7-24. https://doi.org/10.1108/JCMS-04-2020-0006, Copyright 2020, Mete Feridun and Alper zn, Published in Journal of Capital Markets Studies. The Committee initially considered various alternatives for the floor to be set in the range of 6090% of RWAs as calculated under the SA approaches. Therefore, quantitative analyses are instrumental to inform decision-making in different jurisdictions as they consider the implementation in their national laws of the revisions to the credit risk, operational risk and CVA risk frameworks, the introduction of a leverage ratio buffer for G-SIBs and the capital output floor under Basel IV. However, aiming to improve the granularity and risk sensitivity, as well as reducing the mechanistic reliance on credit ratings, BCBS introduced a relatively more granular approach for unrated exposures to banks and corporates, recalibrated risk weights for rated exposures; and introduced separate treatments for covered bonds, specialised lending (SL) [4] and exposures to small and medium-sized enterprises (SMEs) (BCBS, 2017a, b). In response to the global financial crisis, the Basel Committee for Banking Supervision (BCBS) introduced Basel III standards to address shortcomings of the pre-crisis regulatory framework. Feridun, M. (2019a), Integration of Pillar 3 Disclosures into Regulatory Reporting: New Challenges and Opportunities, Finextra, available at: https://www.finextra.com/blogposting/18385/integration-of-pillar-3-disclosures-into-regulatory-reporting-new-challenges-and-opportunities (accessed 12 February 2020). The BCBS sets only the minimum standards and jurisdictions may elect to implement more conservative requirements and accelerated transitional arrangements. A subsequent impact study by the EBA in December 2019, which complemented an earlier report published on in August 2019, indicates that the overall impact of Basel IV standards would result in an average increase of around 24% in the minimum required capital under conservative assumptions. The BCBS sets the minimum threshold for including a loss event in the data collection and calculation of average annual losses at 20,000, allowing national regulators to increase this threshold to 100,000 for Bucket 2 and Bucket 3 banks in line with their respective risk profiles (EC, 2019). While the benefits of timely regulatory action to implement Basel IV are indisputable, the Basel standards are not directly applicable by member state regulators and are often subject to lengthy political debate. The BCBS's initial decision was to phase in capital floors gradually from 2022 onwards until reaching the final level of 72.5% in 2027. CRR 2 leverage ratio also excludes guaranteed parts of exposures that arise from officially supported export credits, where the guarantees are provided by export credit agencies or central governments, provided that a 0% risk weight is applied to the guaranteed part of the exposure. During the 20072008 global financial crisis, capital requirements for operational risk turned out to be insufficient to cover the related losses incurred by some banks. Published by Emerald Publishing Limited. This will be particularly challenging during a period when interest rates are at historically low levels across the world and return on equity is likely to remain low particularly amidst the COVID-19 pandemic (Feridun, 2020a). Although Basel IV CVA framework does not exempt any derivative transactions from the calculation of the CVA capital requirement, the current CRR in the EU provides a number of exemptions with respect to derivative transactions with counterparties that were exempted from the clearing and margining requirements under EMIR. In addition, the FRTB and the updated Pillar 3 disclosures regime are currently being implemented (Feridun, 2019a, b). However, the BCBS does not specify the level of application of the capital output floors in terms of the levels of the banking group, e.g. This will require the industry to make a significant investment in technology, risk modelling and new staff members, with a subsequent increase in compliance costs. They also caution that the SA approach to CVA could lead to higher capital requirements than in a situation where no hedging is applied at all (EBF, 2019). However, as shown by the recent policy measures introduced across the world due to the COVID-19 pandemic, these assumptions are not likely to hold in real world (Feridun, 2020b). The BCBS also introduced a basic approach (BA-CVA) consisting of two alternatives called reduced basic CVA approach, which includes only the capital requirements for covered transactions, and a full basic CVA approach, which captures the CVA capital requirements for covered transactions and CVA capital requirements for eligible hedges. The authors would like to thank two anonymous referees for their valuable comments and suggestions. Basel IV fundamentally amends capital calculations across all risk types. EC (2019), Public Consultation Document Implementing the Final Basel