General
1. In order to assess compliance of an institution with the requirement to assign each exposure to a single exposure class consistently over time as laid down in Article 147 of Regulation (EU) No 575/2013, competent authorities shall assess the following:
(a)
the institution’s assignment methodology and its implementation, in accordance with Article 60;
(b)
the assignment sequence of the exposures to exposure classes, in accordance with Article 61;
(c)
whether specific considerations with regard to the retail exposure class have been taken into account by the institution, in accordance with Article 62.
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, procedures and assignment methodology;
(b)
review the relevant minutes of the institution’s internal bodies, including the management body, or committees;
(c)
review the relevant findings of the internal audit or of other control functions of the institution;
(d)
review the progress reports on the efforts made by the institution to correct shortcomings and mitigate risks detected during relevant audits;
(e)
obtain written statements from or interview the relevant staff and senior management of the institution;
(f)
review the criteria used by the personnel responsible for the manual assignment of exposures to exposure classes.
3. For the purpose of the assessment under paragraph 1, competent authorities may also apply any of the following additional methods:
(a)
conduct sample testing and review documents related to the characteristics of an obligor and to the origination and maintenance of the exposures;
(b)
review the functional documentation of the relevant IT systems;
(c)
compare the institution’s data with data publicly available, including data recorded in the database maintained by EBA in accordance with Article 115(2) of Regulation (EU) No 575/2013 or in the databases maintained by the competent authorities;
(d)
verify the institution’s compliance with the Commission Implementing Decision 2014/908/EU ( 7 ) on the equivalence of the supervisory and regulatory requirements of certain third countries and territories for the purposes of the treatment of exposures according to Regulation (EU) No 575/2013;
(e)
perform own tests on the data of the institution or request the institution to perform tests proposed by the competent authorities;
(f)
review other relevant documents of the institution.
Assignment methodology and its implementation
1. When assessing the institution’s assignment methodology in accordance with Article 147 of Regulation (EU) No 575/2013, competent authorities shall verify that:
(a)
the methodology is fully documented and complies with all requirements laid down in Article 147 of Regulation (EU) No 575/2013;
(b)
the methodology reflects the assigning sequence laid down in Article 61;
(c)
the methodology includes a list of the regulatory and supervisory regimes of third countries considered equivalent to those applied in the Union in accordance with the Implementing Decision 2014/908/EU as referred to in Article 107(4), Article 114(7), Article 115(4) and Article 116(5) of Regulation (EU) No 575/2013, when such an equivalence is required for the assignment of an exposure to a specific class.
2. When assessing the implementation of the assignment methodology as referred to in paragraph 1, competent authorities shall verify that:
(a)
the procedures governing the input and transformations of data in the IT systems are sufficiently robust to ensure correct assignment of each exposure to an exposure class;
(b)
sufficiently detailed criteria are available for the personnel responsible for the assignment of the exposures to ensure a consistent assignment;
(c)
the assignment to equity exposures, items representing securitisation positions and exposures identified as specialised lending exposures in accordance with Article 147(8) of Regulation (EU) No 575/2013 is performed by personnel who are aware of the terms and conditions and of the relevant details of the transaction that determine the identification of those exposures;
(d)
the assignment is performed using the most recent data available.
3. For exposures to CIU, competent authorities shall verify that the institutions make every effort to assign the underlying exposures to adequate exposure classes in accordance with Article 152 of Regulation (EU) No 575/2013.
Assigning sequence
When assessing whether the institution assigns exposures to exposure classes in compliance with Article 147 of Regulation (EU) No 575/2013, the competent authorities shall verify that the assignment is carried out in the following sequence:
(a)
first, exposures eligible to be classified under equity exposures, items representing securitisation positions and other non-credit obligation assets are assigned to those classes in accordance with points (e), (f) and (g) of Article 147(2) of Regulation (EU) No 575/2013;
(b)
second, exposures which have not been assigned in accordance with point (a) and which are eligible to be classified under the classes for exposures to central governments and central banks, exposures to institutions, exposures to corporates or retail exposures are assigned to those classes in accordance with points (a), (b), (c) and (d) of Article 147(2) of Regulation (EU) No 575/2013;
(c)
third, any credit obligations not assigned in accordance with point (a) or (b) are assigned to the class of exposures to corporates in accordance with Article 147(7) of Regulation (EU) No 575/2013.
Specific requirements for retail exposures
1. When assessing the assignment of exposures to the retail exposure class in accordance with Article 147(5) of Regulation (EU) No 575/2013, competent authorities shall verify that:
(a)
the institution distinguishes between exposures to natural persons and to SMEs based on clear criteria in a consistent manner;
(b)
for the purposes of monitoring compliance with the limit laid down in Article 147(5)(a)(ii) of Regulation (EU) No 575/2013 the institution has in place adequate procedures and mechanisms for the following:
(i)
identifying groups of connected clients and aggregating relevant exposures that each institution and its parent or subsidiaries maintain against this group of connected clients;
(ii)
assessing cases where the limit has been exceeded;
(iii)
ensuring that an exposure to an SME for which the limit has been exceeded is re-assigned to the corporate exposure class without undue delay.
2. When verifying that retail exposures are not managed just as individually as exposures in the corporate exposure class in the meaning of Article 147(5)(c) of Regulation (EU) No 575/2013, competent authorities shall take into consideration at least the following components of the credit process:
(a)
marketing and sales activities;
(b)
type of product;
(c)
rating process;
(d)
rating system;
(e)
credit decision process;
(f)
credit risk mitigation methods;
(g)
monitoring processes;
(h)
collection and recovery process.
3. When determining whether the criteria laid down in Article 147(5)(c) and (d) of Regulation (EU) No 575/2013 are met, competent authorities shall examine whether the assignment of exposures is consistent with the institution’s business lines and the way those exposures are managed.
4. Competent authorities shall verify that the institution assigns each retail exposure to a single category of exposures to which the relevant correlation coefficient applies in accordance with paragraphs (1), (3) and (4) of Article 154 of Regulation (EU) No 575/2013:
(a)
for the purposes of verifying compliance with points (d) and (e) of Article 154(4) of Regulation (EU) No 575/2013, competent authorities shall verify that:
(i)
the volatility of loss rates for qualifying revolving retail exposures portfolio is low relative to their average level of loss rates, by assessing the institution’s comparison of the volatility of loss rates for qualifying revolving retail exposures portfolio as opposed to other retail exposures or to other benchmark values;
(ii)
the risk management of qualifying revolving retail exposures portfolio is consistent with the underlying risk characteristics, including loss rates;
(b)
for the purposes of verifying compliance with Article 154(3) of Regulation (EU) No 575/2013, competent authorities shall verify that for all exposures where the immovable property collateral is used in the own-LGD estimates in accordance with Article 181(1)(f) of Regulation (EU) No 575/2013, the coefficient of correlation laid down in Article 154(3) of Regulation (EU) No 575/2013 is assigned.
Source: EUR-Lex (Publications Office of the EU), © European Union, reuse permitted under Commission Decision 2011/833/EU.
