General
1. In order to assess the institution’s compliance with the requirements regarding the assignment of obligors or exposures to grades or pools laid down in Articles 169, 171, 172 and 173 of Regulation (EU) No 575/2013, competent authorities shall verify both of the following:
(a)
the adequacy of the definitions, processes and criteria used by the institution for assigning or reviewing the assignment of exposures to grades or pools, including the treatment of overrides, in accordance with Article 24;
(b)
the integrity of the assignment process as referred to in Article 173 of Regulation (EU) No 575/2013, including the independence of the assignment process, as well as the reviews of the assignment, in accordance with Article 25.
2. For the purposes of the verification 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 roles and responsibilities of units responsible for origination and renewal of exposures and units responsible for the assignment of exposures to grades or pools;
(c)
review the relevant minutes of the institution’s internal bodies, including the management body, or committees;
(d)
review the institution’s internal reports regarding the performance of the assignment process;
(e)
review the relevant findings of the internal audit or of other control functions of the institution;
(f)
review the progress reports on the efforts made by the institution to correct shortcomings in the assignment or the review process and to mitigate risks detected during audits;
(g)
obtain written statements from or interview the relevant staff and senior management of the institution;
(h)
review the criteria used by the personnel responsible for human judgement in the assignment of exposures to grades or pools.
3. For the purposes of the verification under paragraph 1, competent authorities may also apply any of the following additional methods:
(a)
review the functional documentation of the relevant IT systems;
(b)
conduct sample testing and review documents relating to the characteristics of an obligor and to the origination and maintenance of the exposures;
(c)
perform their own tests on the data of the institution or require the institution to perform specific tests;
(d)
review other relevant documents of the institution.
Assignment definitions, processes and criteria
1. When assessing the adequacy of definitions, processes and criteria used by the institution to assign or review the assignment of exposures to grades or pools in accordance with Articles 169, 171, 172 and 173 of Regulation (EU) No 575/2013, competent authorities shall verify that:
(a)
there are adequate procedures and mechanisms in place that ensure a consistent assignment of obligors or facilities to an appropriate rating system;
(b)
there are adequate procedures and mechanisms in place to ensure that each exposure held by the institution is assigned to a grade or pool in accordance with the rating system;
(c)
for exposures to corporates, institutions, central governments and central banks, and for equity exposures where the institution uses the PD/LGD approach set out in Article 155(3) of Regulation (EU) No 575/2013, there are adequate procedures and mechanisms in place to ensure that all exposures to the same obligor are assigned to the same obligor grade, including exposures along different lines of business, departments, geographical locations, legal entities within the group and IT systems, and to ensure the correct application of the exemption from the requirement to have an obligor rating scale which reflects exclusively quantification of the risk of obligor default for specialised lending exposures, laid down in Article 170(2) of Regulation (EU) No 575/2013, and of the exemption from the obligation to assign separate exposures to the same obligor to the same obligor grade, laid down in Article 172(1)(e) of that Regulation;
(d)
the definitions and criteria used for the assignment are sufficiently detailed to ensure a common understanding and consistent assignment to grades or pools by all the personnel responsible in all business lines, departments, geographical locations, legal entities within the group, regardless of which IT system is used;
(e)
there are adequate procedures and mechanisms in place to obtain all relevant information about the obligors and the facilities;
(f)
all relevant, currently available and most up-to-date information is taken into account;
(g)
in the case of exposures to corporates, institutions, central governments and central banks, and for equity exposures where an institution uses the PD/LGD approach, both, financial and non-financial information is taken into account;
(h)
where information necessary for the assignment of exposures to grades or pools is missing or is not up-to-date, the institution has set tolerances for defined metrics and adopted rules in order to take account of that fact in an adequate and conservative way;
(i)
financial statements older than 24 months are considered outdated and are treated in a conservative way;
(j)
the assignment to grades or pools is part of the credit approval process, in accordance with Article 19;
(k)
the criteria for assignment to grades or pools are consistent with the institution’s lending standards and policies for handling troubled obligors and facilities.