III Reforms in the EU, available at: https://ec.europa.eu/info/sites/info/files/business_economy_euro/banking_and_finance/documents/2019-basel-3-consultation-document_en.pdf (accessed 11 October 2019). EBA (2018), Basel III Monitoring Exercise Results Based on Data as of 31 December 2017, available at: https://eba.europa.eu/sites/default/documents/files/documents/10180/2380948/e2e09646-2594-48a5-b794-a7c2348257db/2018 Basel III Monitoring ExerciseReport.pdf?retry=1 (accessed 4 October 2018). Angelini, P., Clerc, L., Crdia, V., Gambacorta, L., Gerali, A., Locarno, A., Motto, R., Roeger, W., Van den Heuvel, S. and Vlek, J. However, due to the lack of adequate public information from the respective national regulators on their implementation efforts, their progress remains uncertain. Rubio, M. and Yaob, F. (2020), Bank capital, financial stability and Basel regulation in a low interest-rate environment, International Review of Economics and Finance, Vol. This makes any quantitative assessments extremely challenging and render their finding subject to controversy. Public Consultation Document Implementing the Final Basel III Reforms in the EU, Integration of Pillar 3 Disclosures into Regulatory Reporting: New Challenges and Opportunities, Inconsistent Implementation of the FRTB Could Jeopardize Post-Crisis Banking Reforms, Duke Law Global Financial Markets Center FinReg Blog, COVID-19 Outbreak Requires Prompt and Innovative Regulatory Response, Duke Law Global Financial Markets Center FinReg Blog, COVID-19 Should Not Jeopardize the Implementation of Basel IV, Duke Law Global Financial Markets Center FinReg Blog, CRR II and CRD V Are Finally Here: What Should Firms Expect?, PwC Being Better Informed, The UK and Multi-Level Financial Regulation: From Post-crisis Reform to Brexit, ECB Aims to Raise Credibility of Internal Models, Bank capital, financial stability and Basel regulation in a low interest-rate environment, International Review of Economics and Finance, Counterparty credit risk in OTC derivatives under Basel III, https://doi.org/10.1108/JCMS-04-2020-0006, http://creativecommons.org/licences/by/4.0/legalcode, https://www.bis.org/bcbs/publ/d424_hlsummary.pdf, https://eba.europa.eu/file/362841/download?token=050iTyEx, https://europa.eu/rapid/press-release_MEMO-19-2129_en.pdf, https://eba.europa.eu/regulation-and-policy/credit-risk/guidelines-on-specification-of-types-of-exposures-tobe-associated-with-high-risk, https://www.globalriskregulator.com/Subjects/Capital/Europe-to-reconsider-banks-internal-models, https://eba.europa.eu/sites/default/documents/files/documents/10180/2380948/e2e09646-2594-48a5-b794-a7c2348257db/2018 Basel III Monitoring ExerciseReport.pdf?retry=1, https://eba.europa.eu/sites/default/documents/files/documents/10180/2551996/4686802a-94b7-474e-b937-adaa4e6faa26/Basel III monitoring exercise.pdf?retry=1, https://www.ebf.eu/wp-content/uploads/2019/06/EBF_033787-EBF-summary-paper-on-Basel-IV-in-Europe-final-updated-clean.pdf, https://www.europarl.europa.eu/RegData/etudes/BRIE/2016/587361/IPOL_BRI(2016)587361_EN.pdf, https://ec.europa.eu/info/sites/info/files/business_economy_euro/banking_and_finance/documents/2019-basel-3-consultation-document_en.pdf, https://www.finextra.com/blogposting/18385/integration-of-pillar-3-disclosures-into-regulatory-reporting-new-challenges-and-opportunities, https://sites.duke.edu/thefinregblog/2019/11/20/inconsistent-implementation-of-the-frtb-could-jeopardize-post-crisis-banking-reforms, https://sites.duke.edu/thefinregblog/2020/04/07/covid-19-outbreak-requires-prompt-and-innovative-regulatory-response/, https://sites.duke.edu/thefinregblog/2020/04/23/covid-19-should-not-jeopardize-the-implementation-of-basel-iv, https://www.pwc.co.uk/financial-services/assets/pdf/being-better-informed-july-2019.pdf, https://www.globalriskregulator.com/Subjects/Capital/ECB-aims-to-raise-credibility-of-internal-models?ct=true, Revised leverage ratio framework and G-SIB buffer, Revised standard approach for credit risk, Revised internal rating-based approach for credit risk, Revised credit valuation adjustment framework, 1 January 2022; transitional arrangements to 1 January 2027, 1 January 2023; transitional arrangements to 1 January 2027, Subordinated debt and capital other than equities, Equity exposures to certain legislated programmes, Short-term self-liquidating trade letters of credit, Direct credit substitutes and other exposures, Large and mid-sized corporates (consolidated revenues>500, EAD subject to a floor that is the sum of (i) the on balance sheet exposures, and (ii) 50% of the off-balance-sheet exposure using the applicable CCF under the SA approach, Extension of leverage ratio buffers to O-SIIs, Enhanced due diligence requirements, Sl., CCFs, EU-specific governance, reporting and control rules, Exemptions for certain derivative transactions, Level of application within banking groups. The BCBS also allows national regulators to use discretion to neutralise the ILM for all banks by setting it