General
1. In order to assess whether an institution calculates the own funds requirements using its risk parameters for different exposure classes in accordance with Article 110(2) and (3), point (g) of Article 144(1) and Articles 151 to 168 of Regulation (EU) No 575/2013 and is able to carry out the reporting required by Article 430 of Regulation (EU) No 575/2013, competent authorities shall verify all of the following:
(a)
the reliability of the system used for the calculation of own funds requirements, in accordance with Article 68;
(b)
the data quality, in accordance with Article 69;
(c)
the correctness of the implementation of the methodology and procedures for different exposure classes, in accordance with Article 70;
(d)
the organisation of the process for the calculation of own funds requirements, in accordance with Article 71.
2. As regards groups, competent authorities shall for the purpose of the assessment under paragraph 1 take into consideration the structure of the banking group and the established roles and responsibilities of the parent institution and its subsidiaries.
3. For the purposes of the verification under paragraphs 1 and 2, competent authorities shall apply all of the following methods:
(a)
review the institution’s internal policies and procedures with regard to the process of calculation of own funds requirements, including the sources of data, calculation methods and controls applied;
(b)
review the relevant roles and responsibilities of the different units and internal bodies involved in the process of calculation of own funds requirements;
(c)
review the relevant minutes of the institution’s internal bodies, including the management body, or committees;
(d)
review the documentation of the tests of the calculation system, including the scenarios covered in the tests, their results and approvals;
(e)
review the relevant control reports, including the results of reconciliation of data stemming from different sources;
(f)
review the relevant findings of the internal audit or of other control functions of the institution;
(g)
review the progress reports on the efforts made by the institution to correct shortcomings and mitigate risks detected during relevant audits;
(h)
obtain written statements from or interview the relevant staff and senior management of the institution.
4. For the purpose of the assessment under paragraphs 1 and 2, competent authorities may also apply any of the following additional methods:
(a)
review the functional documentation of the IT systems used for the calculation of own funds requirements;
(b)
request the institution to perform a live computation of the own funds requirements for certain types of exposures;
(c)
perform own sample testing of the calculation of own funds requirements on institution’s data for certain types of exposures;
(d)
perform own tests on the data of the institution or request the institution to perform tests proposed by the competent authorities;
(e)
review other relevant documents of the institution.
Reliability of the system used for the calculation of own funds requirements
When assessing the reliability of the institution’s system used for the calculation of own funds requirements as referred to in Article 144(1)(g) of Regulation (EU) No 575/2013, in addition to the requirements of Article 72 to 75 regarding the assessment methodology for data maintenance, competent authorities shall verify that:
(a)
the control tests performed by the institution to confirm that the calculation of own funds requirements is compliant with Articles 151 to 168 of Regulation (EU) No 575/2013 are complete;
(b)
those control tests are reliable, and in particular that the calculations made in the system used for the own funds requirements are coherent with the calculations made in an alternative calculation tool;
(c)
the frequency of the control tests performed by the institution is adequate and the tests take place at least at the moment of the implementation of the algorithms for the calculation of own funds requirements and in all other cases where changes to the system are made.
Data quality
1. When assessing the data quality used for the calculation of own funds requirements referred to in Article 144(1)(g) of Regulation (EU) No 575/2013, in addition to the requirements in Article 73, competent authorities shall verify the mechanisms and procedures implemented by the institution for identifying the exposure values with all relevant characteristics, including data relating to risk parameters and credit risk mitigation techniques. Competent authorities shall verify that:
(a)
the risk parameters are complete, including in cases where missing parameters are substituted by default values, and that where such a substitution has taken place, it is conservative, justified and documented;
(b)
the range of the parameter values complies with the regulatory and minimum values specified in Articles 160 to 164 of Regulation (EU) No 575/2013;
(c)
the data used in the calculation of own funds requirements is consistent with the data used in other internal processes;
(d)
the application of risk parameters is in accordance with the exposure characteristics, and in particular that the LGD assigned is accurate and consistent with the type of exposure and collateral used to secure the exposure in accordance with Article 164 and Article 230(2) of Regulation (EU) No 575/2013;
(e)
the calculation of the exposure value is correct, and in particular the netting agreements and the classification of off-balance sheet items are used in accordance with Article 166 of Regulation (EU) No 575/2013;
(f)
where the PD/LGD method is applied for equity exposures, the classification of the exposures and the application of risk parameters is correct in accordance with Article 165 of Regulation (EU) No 575/2013.
2. When assessing the coherence of the data used for the calculation of own funds requirements with the data used for internal purposes in accordance with Articles 18 to 22 on assessment methodology for use test and experience test, competent authorities shall verify that:
(a)
there are adequate control and reconciliation mechanisms in place to ensure that the values of risk parameters used in the calculation of own funds requirements are consistent with the value of parameters used for internal purposes;
(b)
there are adequate control and reconciliation mechanisms in place to ensure that the value of exposures for which the own funds requirements are calculated is consistent with the accounting data;
(c)
the calculation of own funds requirements for all exposures included in the general ledger of the institution is complete, and that the split between the exposures under the IRB Approach and the Standardised Approach complies with Articles 148 and 150 of Regulation (EU) No 575/2013.
