EN    EN EN 
 
EN    EN  COMMISSION OF THE E UROPEAN COMMUNITIES 
Brussels, 14.7.2004 
COM(2004) 486 final 
2004/0155 (COD) 
2004/0159 (COD)  Annexes techniques 
  
Proposal for 
DIRECTIVES OF THE EUROPEAN PA RLIAMENT AND OF THE COUNCIL 
Re-casting Directive 2000/12/EC of the Euro pean Parliament and of the Council of 20 
March 2000 relating to the taking up and pursuit  of the business of credit institutions 
and Council Directive 93/6/EEC of 15 March 1993 on the capital adequacy of investment 
firms and credit institutions. 
(presented by the Commission) 
  
{SEC(2004) 921} 
 
EN 2   EN EXPLANATORY MEMORANDUM  
- 
 
EN 3   EN Proposal for a 
COUNCIL DIRECTIVE 
on […] 
THE COUNCIL OF THE EUROPEAN UNION, 
Having regard to the Treaty esta blishing the European Communit y, and in particular Article 
[…] thereof, 
Having regard to the proposal from the Commission1, 
Having regard to the opinion of the European Parliament2, 
Having regard to the opinion of the Eu ropean Economic and Social Committee3, 
Having regard to the opinion of  the Committee of the Regions4, 
Whereas: (1) [Initial capital…] . 
(2) [Initial capital…] , 
HAS ADOPTED THIS DIRECTIVE: 
Article 1 
[…] 
Article […] 
Member States shall bring into force the la ws, regulations and ad ministrative provisions 
necessary to comply with this Directive by […] at the latest. They sh all forthwith inform the 
Commission thereof. 
When Member States adopt those provisions, they  shall contain a refere nce to this Directive 
or be accompanied by such a reference on the o ccasion of their official publication. Member 
States shall determine how such  reference is to be made. 
                                                
 
1 OJ C […], […], p. […]. 
2 OJ C […], […], p. […]. 
3 OJ C […], […], p. […]. 
4 OJ C […], […], p. […]. 
 
EN 4   EN Article […] 
This Directive shall enter into force on the […] day following that of its publication in the 
Official Journal of the European Union . 
Article […] 
This Directive is addressed to the Member States. 
Done at Brussels, […] 
 For the Council 
 The President  […] 
 
EN 5   EN ANNEX  
 
Ø new 
Annex V - Technical criteria on or ganisation and treatment of risks  
1. GOVERNANCE  
1. Arrangements shall be defined by the mana gement body referred to in Article 11 
concerning the segregation of duties in the organisation and the prevention of 
conflicts of interest. 
2. TREATMENT OF RISKS  
2. The management body referred to in Article 11 shall approve and periodically review 
the strategies and policies for taking up, managing, monitoring and mitigating the 
risks the credit institution is or might be  exposed to, includi ng those posed by the 
macroeconomic environment in which it opera tes in relation to the status of the 
business cycle. 
3. CREDIT AND COUNTERPARTY RISK  
3. Credit-granting shall be based on sound and well-defined criteria. The process for 
approving, amending, renewing, and re-financing credits shall be cl early established. 
4. The ongoing administration and monitoring of their various credit risk-bearing 
portfolios and exposures, including for iden tifying and managing problem credits and 
for making adequate value adjustments a nd provisions, shall be  operated through 
effective systems. 
5. Diversification of credit portfolios shall be adequate given the credit institution’s 
target markets and overall credit strategy. 
4. RESIDUAL RISK  
6. The risk that recognised credit risk mitigation techniques used by the credit 
institution prove less effective than expect ed shall be addressed and controlled by 
means of written policies and procedures. 
5. CONCENTRATION RISK  
7. The concentration risk arising from exposur es to counterparties,  groups of connected 
counterparties, and counterparties in the same economic sector, geographic region or 
from the same activity or commodity, the application of credit risk mitigation 
techniques, and including in particular risks associated with large indirect credit 
 