to 1. This article has reviewed the Basel IV standards which complement Basel III reforms by improving the robustness and risk sensitivity of the SA approaches for credit risk, CVA risk and operational risk; removing the use of the internal modelling approaches for CVA risk and for operational risk; placing parameter input floors under the IRB approach for credit risk; imposing a leverage ratio buffer on G-SIBs and introducing a capital floor based on the revised SA approaches. It is known that when the rules were being drawn up by the BCBS, major elements of Basel IV were subject to fierce debate during negotiations until the last minute by countries such as France and Germany, which were concerned that the reforms would disproportionately hit their own financial institutions. This article concludes that the global implementation of the reforms by all jurisdictions and transposition into national banking laws concurrently with the European Union in line with the Basel Committee's implementation timeline is important from a financial stability standpoint. The capital impact of Basel IV will also depend on whether the bank currently uses the SA approach or the IRB models for its credit risk. From a policy standpoint, this requires a concerted effort from all stakeholders and national regulatory authorities. This had been necessitated by a number of analyses which had highlighted a worrying degree of variability in banks' calculation of their RWAs, which had resulted in a loss of confidence in their reported regulatory capital ratios. Others argue that the lack of risk-sensitivity of the output floor will be damaging to banks with lower risk profile and create disincentives for the lowest risk portfolios and for exposures with safe risk mitigation tools such as covered bonds. Postponement of the implementation of Basel IV should not delay banks' preparations. It also identifies a number of areas which are subject to further debate in the European Union such as the enhanced due diligence requirements under the new credit risk framework; governance, reporting and control rules under the operational risk framework; exemptions for certain derivative transactions under the credit valuation adjustment framework and the level of application of the capital floors within banking groups. In particular, Basel IV provides a much greater degree of sensitivity in the case of residential mortgages where Basel II uses a risk weight of 35% for secure mortgages [6]. As can be seen in Table 6, BCBS also introduced a new standalone treatment for covered bonds with risk weights ranging from 10 to 100% based on external ratings. Under the revised CVA framework, the BCBS introduces four different approaches to calculate the capital requirements, allowing banks with different levels of complexity to calculate their CVA capital requirements using the approach most appropriate to their circumstances. The risk weight is applied to the portion of the exposure that is below 55% of the property value and the risk weight of the counterparty is applied to the remainder of the exposure. The former separates mortgage loans into a secured and an unsecured part, applying a different risk weights to each. Visit emeraldpublishing.com/platformupdate to discover the latest news and updates, Answers to the most commonly asked questions here, Europe to Reconsider Banks' Internal Models. Under Basel II any unsecured component of residential mortgages carries a higher risk weight than 35% (See BCBS, 2004). See https://europa.eu/rapid/press-release_MEMO-19-2129_en.pdf. On the other hand, studies focussing on the EU implementation of Basel IV are recommended to focus on the assessment of the advantages and disadvantages of various EU-specific measures with respect to the enhanced due diligence requirements under the new credit risk framework; governance, reporting and control rules under the operational risk framework; exemptions for certain derivative transactions under the CVA framework and the level of application of the capital floors within banking groups. Besides, as can be seen in Table 8, the BCBS introduced input floors for PD, EAD and LGD to ensure a minimum level of conservativism in model parameters in the case of asset classes where the IRB approaches remain available. Basel IV also allows banks to treat loans to individuals that are secured by residential property which is under construction, as real estate exposures as long as the property is a primary family residence of the borrower or if there is a legal guarantee ensuring that the property under construction will be finished. In particular, there is a lack of quantitative studies to inform decision-making on the implementation of Basel IV reforms in different jurisdictions. These additional EU-specific requirements aim to achieve higher standards of operational risk management than required by the BCBS in its SA approach to operational risk.
