General
1. In order to assess whether an institution is compliant with the requirements on the use of rating systems for the purposes of Article 144(1)(b), Article 145, Article 171(1)(c), Article 172(1)(a), Article 172(1)(c), Article 172(2) and 175(3) of Regulation (EU) No 575/2013, competent authorities shall verify that:
(a)
internal ratings and default and loss estimates of the rating systems used in the calculation of own funds play an essential role in the risk management, credit approval and decision-making process in accordance with Article 19;
(b)
internal ratings and default and loss estimates of the rating systems used in the calculation of own funds play an essential role in the process of the internal capital allocation in accordance with Article 20;
(c)
internal ratings and default and loss estimates of the rating systems used in the calculation of own funds play an essential role in the corporate governance functions in accordance with Article 21;
(d)
data and estimates used by the institution for the calculation of own funds and those used for internal purposes are consistent, and where discrepancies exist, that these are fully documented and reasonable;
(e)
rating systems are broadly in line with the requirements set out in Article 169 to 191 of Regulation (EU) No 575/2013 and have been applied by the institution at least three years prior to the use of the IRB Approach, as set out in Article 145 of Regulation (EU) No 575/2013, in accordance with Article 22.
2. For the purpose of the assessment under paragraph 1 competent authorities shall apply all of the following methods:
(a)
review the institution's relevant internal policies and procedures;
(b)
review the relevant minutes the institution's internal bodies, including the management body, or committees involved in the credit risk management governance;
(c)
review the allocation of powers to take credit decisions, the credit management manuals and the commercial channels schemes;
(d)
review the analysis the institution has made of the credit approvals and the data on rejected credit applications, including all of the following:
(i)
credit decisions deviating from the institution’s credit policy (‘exceptions’);
(ii)
the instances where human judgement results in deviation from the inputs or outputs of the rating systems (‘overrides’) and the justifications for the overrides;
(iii)
the non-rated exposures and the reasons for missing ratings;
(iv)
manual decisions and cut-off points;
(e)
review the institution’s credit restructuring policies;
(f)
review the documented regular reporting on credit risk;
(g)
review the documentation on calculation of internal capital of the institution and the allocation of the internal capital to types of risk, subsidiaries and portfolios;
(h)
review the relevant findings of the internal audit or of other control functions of the institution;
(i)
review the progress reports on the efforts made by the institution to correct shortcomings and mitigate risks detected during relevant audits;
(j)
obtain written statements from or interview the relevant staff and senior management of the institution.
3. For the purpose of the assessment under paragraph 1, competent authorities may also apply any of the following additional methods:
(a)
review the documentation of early warning systems;
(b)
review the credit risk adjustments methodology and the documented analysis of its coherence with the calculation of own funds requirements;
(c)
review the documented analysis of the risk-adjusted profitability of the institution;
(d)
review the pricing policies of the institution;
(e)
review the procedures for the collection and recovery of debts;
(f)
review the planning manuals and reports on budgeting of the cost of risk;
(g)
review the remuneration policy and the minutes of the remuneration committee;
(h)
review other relevant documents of the institution.
Use test in risk management, decision-making and credit approval process
1. When assessing whether internal ratings and default and loss estimates of the rating systems used in the calculation of the own funds requirements play an essential role in the institution’s risk management and decision-making process and in its credit approval as required by Article 144(1)(b) of Regulation (EU) No 575/2013, with regard to assignment to grades or pools in accordance with Article 171(1), point (c), and (2), of that Regulation, with regard to assignment of exposures in accordance with Article 172(1), points (a), (b) and (c), of that Regulation and with regard to documentation of rating systems in accordance with Article 175(3) of that Regulation, the competent authorities shall verify that:
(a)
the number of non-rated exposures and outdated ratings is immaterial;
(b)
those internal ratings and default and loss estimates play an important role, in particular, when:
(i)
making decisions on the approval, rejection, restructuring and renewal of a credit facility;
(ii)
drawing up the lending policies by influencing either the maximum exposure limits, the mitigation techniques and credit enhancements required or any other aspect of the institution’s global credit risk profile;
(iii)
carrying out the monitoring process of obligors and exposures;
2. Where institutions use internal ratings and default and loss estimates in any of the following areas, competent authorities shall assess how that use contributes to those ratings and estimates playing an essential role in the institution’s risk management and decision-making processes and in its credit approval as referred to in paragraph 1:
(a)
the pricing of each credit facility or obligor;
(b)
the early warning systems used for the credit risk management;
(c)
the determination and implementation of the collection and recovery policies and processes;
(d)
the calculation of credit risk adjustments where this is in line with the applicable accounting framework;
(e)
the allocation or delegation of competence for the credit approval process by the management board to internal committees, to the senior management and to the staff.
Use test in the internal capital allocation
1. When assessing whether internal ratings and default and loss estimates of the rating systems used in the calculation of own funds requirements play an essential role in the institution’s internal capital allocation as referred to in Article 144(1)(b) of Regulation (EU) No 575/2013, competent authorities shall assess whether these ratings and estimates play an important role in:
(a)
the assessment of the amount of internal capital that the institution considers adequate to cover the nature and level of the risk to which it is or might be exposed as referred to in Article 73 of Directive 2013/36/EU;
(b)
the allocation of the internal capital among types of risk, subsidiaries and portfolios.
2. Where institutions take into consideration internal ratings and default and loss estimates for the purpose of calculating the cost of risk to the institution for budgetary purposes, competent authorities shall assess how taking those elements into consideration contributes to those ratings and estimates playing an essential role in the institution’s internal capital allocation.
Use test in corporate governance functions
1. When assessing whether internal ratings and default and loss estimates of the rating systems used in the calculation of own funds requirements play an essential role in the institution’s corporate governance functions as referred to in Article 144(1)(b) of Regulation (EU) No 575/2013, competent authorities shall assess whether these ratings and estimates play an important role in:
(a)
the management reporting;
(b)
the monitoring of the credit risk at the portfolio level.
2. Where institutions take into consideration internal ratings and default and loss estimates in any of the following areas, competent authorities shall assess how taking those elements into consideration contributes to those ratings and estimates playing an essential role in the institution’s corporate governance functions referred to in paragraph 1:
(a)
the internal audit planning;
(b)
the design of the remuneration policies.
Experience test
1. When assessing whether rating systems broadly in line with the requirements set out in Article 169 to 191 of Regulation (EU) No 575/2013 have been applied by the institution at least three years prior to the use of the IRB Approach for the purpose of the calculation of the own funds requirements, as referred to in Article 145 of Regulation (EU) No 575/2013, competent authorities shall verify that:
(a)
those rating systems have been used in the institution’s risk management and decision-making processes and credit approval processes referred to in Article 19(1)(b);
(b)
adequate documentation of the effective operation of the rating systems for those three years is available, in particular with regard to the respective monitoring, validation and audit reports.
2. For the purposes of assessing a request for permission to extend the IRB Approach in accordance with the sequential implementation plan, paragraph 1 shall also apply where the extension concerns exposures that are significantly different to the scope of the existing coverage, such that the existing experience cannot be reasonably assumed to be sufficient to meet the requirements of Article 145(1) and (2) of Regulation (EU) No 575/2013 in respect of the additional exposures, as laid down in Article 145(3) of Regulation (EU) No 575/2013.
Source: EUR-Lex (Publications Office of the EU), © European Union, reuse permitted under Commission Decision 2011/833/EU.
