Use test in the internal capital allocation
Article 20
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.