In terms of the implementation of the operational risk framework, the EU already has certain regulations which differ from the Basel II standards. This article reviews the main components of the new framework, analyses its ongoing implementation in the European Union and discusses its potential impact on banks, putting forward policy recommendations. This article discusses that Basel IV will introduce strategic, operational and regulatory challenges for banks in scope. Table 9 shows the revised implementation timetable for the capital floors. In the case of exposures to banks, risk weights range between 20 and 150% based on external ratings as can be seen in Table 3. (2017), ECB Aims to Raise Credibility of Internal Models, Global Risk Regulator, 24 March, available at: https://www.globalriskregulator.com/Subjects/Capital/ECB-aims-to-raise-credibility-of-internal-models?ct=true. Table 1 shows the revised implementation timeline and also summarises the intended revisions under Basel IV. Upgrading the Basel standards: from Basel III to Basel IV? In the case of subordinated debt and equity, the respective risk weights are categorised based on exposure type and vary between 100 and 400%.
It also considered other options such as the calculation of floors at a more granular level (European Parliament, 2017). Fifthly, it introduces a leverage ratio buffer for G-SIBs, which will take the form of a Tier 1 capital buffer set at 50% of a G-SIB's risk-weighted capital buffer (BCBS, 2017a, b). However, there is very limited research on the potential impact of Basel IV due to technical complexity of the subject. For instance, banks with predominantly high LTV residential and commercial property loans and income-producing real estate (IPRE) will see a significant increase in their capital requirements. The final SA approach to credit risk allows banks to use external ratings, where available and permitted by national supervisors, for exposures to banks and corporates. Therefore, the new regime takes into account the exposure variability due to change in market risk factors as well. Also, in the case of LGD it decided that input floors should range between 0 and 50%, depending on the type of the exposure and the collateral type. Firstly, as the article emphasised, the EU is the first jurisdiction to start implementation of the Basel IV. In particular, global banking groups are expected to face significantly higher minimum capital requirements as a result of the full implementation of Basel IV standards (EBA, 2018). There are also ongoing discussions in some other areas with respect to the CVA risks. Exposures to unrated corporates are to be risk-weighted at 100%, unless they qualify as SMEs, in which case they are subject to an 85% risk weight. In the case of the latter, respective risk weight buckets have become more granular based on the LTV ratio and depending on whether the exposure is to IPRE or general residential real estate. On the other hand, the BCBS provided institutions with smaller derivatives portfolios with a simple alternative to the revised CVA, allowing banks below a materiality threshold of 100bn, relating to the aggregate notional amount of non-centrally cleared derivatives to calculate their CVA capital requirement as 100% of their counterparty credit risk requirements. They should carefully explore the potential balance sheet and business model impacts along with any other broader implications, and consider mitigating management actions. Source(s): BCBS, Governors and Heads of Supervision announce deferral of Basel III implementation to increase operational capacity of banks and supervisors to respond to Covid-19, 27 March 2020, https://www.bis.org/press/p200327.htm, Basel IV risk weights for corporate exposures, Source(s): BCBS, High-level summary of Basel III reforms, December 2017, https://www.bis.org/bcbs/publ/d424_hlsummary.pdf, Basel IV risk weights for subordinated debt and equity, Basel IV credit conversion factors for off-balance-sheet exposures, Revised scope of credit risk IRB approaches for asset classes, Minimum parameter values in the revised IRB framework, 10% commercial or residential real estate, Soruce(s): BCBS, High-level summary of Basel III reforms, December 2017, https://www.bis.org/bcbs/publ/d424_hlsummary.pdf, The EBA's assessment of the impact of Basel IV in the EU, Source(s): EBA, Basel III reforms: impact study and key recommendations macroeconomic assessment, CVA and market risk and corresponding Policy advice on Basel III reforms on CVA and market risk, 4 December 2019, https://eba.europa.eu/file/362841/download?token=050iTyEx, Implementation of key Basel IV topics in the EU. These include stringent requirements regarding the processes and procedures for loss data collection, as well as the quality and type of the loss dataset. Regarding SL, the BCBS also retained the use of both A-IRB and F-IRB, despite its initial proposal. Feridun, M. (2020b), COVID-19 Should Not Jeopardize the Implementation of Basel IV, Duke Law Global Financial Markets Center FinReg Blog, available at: