Limited or uncertain
ability to manage the with the type of with the type of the type of transaction track record in
logistic process transaction in transaction in in question. Average general. Volatile costs
question. Strong question. Above record of operating and profits
record of operating average record of success and cost
success and cost operating success and efficiency
efficiency cost efficiency

Trading controls and Strong standards for Adequate standards Past deals have Trader has
hedging policies counterparty for counterparty experienced no or experienced
selection, hedging, and selection, hedging, and minor problems significant losses on
monitoring monitoring past deals

Quality of financial Excellent Good Satisfactory Financial disclosure

disclosure contains some
uncertainties or is
insufficient

Security package

Asset control First perfected security First perfected security At some point in the Contract leaves room
interest provides the interest provides the process, there is a for some risk of losing
lender legal control of lender legal control of rupture in the control of control over the
the assets at any time the assets at any time the assets by the lender. assets. Recovery could
if needed if needed The rupture is mitigated be jeopardised
by knowledge of the
trade process or a third
party undertaking as the
case may be

Insurance against Strong insurance Satisfactory insurance Fair insurance coverage Weak insurance
damages coverage including coverage (not (not including collateral coverage (not
collateral damages including collateral damages) with including collateral
with top quality damages) with good acceptable quality damages) or with
insurance companies quality insurance insurance companies weak quality insurance
companies companies

12/12