What should standardised banks do in order to live up to CRD Article 79 (b)? Should standardised banks make their own assessment of the risk weights assigned to unrated counterparts? I.e. If a banking counterpart (institution) in a 0 % risk weight country is unrated and therefore assigned a risk weight of 20 % according to Article 121of Regulation (EU) No 575/2013 (CRR), but an internal assessment shows that other comparable counterparts with a rating get assigned a 50 % risk weight according to Article 120 of CRR, what should the calculating institution do? Should the calculating institution overwrite the 20% with 50 % or should the calculating institution add the difference in risk weighted assets under Pillar II?

Clarification of what CRD Article 79 (b) means for standardised banks. Our understanding is that CRD Article 79 (b) has it origin in Basel III Para. 733 about incentives to avoid getting rated.

Article 79(b) of Directive 2013/36/EU (CRD) relates to the arrangements, processes and mechanisms of institutions and aims at ensuring that institutions have in place sound credit risk management practices. The provisions of this article applies to all institutions and is independent from the approach adopted by an institution to risk-weight its credit risk exposures.

Accordingly, in the situation described in the question, the institution should not overwrite the risk-weight specified in CRR for the calculation of the capital requirements, but take into account its internal assessment in the allocation of internal capital as required by Article 79(b) of CRD.

Update 26.03.2021: This Q&A has been reviewed in the light of the changes introduced to Directive 2013/36/EU (CRD) and continues to be relevant.