EN 6   EN exposures (e.g. to a single co llateral issuer), sh all be addressed and controlled by 
means of written policies and procedures. 
6. SECURITISATION RISKS  
8. The risks arising from securitisation transactions in relation to which the credit 
institutions are originator or sponsor shall be evaluated and addressed through 
appropriate policies and procedures, to en sure in particular that the economic 
substance of the transaction is fully reflected in the risk assessment and management 
decisions.  
9. Liquidity plans to address the implications  of both scheduled and early amortization 
shall exist at credit institutions which are originators of revolving securitisation 
transactions involving earl y amortisation provisions. 
7. INTEREST RATE RISK ARISING FROM NON -TRADING ACTIVITIES  
10. Systems shall be implemented to evaluate and manage the risk arising from potential 
changes in interest rates as they affect a credit institution’s non-trading activities. 
8. OPERATIONAL RISK  
11. Policies and processes to evaluate and manage the exposure to operational risk, 
including to low-frequency high-severity  events, shall be implemented. Without 
prejudice to the definition laid down in Article 4(22), credit institutions shall 
articulate what constitutes operational risk for the purposes of those policies and 
procedures. 
12. Contingency and business continuity plans shall be in place to ensure a credit 
institutions' ability to operate on an ongoi ng basis and limit losses in the event of 
severe business disruption. 
9. LIQUIDITY RISK  
13. Policies and processes for the measuremen t and management of their net funding 
position and requirements on an ongoing an d forward-looking basis shall exist. 
Alternative scenarios shall be considered and the assumptions underpinning 
decisions concerning the net funding pos ition shall be reviewed regularly. 
14. Contingency plans to deal with liqui dity crises shall be in place. 
 
EN 7   EN ANNEX VI  
 
Standardised Approach  
 
Part 1 - Risk weights  
1. EXPOSURES  TO CENTRAL  GOVERNMENTS  OR  CENTRAL  BANKS 
1.1. Treatment 
1. Without prejudice to paragraphs 2 to 8, e xposures to central governments and central 
banks shall receive a 100% risk weight. 
2. Exposures to central governments and central  banks for which a credit assessment by 
a nominated ECAI is available shall be assi gned a risk weight according to Table 1 in 
accordance with the assignment by the co mpetent authorities of the credit 
assessments of eligible ECAIs to six st eps in a credit quality  assessment scale. 
Table 1 
Credit 
quality step 1 2 3 4 5 6
Risk weight 0
%2
0
%5
0
%1
0
0
%1
0
0
%1
5
0
%
3. Exposures to the European Central Bank shall be assigned a 0% risk weight. 
1.2. Exposures in the national currency of the borrower 
4. Subject to the discretion of competent au thorities, exposures to their central 
government and central bank denominated and funded in the domestic currency may 
be assigned a risk weight which is lowe r than that indicated in paragraph 2. 
5. When the discretion in paragraph 4 is exer cised by the competent authorities of one 
Member State, the competent authorities of another Member State may also allow 
their credit institutions to apply the same risk weight to  exposures to that central 
government or central bank denominat ed and funded in that currency. 
6. When the competent authorities of a th ird country which apply supervisory and 
regulatory arrangements at l east equivalent to those applied in the Community 
assigns a risk weight which is lower than  that indicated in paragraph 1 to 2 to 
exposures to its central government and cen tral bank denominated and funded in the 
domestic currency, Member States may allow their credit institutions to risk weight 
such exposures in the same manner. 
 
