What is the supervisory slotting approach for specialized lending?

Question

AcadiFi · Accepted Answer

The supervisory slotting approach is a prescribed method for **specialized lending** exposures where banks cannot estimate A-IRB parameters reliably due to limited default data. It applies to:

1. **Project Finance (PF)** — non-recourse project debt (toll roads, power plants)
2. **Object Finance (OF)** — financing physical assets (ships, aircraft)
3. **Commodities Finance (CF)** — short-term secured on commodity inventories
4. **Income-Producing Real Estate (IPRE)** — CRE where servicing depends on rental income
5. **High-Volatility CRE (HVCRE)** — development projects with volatile cash flows

Banks 'slot' each exposure into one of five supervisory categories: **Strong, Good, Satisfactory, Weak, or Default**, based on qualitative factors (financial strength, political/regulatory environment, transaction characteristics, sponsor strength, security package).

Each category maps to a supervisory risk weight:

| Category | Remaining Maturity ≥ 2.5Y | Remaining Maturity < 2.5Y |
|---|---|---|
| Strong | 70% | 50% |
| Good | 90% | 70% |
| Satisfactory | 115% | 115% |
| Weak | 250% | 250% |
| Default | 0% (handled separately) | — |

Example: Bridgeport Infrastructure Bank has a $180M 10-year project finance loan to Seastrand Offshore Wind Ltd. Slotted as 'Good' based on strong PPA off-taker (investment-grade utility), experienced sponsor, and robust technical structure.

RWA = $180M × 90% = $162M. Minimum capital = $162M × 8% = $12.96M.

```mermaid
flowchart TD
  A[Specialized lending] --> B[Slot assessment]
  B --> C[Strong 70%]
  B --> D[Good 90%]
  B --> E[Satisfactory 115%]
  B --> F[Weak 250%]
  B --> G[Default]
```

National supervisors may permit banks with sufficient data and experience to migrate to full A-IRB for specialized lending, but must demonstrate track record and robust modeling.

What is the supervisory slotting approach for specialized lending?

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