2. For the purposes of the verification under paragraph 1, competent authorities shall assess the situations where human judgement is used to override any inputs or outputs of the rating system in accordance with Article 172(3) of Regulation (EU) No 575/2013. They shall verify that:
(a)
there are documented policies setting out the grounds for and the maximum extent of overrides and specifying at what stages of the assignment process the overrides are allowed;
(b)
the overrides are sufficiently justified by reference to the grounds set out in the policies referred to in point (a) and that this justification is documented;
(c)
the institution regularly carries out an analysis of the performance of exposures the rating of which has been overridden, including an analysis of overrides performed by each member of staff applying the overrides, and that the results of this analysis are taken into account in the decision-making process at an appropriate management level;
(d)
the institution collects full information on overrides, including information both before and after the overrides, monitors the number and justifications for overrides on a regular basis, and analyses the effect of overrides on the performance of the model;
(e)
the number and justifications for overrides do not indicate significant weaknesses of the rating model.
3. For the purposes of the verification under paragraph 1, competent authorities shall verify that the assignment definitions, processes and criteria achieve all of the following:
(a)
groups of connected clients as defined in Regulation (EU) No 575/2013 are identified;
(b)
information on the ratings and defaults of other relevant entities within the group of connected clients is taken into account in an obligor grade assignment in such a way that the rating grades of each relevant entity in the group reflects the different situation of each relevant entity and its relations with the other relevant entities of the group;
(c)
the cases where the obligors are assigned to a better grade than their parent entities are documented and justified.
Integrity of assignment process
1. When assessing the independence of the assignment process in accordance with Article 173 of Regulation (EU) No 575/2013, competent authorities shall verify that:
(a)
the staff and management responsible for the final approval of the assignment or of the review of the assignment of exposures to grades or pools are not involved in or responsible for the origination or renewal of exposures;
(b)
senior managers of units responsible for the final approval of the assignment or of the review of the assignment of exposures to grades or pools and senior managers of units responsible for the origination or renewal of exposures report to different members of the management body or the relevant designated committee of the institution;
(c)
the remuneration of the staff and management responsible for the final approval of the assignment or of the review of the assignment of exposures to grades or pools is not linked to the performance of the tasks relating to the origination or renewal of exposures;
(d)
the same practices as those referred to in points (a), (b) and (c) apply to overrides in the retail exposure class.
2. When assessing the adequacy and frequency of the assignment process as set out in Article 173 of Regulation (EU) No 575/2013, competent authorities shall verify that:
(a)
adequate and detailed policies specify the frequency of the review, and the criteria for the necessity of more frequent reviews having regard to the higher risk of obligors or problematic exposures and that those policies are applied consistently over time;
(b)
a review of the assignment is carried out within a maximum of 12 months after the approval of the assignment and that any adjustments to it that are found during the review to be necessary are made within that time-limit;
(c)
a review of the assignment is carried out when new material information on the obligor or the exposure becomes available and that any adjustments to it that are found during the review to be necessary are made without undue delay;
(d)
the institution has defined criteria and processes for assessing the materiality of new information and the subsequent need for reassignment and that these criteria and processes are applied consistently;
(e)
the most recent information available is used in the review of the assignment;
(f)
where for practical reasons the assignment has not been reviewed as set out in points (a) to (e), that adequate policies to identify, monitor and remedy the situation are in place and that measures are taken to ensure return to compliance with points (a) to (e);
(g)
senior management is regularly informed about the reviews of assignment of exposures to grades or pools and of any delays of the reviews of the assignment referred to in point (f);
(h)
there are adequate policies for effectively obtaining and regularly updating relevant information, and that this is reflected appropriately in the terms of the contracts with the obligors.
3. For the purposes of the verification under paragraph 2, competent authorities shall assess the value and number of exposures that have not been reviewed in accordance with points (a) to (e) of paragraph 2, and verify that those exposures are treated in a conservative manner when calculating the risk-weighted exposure amounts. The assessment and verification shall be carried out separately for each rating system and each risk parameter.
