The output floor limits how far internal models can lower capital requirements: total risk-weighted assets cannot fall below 72.5% of the amount calculated with standardised approaches. In the EU it is phased in under CRR3 from 50% in 2025 to 72.5% in 2030.
CRR3CRR3 is Regulation (EU) 2024/1623, the amendment to the Capital Requirements Regulation that implements the final Basel III reforms in the EU. It revises the standardised approach for credit risk, limits internal models, introduces the output floor and replaces the operational risk approaches, mostly applying from 1 January 2025.
Risk-weighted assets (RWA)Risk-weighted assets measure a bank's exposures adjusted for risk: each exposure is multiplied by a risk weight that reflects its credit, operational or other risk. Capital ratios divide capital by RWA, so RWA also sets how much capital a bank must hold. Also called risk exposure amount.
IRB approach (internal ratings-based)The internal ratings-based approach lets a bank use its own approved models for probability of default and, in the advanced version, loss given default and exposure at default to set credit risk weights. CRR3 restricts its use for some portfolios and adds input floors.
Standardised approach for credit riskThe standardised approach sets credit risk weights by exposure class, using external ratings or prescribed values: for example 100% for unrated corporates and lower weights for residential mortgages by loan-to-value. CRR3 makes it more risk-sensitive, and it also feeds the output floor.
Risk-weighted assets (RWA)Risk-weighted assets measure a bank's exposures adjusted for risk: each exposure is multiplied by a risk weight that reflects its credit, operational or other risk. Capital ratios divide capital by RWA, so RWA also sets how much capital a bank must hold. Also called risk exposure amount.
CRR3CRR3 is Regulation (EU) 2024/1623, the amendment to the Capital Requirements Regulation that implements the final Basel III reforms in the EU. It revises the standardised approach for credit risk, limits internal models, introduces the output floor and replaces the operational risk approaches, mostly applying from 1 January 2025.