Version 1.0
STANDARD & POOR’S
RATING SERVICES
SIMPLIFIED RISK ADJUSTED CAPITAL
FRAMEWORK MODEL
2014
This model guide describes the functionality of the simplified Risk Adjusted Capital (RAC) Model. This is based on the Engine of
a broader model that Standard and Poor’s uses in conjunction with other material to review a bank’s capital and earnings score.
The user is advised to read this guide in full before using the model.
Quick Reference Guide
Risk Adjusted Capital (RAC) Model
QUICK REFERENCE GUIDE
Using the Model
The model is written in Microsoft Office Excel 2010 and valid only for use by banks compliant with Basel II, 2.5 and III.
The model incorporates two output worksheets (S&P RAC Ratio Result and RAC Sensitivity Analysis), one input
worksheet (Inputs), and two additional worksheets to review the calculation details and Parameters (Calculus and
Parameters).
A schematic structure of the model is set out in diagram 1.
Calculations
S&P RAC Ratio
Result
Parameters
Generic Inputs
Validation
Calculus
Inputs
RAC Sensitivity
Analysis
Generic Inputs
The model requires the user to input mandatory data into the input page in order for the model to calculate the RAC
ratio.
Mandatory Input Cells:

B10, Total Adjusted Capital (TAC) - the numerator to the RAC calculation, mandatory to the calculation used in
the computation of bank capital ratios in accordance with our published criteria titled "Bank Capital
Methodology and Assumptions", dated 6 Dec 2010 (the “Criteria”).

B11, Country – Bank’s Country of domicile (and where it is primarily regulated).

Column C, Exposure at Default (EAD) – If inputs are made into this column, the exposure needs to be split by
geography (Column G – CN).