EN 8   EN 1.3. Use of credit assessments by Export Credit Agencies 
7. A credit assessment by an Export Credit Agency may be recognised only if either of 
the following conditions are met: 
(a) the credit assessment is a consensus risk score from an Export Credit Agency 
participating in the OECD “Arrangeme nt on Guidelines for Officially 
Supported Export Credits” 
(b) the Export Credit Agency publishes it s credit assessments, and the Export 
Credit Agency subscribes to the OE CD agreed methodology, and the credit 
assessment is associated with one of the seven minimum export insurance 
premiums (MEIP) that the OECD  agreed methodology establishes. 
8. Exposures for which a credit assessment by an Export Credit Agency is recognised 
for risk weighting purposes shall be assi gned a risk weight according to Table 2. 
Table 2 
MEIP 1 2 3 4 5 6 7 
Risk 
weight 0% 20% 50% 100% 100% 100% 150% 
 
2. EXPOSURES  TO REGIONAL  GOVERNMENTS  OR  LOCAL  AUTHORITIES 
9. Without prejudice to paragraphs 10 to 12, exposures to regional governments and 
local authorities shall be risk  weighted as exposures to in stitutions. Exercise of this 
discretion by competent authorities is independent of the exercise of discretion by 
competent authorities as speci fied in Article 80. The pref erential treatment for short-
term exposures specified in paragraphs 30, 31and 36 shall not be applied. 
10. Subject to the discreti on of competent authorities, expos ures to regional governments 
and local authorities may be treated as e xposures to the central government in whose 
jurisdiction they are established where ther e is no difference in risk between such 
exposures because of the specific revenue -raising powers of the former, and the 
existence of specific institutional arrangement s the effect of which is to reduce their 
risks of default.  
11. When the discretion of paragraph 10 is exer cised by the competent authorities of one 
Member State, the competent authorities of  another Member States may also allow 
their credit institutions to apply the same risk weight to exposures to those regional 
governments and local authorities. 
12. When competent authorities of a third c ountry jurisdiction which apply supervisory 
and regulatory arrangements at  least equivalent to thos e applied in the Community 
treat exposures to regional governments and local authorities as exposures to their 
central government, Member States may allow their credit institutions to risk weight 
exposures to such regional governments a nd local authorities in the same manner. 
 
EN 9   EN 3. EXPOSURES  ON  ADMINISTRATIVE  BODIES  AND  NON-COMMERCIAL  
UNDERTAKINGS   
3.1. Treatment 
13. Without prejudice to paragraphs 14 to 18, exposures to administrative bodies and 
non-commercial undertakings shal l receive a 100% risk weight. 
3.2. Public Sector Entities 
14. Without prejudice to paragraphs 15 to 17, e xposures to public sector entities shall 
receive a 100% risk weight. 
15. Subject to the discretion of competent author ities, exposures to public sector entities 
may be treated as exposures to institutions . Exercise of this discretion by competent 
authorities is independent of  the exercise of discretion by competent authorities as 
specified in Article 80. The preferential trea tment for short-term exposures specified 
in paragraphs 30, 31 and 36 shall not be applied. 
16. When the discretion to trea t exposures to public sector  entities as exposures to 
institutions is exercised by the competen t authorities of one Member State, the 
competent authorities of another Member State may allow their credit institutions to 
risk weight exposures to such public sector entiti es in the same manner. 
17. When competent authorities of a third c ountry jurisdiction, which apply supervisory 
and regulatory arrangements at  least equivalent to thos e applied in the Community, 
treat exposures to public sector entities as  exposures to institu tions, Member States 
may allow their credit institutions to risk weight exposures to such public sector 
entities in the same manner. 
3.3. Churches and religious communities 
18. Exposures to churches and religious commun ities constituted in the form of a legal 
person under public law shall, in so far as they raise taxe s in accordance with 
legislation conferring on them  the right to do so, be treated as exposures to public 
sector entities. 
4. EXPOSURES  TO MULTILATERAL  DEVELOPMENT  BANKS 
4.1. Scope 
19. For the purposes of Articles 78 to 83, the In ter-American Investment Corporation is 
considered to be a Multilateral Development Bank (MDB). 
4.2. Treatment 
20. Without prejudice to paragraphs 21 and 22, exposures to multilateral development 
banks shall be treated in the same manner as exposures to credit institutions in 
accordance with paragraphs 28 to 31. The pr eferential treatment for short-term 
exposures as specified in  paragraph 30, 31 and 36  shall not apply. 
 