https://sites.duke.edu/thefinregblog/2020/04/23/covid-19-should-not-jeopardize-the-implementation-of-basel-iv (accessed 23 April 2020). However, to prevent mechanistic reliance on external credit ratings and to ensure the risk weight applied is appropriate, BCBS introduced highly demanding due diligence requirements for corporate and bank exposures where ratings are used, with the exception for exposures to sovereigns and public sector entities (EC, 2019). There are also ongoing discussions with respect to the revised credit risk framework such as the enhanced due diligence requirements under the SA approach and the related quantitative and qualitative criteria for the classification of counterparties into grades. For instance, the BCBS decided that the PD should range between 0.05 and 0.10%, depending on retail classes such as Qualifying Retail Revolving Exposure (QRRE) transactors and revolvers. Basel II allows banks either to use the SA or the IRB approaches to calculate their credit risk capital requirements, which has resulted in risk weights ending up incomparable across banks (BCBS, 2004).
In terms of the implementation of the leverage ratio, CRR 2 adopts the Basel framework, setting the Tier 1 capital-based leverage ratio requirement at 3% for all EU banks. Banks can optimise their commercial loan portfolios taking into account the new risk weights such as those in the case of SL, where the risk weights vary widely depending on the nature of the loan. the transitory to temporarily prevent RWA increase exceeding 25% in the EU (EC, 2019). Firstly, it limits the use of the Advanced IRB (A-IRB) approach to credit risks for low-default portfolios. (2020), "Basel IV implementation: a review of the case of the European Union", Journal of Capital Markets Studies, Vol. BCBS (2020a), Governors and Heads of Supervision Announce Deferral of Basel III Implementation to Increase Operational Capacity of Banks and Supervisors to Respond to Covid-19, Press release, available at: https://www.bis.org/press/p200327.htm (accessed 27 March 2020). Banks may also consider removing high LTV residential mortgages, which have higher interest rates, and maintaining a low LTV portfolio, which generally carry lower interest rates. Given the fundamental changes and the associated implementation challenges posed by Basel IV, its consistent implementation across all jurisdictions is crucial to avoid pricing distortions and an unlevel playing field across jurisdictions. Given credit risk is the main driver of most banks' RWAs, changes to the Basel II credit risk framework will represent the biggest challenge for the global banking sector. CRR 2 also excludes parts of exposures arising from passing-through promotional loans to other credit institutions, where the firm is not a public development credit institution. buy-to-let. Feridun, M. (2019b), Inconsistent Implementation of the FRTB Could Jeopardize Post-Crisis Banking Reforms, Duke Law Global Financial Markets Center FinReg Blog, available at: https://sites.duke.edu/thefinregblog/2019/11/20/inconsistent-implementation-of-the-frtb-could-jeopardize-post-crisis-banking-reforms (accessed 20 November 2019). Pugsley, J. Therefore, the main element of the regulatory operational risk capital calculations under Basel IV is the identification and collection of relevant loss events. The LS approach applies the risk weight of the counterparty to the unsecured part of the loan and reflects the risk mitigating effects of the collateral. As discussed earlier, these measures are expected to restore credibility in the calculation of RWAs and improve the comparability of banks' capital ratios. However, this will require them to carefully evaluate the impact on their net interest income. Basel IV has been complemented by the revised market risk standard known as the Fundamental Review of the Trading Book (FRTB) [1] and the updated Pillar 3 disclosure requirements [2], both of which are beyond the scope of this article. The implementation of Basel IV will complete the global reform of the regulatory framework, which began in the wake of the financial crisis. They caution that this may result in the segments of clients of the highest credit quality seeing their cost of credit increase. While the revised SA approach to credit risk recalibrates risk weights in most asset classes and leads to a significant impact on capital requirements and business models, the final standards are not as detrimental as banks had anticipated in the beginning. The framework also includes a number of other regulations ranging from remuneration standards to environmental, social and governance criteria. On the other hand, in the case of the newly established banks whose ILM is greater than 1, supervisors may allow the use less than five years of historical losses should they believe the losses are representative of their operational risk exposure. It also allows the use of loan and to improve loan-to-value ratios (LTV) to determine risk weights for retail and commercial