A99, Market Risk

A151, Operational Risk
Confirmation text boxes: Throughout the model ‘input’ worksheet confirmation text boxes are used to describe each cell
and/or the data to be entered in each cell. The confirmation box for a cell will appear when the cell is selected.
Validation
The model runs optimally when the ‘Validation’ button turns green. To check this, when the model is open and all data
has been input, the user should click on the validation button at the top of the ‘Inputs’ page. If validation errors occur,
the model provides assistance on how to resolve the errors. Once all errors have been resolved, the button should turn
green. It is important to make sure all validation checks are resolved.
Macros: The validation button is macro-driven and will not function properly if macros are disabled. Therefore, when
opening the model, the user should select “Enable Macros” when prompted.
Parameters
This sheet contains only public information used to compute the RAC ratio. Within the parameters sheet, the model
enables the user to simulate certain scenarios based on the following inputs: sovereign rating, BICRA score, economic
risk score and equity class (see rows 403 to 488, column E to I).
Calculus Sheet
This enables the user to view the intermediate results based on the data input in the ‘inputs’ worksheet.
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Quick Reference Guide
Risk Adjusted Capital (RAC) Model
RAC Sensitivity
This sheet contains the implied capital and earnings score based on the data inputs provided by the user from the
‘input’ worksheet. The RAC model used by Standard & Poor’s rating analysts includes confidential and publically
available information. The model here only references public information. In addition, rating analysts may make certain
adjustments to inputs to the RAC model to reflect analytical judgment as per S&P Ratings Criteria. Accordingly, the
capital and earnings score produced by this model may differ from those used by Standard & Poor's rating analysts. The
relevant metrics are combined in scoring capital and earnings on a six-point scale (very strong-very weak). The sheet
reflects the implied capital and earnings score and two further scenarios to reflect an increase/decrease in the implied
capital and earnings score category. The sensitivity of RAC ratio under a one notch adjustment of domestic
BICRA/economic risk is plotted.
S&P RAC Ratio Result
This worksheet reflects the S&P RAC Ratio based on the data inputs provided by the user from the ‘input’ worksheet.
This model is a simplified version of the model used within S&P for rating analysis on capital and earnings. The RAC
model used by Standard & Poor’s rating analysts includes confidential and publically available information. The model
here only references public information. In addition, rating analysts may make adjustments to the inputs to the RAC
model to reflect analytical judgment as per the S&P Ratings Criteria. Accordingly, the RAC ratios produced by this
model may differ from those used by Standard & Poor's rating analysts. Figue1 is an example of the result sheet using
mock input data.
Figure1.
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Quick Reference Guide
Risk Adjusted Capital (RAC) Model
APPENDIX
Exposure at Default (EAD):
Enter the Exposure At Default Before Credit Risk Mitigation. For banks under Basel, enter both the on-balance sheet and
off-balance sheet exposures, after application of regulatory Credit Conversion Factors. For banks not under Basel, the
EAD is the sum of a bank's (1) outstanding loans, plus (2) 50% of off balance sheet commitments, plus (3) securities
holdings and other types of exposures. Use the Basel definition of asset classes to allocate assets whenever possible.
Residual value exposure should contain the residual value of leases. Examples of other non-credit-obligation assets are
property, plant, and equipment, other real estate, and any exposure that would not have been included in the other asset
classes.
Split of Exposure by Geography:
Column H of the spreadsheet has a drop-down menu with countries and regions in which to place credit exposure as
well as equity exposure breakdown. The worksheet requires that the sum of the countries/regions equals the total EAD,
so residual exposure should be assigned to the region “World”. Should the user need to remove the last selected
country from the drop-down, press the button "Clear last". The button "Clear all" removes all the countries and regions
previously selected. The list of countries and regions is shown in the worksheet "Countries".
Split of Corporate Exposure by Industry sectors :
For the book of corporate loans only, allocate them to one of the 10 categories. The total must equal total corporate
exposure.
EAD Covered and Financial Collateral under the AIRB Approach:
For banks under Basel:
Enter under the column EAD the exposure amount covered by eligible financial collateral only after applying regulatory
haircuts. (Standardized and Foundation IRB approaches).
For collateral under the Advanced IRB approach, fill instead the specific table at the end of the credit risk section. For
banks not under Basel, fill in financial collateral amounts in the table "Financial Collateral under the AIRB Approach" at
the end of the credit risk section.
Securitization exposures:
Input any securitization exposures in the banking book, including exposures deducted from capital for banks under
Basel in the Credit risk section. As for the "Split of EAD by external rating (or regulatory risk-weight bands)", use rating
agencies' ratings or regulatory risk-weight bands and input the non-rated securitization exposure in the column "NR".
For banks under Basel 2.5, input any securitization exposures in the trading book (including the exposures deducted
from regulatory capital) and capital requirements in the Market risk section. As for the "Split of EAD by external rating
(or regulatory risk-weight bands)", use rating agencies' ratings or regulatory risk-weight bands and input the non-rated
securitization exposure in the column "NR".
Counterparty risk in the trading book:
Input OTC derivatives exposure amounts in the specific line within "Other items" if and only if the exposures are not
already incorporated in relevant asset classes (financial institutions, corporates, or sovereign).
For banks under Basel, the derivatives exposure amount is the Exposure At Default. For banks not under Basel, please
compute the exposure amount as the sum of the Mark-to-Market value plus an add-on calculated on the basis of the total
notional principal amount of the derivatives book, split by residual maturity and type of contract, as follows:.
Interest Rates
One year or less
Over one year to five years
Over five years
0.0%
0.5%
1.5%
FX and Gold
1.0%
5.0%
7.5%
Equities
6.0%
8.0%
10.0%
Precious Metals Except Other Commodities
Gold
7.0%
10.0%
7.0%
12.0%
8.0%
15.0%
Market Risk in the Trading Book
For banks under Basel with a trading book, enter the regulatory capital requirement split by approach, i.e. Internal Model
Approach (VaR) and Standardized approach.
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Quick Reference Guide
Risk Adjusted Capital (RAC) Model
DISCLAIMER
The Risk Adjusted Capital (RAC) Model from Standard & Poor's Ratings Services is designed to provide insight into the
range of inputs and calculation parameters used in the computation of bank capital ratios in accordance with our published
criteria titled "Bank Capital Methodology and Assumptions", dated 6 Dec 2010. This tool includes a static range of Sovereign
Ratings and BICRA scores as reference parameters. Changes to these Sovereign ratings and BICRA scores will be input into
the model through a regular update to the Excel file. In light of the lagged adjustment, ratings and scores used in the model
may not reflect current ratings and/or scores which may have changed since the last update. Prior to use, the user should go
to www.spratings.com to download the most current version of the model available. The RAC model used by Standard &
Poor’s rating analysts includes confidential and publically available information. The model here only references public
information. In addition, rating analysts may make adjustments to the inputs to the RAC model to reflect analytical judgment
as per the Criteria. Accordingly, RAC ratios produced by this model may differ from those used by Standard & Poor's rating
analysts.
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