EN 10   EN 21. Exposures to the following multilateral de velopment banks shall attract a 0% risk 
weight: 
(a) the International Bank for Reconstruction and Development; 
(b) the International Finance Corporation; 
(c) the Inter-American Development Bank; 
(d) the Asian Development Bank; 
(e) the African Development Bank; 
(f) the Council of Europe Development Bank 
(g) the Nordic Investment Bank; 
(h) the Caribbean Development Bank; 
(i) the European Bank for R econstruction and Development; 
(j) the European Investment Bank; 
(k) the European Investment Fund; 
(l) the Multilateral Investment Guarantee Agency 
22. A risk weight of 20% shall be applied to the portion of unpaid capital subscribed to 
the European Investment Fund. 
5. EXPOSURES  TO INTERNATIONAL  ORGANISATIONS 
23. Exposures to the following in ternational organisations sh all be assigned a 0% risk 
weight: 
(a) the European Community; 
(b) the International Monetary Fund; 
(c) the Bank for International Settlements. 
6. EXPOSURES  TO INSTITUTIONS 
6.1. Treatment 
24. One of the two methods described in paragraphs 26 to 27 and 28 to 31 shall apply in 
determining the risk weights for exposures to institutions. 
 
EN 11   EN 6.2. Risk-weight floor on exposures  to unrated institutions 
25. Exposures to an unrated institution shall no t receive a risk weight lower than that 
applied to exposures to its central government. 
6.3. Central government risk weight based method 
26. Exposures to institutions shall be assigne d a risk weight according to the credit 
quality step to which exposures  to the central government of the jurisdiction in which 
the institution is incorporated are assigned in accordance with Table 3. 
Table 3 
Credit quality step 
to which central 
government is 
assigned 1 2 3 4 5 6 
Risk weight of 
exposure 20% 50% 100% 100% 100% 150% 
 
27. For exposures to institutions incorporated in countries where the central government 
is unrated, the risk weight shall be not more than 100%. 
6.4. Credit assessment based method 
28. Exposures to institutions with  an original effective matu rity of more than three 
months for which a credit assessment by a nominated ECAI is available shall be 
assigned a risk weight according to Table 4 in accordance with the assignment by the 
competent authorities of the credit assessmen ts of eligible ECAIs to six steps in a 
credit quality assessment scale. 
Table 4 
Credit quality step 1 2 3 4 5 6 
Risk weight 20% 50% 50% 100% 100% 150% 
 
29. Exposures to unrated institutions shall be assigned a risk weight of 50%. 
30. Exposures to an institution with an original  effective maturity of three months or less 
for which a credit assessment by a nominated ECAI is available shall receive a risk 
weight according to Table 5 in accordance with the assignment by the competent 
authorities of the credit asse ssments of eligible ECAIs to six steps in a credit quality 
assessment scale: 
Table 5 
 