Correctness of the implementation of the methodology and procedures for different exposure classes
When assessing the correctness of the implementation of the methodology and procedures for the calculation of own funds requirements referred to in Article 144(1)(g) of Regulation (EU) No 575/2013 for different exposure classes, competent authorities shall verify that:
(a)
the risk weight formula is implemented correctly in accordance with Articles 153 and 154 of Regulation (EU) No 575/2013, taking into account the assignment of exposures to exposure classes;
(b)
the calculation of the correlation coefficient is done based on the characteristics of the exposures, in particular that the total sales parameter is applied on the basis of consolidated financial information;
(c)
where the risk-weighted exposure amount is adjusted in accordance with Article 153(3) of Regulation (EU) No 575/2013, the adjustment is based on all of the following considerations:
(i)
the information on the PD of the protection provider is applied correctly;
(ii)
the PD of the protection provider is estimated with the use of the rating system that has been approved by the competent authorities under the IRB Approach;
(d)
the calculation of the maturity parameter is correct, and in particular:
(i)
that the expiry date of the facility is used for the purpose of calculation of the maturity parameter in accordance with Article 162(2)(f) of Regulation (EU) No 575/2013;
(ii)
that in cases where the maturity parameter is lower than one year this is adequately justified and documented for the purpose of Article 162(1), (2) and (3) of Regulation (EU) No 575/2013;
(e)
the floors for the exposure-weighted average LGD for retail exposures secured by residential property and commercial real estate, which are not benefiting from guarantees of central governments laid down in Article 164(4) and (5) of Regulation (EU) No 575/2013, are calculated at the aggregated level of all retail exposures secured by residential property and commercial real estate respectively, and that, where the exposure-weighted average LGD at the aggregated level is below the respective floors, relevant adjustments are applied consistently over time by the institution;
(f)
the application of different approaches for different equity portfolios where the institution itself uses different approaches for internal risk management in accordance with Article 155 of Regulation (EU) No 575/2013, is correct, in particular that the choice of the approach:
(i)
does not lead to underestimation of own funds requirements;
(ii)
is made consistently, including over time;
(iii)
is justified by internal risk management practices;
(g)
where the simple risk weight approach is used in accordance with Article 155(2) of Regulation (EU) No 575/2013, the application of risk weights is correct, in particular that the risk weight of 190 % is used only for sufficiently diversified portfolios, where the institution has proved that significant reduction of risk has been achieved as a result of the diversification of the portfolio in comparison to the risk of individual exposures in the portfolio;
(h)
the calculation of the difference between expected loss amounts and credit risk adjustments, additional value adjustments and other own funds reductions in accordance with Article 159 of Regulation (EU) No 575/2013 is correct, and in particular:
(i)
that the calculation is performed separately for the portfolio of defaulted exposures and the portfolio of exposures that are not in default;
(ii)
where the calculation performed for the defaulted portfolio results in a negative amount, that this amount is not used to offset the positive amounts resulting from the calculation performed for the portfolio of exposures that are not in default;
(iii)
that the calculation is performed gross of tax effects;
(i)
the various approaches for the treatment of exposures in the form of units or shares in CIUs are applied correctly, and in particular:
(i)
that the institution correctly distinguishes between exposures in CIUs subject to the look-through approach as set out in Article 152(1) and (2) of Regulation (EU) No 575/2013 and other exposures in CIUs;
(ii)
that the exposures in CIUs treated in accordance with Article 152(1) or (2) of Regulation (EU) No 575/2013 meet the eligibility criteria of Article 132(3) of that Regulation;
(iii)
where the institution uses the approach laid down in Article 152(4) of Regulation (EU) No 575/2013 for the calculation of the average risk-weighted exposure amounts, that:
—
the correctness of the calculation is confirmed by an external auditor,
—
the multiplication factors laid down in Article 152(2)(b)(i) and (ii) of Regulation (EU) No 575/2013 are applied correctly,
—
where the institution relies on a third party for the calculation of the risk- weighted exposure amounts, that the third party meets the requirements of Article 152(4)(a) and (b) of Regulation (EU) No 575/2013.
Organisation of the process for the calculation of own funds requirements
When assessing the soundness of the process for the calculation of own funds requirements as referred to in Article 144(1)(g) of Regulation (EU) No 575/2013, competent authorities shall verify that:
(a)
the allocation of responsibilities of the unit or units in charge of the control and management of the calculation process, in particular the allocation of responsibilities for the specific controls to be performed at each step of the calculation process, is clearly defined;
(b)
relevant procedures, including back-up procedures, ensure that the calculation of own funds requirements is carried out in accordance with Article 430 of Regulation (EU) No 575/2013;
(c)
all input data, including the values of risk parameters and the previous versions of the system, are stored to allow replication of the calculation of own funds requirements;
(d)
the results of the calculation are approved on an adequate management level and that senior management is informed about possible errors or inadequacies of the calculation and the measures to be taken.
Source: EUR-Lex (Publications Office of the EU), © European Union, reuse permitted under Commission Decision 2011/833/EU.
