Credit Quality Step

From Open Risk Manual

Definition

Credit Quality Step (CQS) denotes a standardised indicator of Credit Risk that is recognized in the European Union

  • The CQS Credit Rating Scale is based on numbers, ranging from 1 to 6.
  • 1 is the highest quality, 6 is the lowest quality

Reference Meaning

Credit Quality Step Meaning of the rating category
1 The rated entity has extremely/very strong capacity to meet its financial commitments and is subject to minimal/very low credit risk.
2 The rated entity has strong capacity to meet its financial commitments and is subject to low credit risk but is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than rated entities in CQS 1.
3 The rated entity has adequate capacity to meet its financial commitments and is subject to moderate credit risk. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the rated entity to meet its financial commitments.
4 The rated entity has the capacity to meet its financial commitments but is subject to substantial credit risk. It faces major ongoing uncertainties and exposure to adverse business, financial, or economic conditions, which could lead to the rated entity's inadequate capacity to meet its financial commitments.
5 The rated entity has the capacity to meet its financial commitments but is subject to high credit risk. Adverse business, financial, or economic conditions will likely impair the rated entity's capacity or willingness to meet its financial commitments.
6 The rated entity is currently vulnerable or highly vulnerable and is subject to very high credit risk, including in or very near to default. It is dependent upon favourable business, financial, and economic conditions to meet its financial commitments.

Usage

  • Calculation of capital requirements under the standardized approach
  • Securitization

Legal Framework

Article 270 of Regulation (EU) No 575/2013 requires the specification for all external credit assessment institutions (ECAIs), of the correspondence of the relevant credit assessments issued by an ECAI to the credit quality steps set out in Chapter 5 of that Regulation (‘mapping’). ECAIs are credit rating agencies that are registered or certified in accordance with Regulation (EC) No 1060/2009 of the European Parliament and of the Council or a central bank issuing credit ratings which are exempt from the application of that Regulation

Mapping

In line with article 136 (1) CRR, the Joint Committee (JC) of the European Supervisory Authorities (ESAs) has previously provided a correspondence (‘mapping’) between relevant credit assessments of ECAIs and credit quality steps, as set out in Section 2 of Chapter 2 of Title II of Part Three of the CRR, to be used for the determination of capital requirements. The original ITS was adopted on 7 October 2016 by the European Commission as Implementing Regulation (EU) 2016/1799 (‘the Implementing Regulation’). This Implementing Regulation was subsequently amended on the 7 December 2017, to incorporate mappings for the five new ECAIs, that had been registered or certified after the ESAs submitted the original draft ITS to the Commission , thereby providing in total mappings for 30 ECAIs.



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