EN 12   EN Credit quality step 1 2 3 4 5 6 
Risk weight 20% 20% 20% 50% 50% 150% 
 
31. Exposures to unrated institutions having an  original effective maturity of three 
months or less shall be a ssigned a 20% risk weight. 
6.5. Interaction with short-t erm credit assessments 
32. If the method specified in paragraphs 28 to 31 is applied to exposur es to institutions, 
then the interaction with specific short-term assessments shall be the following. 
33. If there is no short-term exposure assessmen t, the general preferential treatment for 
short-term exposures as specified in para graph 30 shall apply to  all exposures to 
institutions of up to three months initial maturity. 
34. If there is a short-term assessment and such an assessment determines the application 
of a more favourable or identi cal risk weight than the use of the general preferential 
treatment for short-term exposures, as spec ified in paragraph 30, then the short-term 
assessment shall be used for that specifi c exposure only. Other short-term exposures 
shall follow the general pref erential treatment for short-te rm exposures, as specified 
in paragraph 30. 
35. If there is a short-term assessment and such an assessment determines a less 
favourable risk weight than the use of th e general preferential  treatment for short-
term exposures, as specified in paragraph 30, then the general pr eferential treatment 
for short-term exposures shall not be used  and all unrated short-term claims shall 
receive the same risk weight as that a pplied by the specific short-term assessment. 
6.6. Short-term exposures in the nati onal currency of the borrower 
36. When competent authorities have adopted for exposures to central governments and 
central banks the method descri bed in paragraphs 4 to 6, subject to their discretion, 
exposures to institutions of an original effective maturity of 3 months or less 
denominated and funded in the nationa l currency may be assigned, under both 
methods described in paragraphs 26 to 27 and 28 to 31, a risk weight that is one 
category less favourable than the preferential risk weight, as described in paragraphs 
4 to 6, assigned to exposures  to its central government. 
37. No exposures of an original effective matu rity of 3 months or less denominated and 
funded in the national currenc y of the borrower shall be assigned a risk weight less 
than 20%. 
6.7 Investments in regulato ry capital instruments 
38. Investments in equity or regulatory capital instruments issued by institutions shall be 
risk weighted at 100%, unless deducted from the own funds. 
 
EN 13   EN 7. EXPOSURES  TO CORPORATES 
7.1. Treatment 
39. Exposures for which a credit assessment by a nominated ECAI is available shall be 
assigned a risk weight according to Table 5 in accordance with the assignment by the 
competent authorities of the credit assessmen ts of eligible ECAIs to six steps in a 
credit quality assessment scale. 
Table 5 
Credit quality step 1 2 3 4 5 6 
Risk weight 20% 50% 100% 100% 150% 150% 
 
40. Exposures for which such a credit assessmen t is not available shall receive a 100% 
risk weight or the risk weight of its central government, whichever is the higher. 
8. RETAIL  EXPOSURES 
41. Exposures that comply with the criteria listed in Article 79(2) may, subject to the 
discretion of competent authorities, be assigned a risk  weight of 75%. 
9. EXPOSURES  SECURED  BY REAL  ESTATE  PROPERTY 
42. Without prejudice to paragraphs 43 to 57, exposures fully secured by real estate 
property shall be assigned a risk weight of 100%. 
9.1. Exposures secured by mortgages on residential property 
43. Exposures fully and completely secured, to the satisfaction of the competent 
authorities, by mortgages on resi dential property which is or shall be occupied or let 
by the owner shall be assigned a risk weight of 35%. 
44. Exposures fully and completely secured, to the satisfaction of the competent 
authorities, by shares in Finnish resi dential housing companies, operating in 
accordance with the Finnish Housing Compa ny Act of 1991 or subsequent equivalent 
legislation, in respect of resi dential property which is or sh all be occupied or let by 
the owner shall be assigned  a risk weight of 35%. 
45. In the exercise of their judgement, competen t authorities shall be satisfied only if the 
following conditions are met: 
(a) the value of the property does not materially depend upon the credit quality of 
the obligor. This requirement does not preclude situations where purely macro-
economic factors affect both the value of  the property and the performance of 
the borrower; 
 
