General
1. In order to assess the compliance of an institution with the conditions for implementing the IRB Approach laid down in Article 148 of Regulation (EU) No 575/2013 and the conditions for permanent partial use laid down in Article 150 of that Regulation, competent authorities shall verify both of the following:
(a)
that the institution’s initial coverage and plan for sequential implementation of the IRB Approach are adequate, in accordance with Article 7;
(b)
that the exposure classes, types of exposures or business units where the Standardised Approach is applied are eligible for permanent exemption from the IRB Approach.
2. For the purposes of the verification under paragraph 1, competent authorities shall apply all of the following methods:
(a)
review the institution’s plan for sequential implementation of the IRB Approach;
(b)
review the institution’s relevant internal policies and procedures, including the calculation methods for the share of exposures to be covered by the sequential implementation of the IRB Approach and the permanent exemption from the IRB Approach;
(c)
review the roles and responsibilities of the units and management bodies involved in the assignment of individual exposures to the IRB Approach or the Standardised Approach;
(d)
review the relevant minutes of meetings of the institution’s internal bodies, including the management body, or committees;
(e)
review the relevant findings of the internal audit function or of other control functions of the institution;
(f)
review the relevant progress reports on the effort made by the institution to correct shortcomings and mitigate risks detected during audits;
(g)
obtain written statements from the relevant staff and senior management of the institution or interview them.
3. For the purposes of the verification under paragraph 1, competent authorities may:
(a)
review the functional documentation of the IT systems used in the process of the assignment of individual exposures to the IRB Approach or the Standardised Approach;
(b)
conduct sample testing and review documents relating to the characteristics of the obligors and to the origination and maintenance of the exposures included in the sample;
(c)
review other relevant documents of the institution.
Sequential implementation of the IRB Approach
1. When assessing the initial coverage and the institution’s plan for sequential implementation of the IRB Approach in accordance with Article 148 of Regulation (EU) No 575/2013, competent authorities shall verify that:
(a)
the sequential implementation plan includes at least the following:
(i)
a specification of the range of application of each rating system, as well as of the types of exposures which are rated using each rating model;
(ii)
the planned dates of application of the IRB Approach with regard to each type of exposures;
(iii)
information on the total exposure values at the time of the assessment and risk-weighted exposure amounts calculated in accordance with the approach applied at the time of the assessment to each type of exposures;
(b)
the sequential implementation plan comprises all exposures of the institution, and, where applicable, its parent undertaking, and all exposures of the subsidiaries of the institution, unless the exposures are assessed in accordance with Article 8;
(c)
the implementation is planned to be performed in accordance with the second and third subparagraphs of Article 148(1) of Regulation (EU) No 575/2013;
(d)
where the institution is permitted to use the IRB Approach for any exposure class, that it uses the IRB Approach for equity exposures except in the cases specified in Article 148(5) of Regulation (EU) No 575/2013;
(e)
the sequence and time periods of the implementation of the IRB Approach are specified on the basis of the real capabilities of the institution, having regard to the availability of data, rating systems and experience periods as referred to in Article 145 of Regulation (EU) No 575/2013 and are not used selectively for the purpose of achieving reduced own funds requirements;
(f)
the sequence of the implementation of the IRB Approach ensures that implementation with regard to the credit exposures relating to the institution’s core business is given priority;
(g)
a definite time limit for the implementation of the IRB Approach is set for each type of exposures and business units and is reasonable on the basis of the nature and scale of the institution’s activities.
2. Competent authorities shall determine whether the time limit referred to in point (g) of paragraph 1 is reasonable based on all of the following:
(a)
the complexity of the institution’s operations, including those of the parent undertaking and its subsidiaries;
(b)
the number of business units and business lines within the institution, and, where applicable, its parent undertaking and the subsidiaries of the institution;
(c)
the number and complexity of the rating systems to be implemented by all entities covered by the sequential implementation plan;
(d)
the plans to implement rating systems in subsidiaries located in third countries where significant legal or other difficulties for the approval of IRB models exist;
(e)
the availability of accurate, appropriate and complete time series;
(f)
the institution’s operational capability to develop and implement the rating systems;
(g)
the institution’s prior experience in managing specific types of exposures.
3. When assessing the institution’s compliance with the plan for sequential implementation of the IRB Approach, which has been subject to permission of the competent authorities in accordance with Article 148 of Regulation (EU) No 575/2013, competent authorities may consider changes to the sequence and time period appropriate only if one or more of the following conditions are met:
(a)
there are significant changes in the business environment and in particular changes in strategy, mergers and acquisitions;
(b)
there are significant changes in the relevant regulatory requirements;
(c)
material weaknesses in the rating systems have been identified by the competent authority, or by the internal audit or the validation function;
(d)
the elements referred to in paragraph 2 have changed significantly, or any of the elements referred to in paragraph 2 were not taken into account adequately in the plan for sequential implementation of the IRB Approach which was approved.
Conditions for permanent partial use
1. When assessing the institution’s compliance with the conditions for permanent partial use of the Standardised Approach in relation to the exposures referred to in points (a) and (b) of Article 150(1) of Regulation (EU) No 575/2013, competent authorities shall verify that:
(a)
the availability of external data for representative counterparties is assessed and taken into account by the institution;
(b)
the cost to the institution of developing a rating system for the counterparties in the relevant exposure class is assessed taking into account the size of the institution and the nature and scale of its activities;
(c)
the operational capability of the institution to develop and implement a rating system is assessed taking into account the nature and scale of the institution’s activity.
2. When assessing the institution’s compliance with the conditions for permanent partial use of the Standardised Approach in relation to the exposures referred to in point (c) of Article 150(1) of Regulation (EU) No 575/2013, competent authorities shall verify that the institution has verified and taken into account at least one of the following:
(a)
that the exposures, including the number of separately managed portfolios and business lines are not homogenous enough to allow the development of a robust and reliable rating system;
(b)
that the risk-weighted exposure amount calculated in accordance with the Standardised Approach is significantly higher than the expected risk-weighted exposure amount calculated in accordance with the IRB Approach;
(c)
that the exposures relate to a business unit or business line of the institution which is planned to be discontinued;
(d)
that the exposures include portfolios subject to proportional consolidation of partly-owned subsidiaries, in accordance with Article 18 of Regulation (EU) No 575/2013.
3. When assessing the institution’s compliance with the conditions for permanent partial use of the Standardised Approach, competent authorities shall verify that the institution monitors compliance with the requirements of Article 150 of Regulation (EU) No 575/2013 on a regular basis.