real estate exposures. As a result, it allows banks to realise the capital benefit from those hedges which have been put in place to reduce exposure to CVA risk. This is mainly because such quantitative assessments will inevitably have to depend on certain unrealistic assumptions such as static balance sheets, which means that banks under study will not alter their exposures and that there are no maturing assets in their portfolios, and that their Pillar 2 capital requirements and CCyB will remain constant. The Commission Delegated Regulation 959/2018 also includes certain provisions with respect to the collection of the loss data. However, this article does not undertake any empirical analysis. Introducing radical changes to the methodologies for the determination of capital requirements, the final stage of the Basel III standards, which is referred to as Basel IV by the industry, will be a significant challenge for the global banking sector. The implementation of the remaining standards under Basel IV in the EU has been a source of controversy.
(2011), Basel III: long-term impact on economic performance and fluctuations, BIS Working Papers, Vol. Under this approach a flat risk weight of 100% is applicable to all corporate exposures, with the exception of, exposures to corporate SMEs and to investment grade corporates, which are assigned 85 and 65% risk weights, respectively (EC, 2019). 338, available at: https://www.bis.org/publ/work338.pdf. The standards agreed by the BCBS are not directly applicable in member jurisdictions and are required to be transposed into national laws. The final CRD2 and CRD5 framework complements and builds on the existing CRD 4 and CRR regimes, introducing a number of important amendments in a number of key Basel III areas including large exposures, leverage ratio, liquidity, market risk, counterparty credit risk, reporting and disclosure requirements, as well as a structural holding company requirement referred to as the Intermediate EU parent undertaking rule for large third-country G-SIBs (Huez and Feridun, 2019). EBA (2019a), Basel III Monitoring Exercise Results Based on Data AS of 31 December 2018, October 2019, available at: https://eba.europa.eu/sites/default/documents/files/documents/10180/2551996/4686802a-94b7-474e-b937-adaa4e6faa26/Basel III monitoring exercise.pdf?retry=1. These include the enhanced due diligence requirements under the new credit risk framework; governance, reporting and control rules under the operational risk framework; exemptions for certain derivative transactions under the CVA framework and the level of application of the capital floors within banking groups. The new SA approach to operational risk is based on the assumption that operational risk increases at an increasing rate with a bank's income and that experiencing greater operational risk losses in the past would indicate a higher likelihood of future operational risk losses. As shown in Table 10, this assessment, which was based on a sample of 189 banks from 19 EU countries, indicates an aggregate shortfall of around 125bn in total capital for the EU banks (EBA, 2019b) and represents an increase from the EBA's initial forecasts in December 2017, when Basel IV was finally agreed. The academic literature to date has examined various aspects of the Basel III reforms and (Angelini et al., 2011; Allen et al., 2012; Sayah, 2017; Rubio and Yaob, 2019; James and Quaglia 2020). BCBS (2017b), High-level Summary of Basel III Reforms, December 2017, available at: https://www.bis.org/bcbs/publ/d424_hlsummary.pdf. From a financial stability standpoint, it is imperative that all national authorities remain aligned with BCBS's implementation timeline. 1, pp. It also revised, by and large, all exposure classes to reduce excessive variability in RWAs and improve the comparability of banks' risk-based capital ratios. Thirdly, it revises the SA approach for operational risk and removes the advanced measurement approaches (AMA). This is partially driven by the European Banking Authority's (EBA) reports, recommending the full implementation of the final Basel III framework in the EU in response to the European Commission's (EC) call for technical advice in May 2018 (EBA, 2019b). BCBS (2017a), Basel III: Finalising Post-crisis Reforms, December 2017, available at: https://www.bis.org/bcbs/publ/d424.pdf. Secondly, simultaneous implementation of Basel IV across all jurisdictions is required to avoid regulatory arbitrage opportunities. The capital requirements for delta and vega risks, on the other hand, is a sum of capital requirements calculated independently for interest rate, foreign exchange, counterparty credit spread, reference credit spread, equity and commodity risk types. You can join in the discussion by joining the community or logging in here.You can also find out more about Emerald Engage. In the case of project finance, on the other hand, the corporate weightings will apply where there exist issue-specific ratings and are permitted.