In the recent publication of the Central Bank of Nigeria on requirements for credit risk Assessment by Nigerian Banks. Scope of application of external credit assessment institutions(ECAIs) also known as the credit rating agencies states that a bank shall use its chosen ECAIs and their external credit assessments consistently for each type of exposure, for both risk weighting and risk management purposes. A Bank shall not “cherry-pick” the assessments provided by different ECAIs. A bank shall not recognize the effects of Credit Risk Management (CRM) if such CRM is already reflected in the issue-specific external credit assessment of the exposure.
Use of single and multiple assessment
Where a bank has two external credit assessments which map into different credit quality grades, it shall assign the exposure to the credit rating associated with the higher risk weight. Where a bank has three or more external credit assessments which map into two or more different credit grades, it shall assign the exposure to the credit grade associated with the higher of the two lowest risk weights. For illustration, if there are three external credit assessments mapping into credit grades with risk weights of 0%, 20% and 50%, and then the applicable risk weight is 20%.
Use of unsolicited rating
A rating would be treated as solicited only if the issuer of the instrument has requested the ECAI for the rating and has accepted the rating assigned by the agency. As a general rule, banks should use only solicited ratings from the chosen ECAI. No ratings issued by the ECAI on an unsolicited basis should be considered for risk weight calculation as per the Standardized Approach without the approval of the CBN
Issuer and issue rating
Where an exposure has an issue-specific external credit assessment, a bank shall use such assessment. Where an exposure does not have an issue-specific external credit assessment the following principles shall apply: a) if there is an issue-specific external credit assessment for another exposure to the same obligor which maps to a risk weight that is lower than that applicable to an unrated exposure, a bank may use the issue-specific assessment for the other exposure only if the exposure without an issue-specific assessment ranks pari-passu with or is senior to the exposure with the issue-specific assessment in all respects; b) if the obligor has an issuer external credit assessment which maps to a risk weight that is lower than that applicable to an unrated exposure, a bank may use the issuer assessment of the obligor only if the exposure is a senior claim; Where either the issuer or a single security has a low quality rating which maps into a risk weight equal to or higher than that which applies to unrated exposures, an unrated exposure on the same borrower or issuer will be assigned the same risk weight as is applicable to the low quality rating (instead of the risk weight for unrated exposures).