EN 14   EN (b) the risk of the borrower does not ma terially depend upon the performance of 
the underlying property or project, but rather on the underlyi ng capacity of the 
borrower to repay the debt from othe r sources. As such, repayment of the 
facility does not materially depe nd on any cash flow generated by the 
underlying property serv ing as collateral; 
(c) the minimum requirements set out in Annex VIII, Part 2, paragraph 8 and the 
valuation rules set out in Annex VIII, Part 3, paragraphs  63 to 66 are met; 
(d) the value of the property exceeds by a substantial margin the exposures. 
46. Competent authorities may dispense with the condition contained in paragraph 45(b) 
for exposures fully and completely secu red by mortgages on residential property 
which is situated within their territory, if they have evidence that a well-developed 
and long-established residential real estate market is present in their territory with 
loss rates which are sufficiently low to justify such treatment.  
47. When the discretion contai ned in paragraph 46 is exercised by the competent 
authorities of a Member State, the compet ent authorities of another Member State 
may allow their credit institutions to apply a risk weight of 35% to such exposures 
fully and completely secured by mortgages on residential property. 
9.2. Exposures secured by mortgages on commercial real estate 
48. Subject to the discretion of competent authorities, expos ures fully and completely 
secured, to the satisfaction of the competen t authorities, by mortgages on offices or 
other commercial premises situated within  their territory may be assigned a risk 
weight of 50%. 
49. Subject to the discretion of competent authorities, expos ures fully and completely 
secured, to the satisfaction of the competen t authorities, by shares in Finnish housing 
companies, operating in accordance with the Finnish Housing Company Act of 1991 
or subsequent equivalent legislation, in  respect of offices or other commercial 
premises may be assigned a risk weight of 50%.  
50. Subject to the discretion of competent au thorities, exposures related to property 
leasing transactions concerning offices or ot her commercial premises situated in their 
territory and governed by statutory provisi ons whereby the lessor retains full 
ownership of the rented assets until the te nant exercises his option to purchase, may 
be assigned a risk weight of 50%.  
51. The application of paragraphs 48 to 50 is subject to the following conditions: 
(a) the value of the property must not ma terially depend upon the credit quality of 
the obligor. This requirement does not preclude situations where purely macro-
economic factors affect both the value of  the property and the performance of 
the borrower; 
(b) the risk of the borrower must not materially depend upon the performance of 
the underlying property or project, but rather on the underlyi ng capacity of the 
borrower to repay the debt from othe r sources. As such, repayment of the 
 
EN 15   EN facility must not materially depend  on any cash flow generated by the 
underlying property serv ing as collateral; 
(c) the minimum requirements set out in Annex VIII, Part 2, paragraph 8, and the 
valuation rules set out in Annex VIII, Part 3, paragraphs 63 to 66 are met. 
52. The 50 % risk weight shall apply to the part  of the loan that does not exceed a limit 
calculated according to either of the following conditions: 
(a) 50% of the market value of  the property in question; 
(b) 50% of the market value of the pr operty or 60 % of the mortgage lending 
value, whichever is lower, in those Member States that have laid down rigorous 
criteria for the assessment of the mo rtgage lending value in statutory or 
regulatory provisions. 
53. A 100% risk weigh shall apply to the part of the loan that exceeds the limits set out 
in paragraph 52. 
54. When the discretion contained in paragra ph 48 to 50 is exercised by the competent 
authorities of one Member State, the comp etent authorities of another Member State 
may allow their credit institutions to risk  weight at 50% such exposures fully and 
completely secured by mortgages on commercial property. 
55. Competent authorities may dispense with the condition contained in paragraph 51(b) 
for exposures fully and completely secured by mortgages on commercial property 
which is situated within their territory, if they have evidence that a well-developed 
and long-established commercial real estate market is pres ent in their territory with 
loss-rates which do not exceed the following limits: 
(a) up to 50% of the market value (or where applicable and if lower 60 % of the 
mortgage lending value (MLV)) must not  exceed 0.3 % of the outstanding 
loans in any given year; 
(b) overall losses stemming from commercial  real estate lendin g must not exceed 
0.5% of the outstanding lo ans in any given year. 
56. If either of the limits referred to in paragraph 55 is not satisfied in a given year, the 
eligibility to use this treatment shall cease and the second condition contained in 
paragraph 51(b) shall need to  be satisfied again before it can be applied any more.  
57. When the discretion contai ned in paragraph 55 is exercised by the competent 
authorities of a Member State, the compet ent authorities of another Member State 
may allow their credit institutions to apply a risk weight of 50% to such exposures 
fully and completely secured by mortgages on commercial property. 
10. PAST  DUE  ITEMS 
58. Without prejudice to the provisions contai ned in paragraphs 59 to 62, the unsecured 
portion of any item that is past due for mo re than 90 days shall be assigned a risk 
weight of: 
 
EN 16   EN (a) 150% if value adjustments are less th an 20% of the unsec ured part of the 
exposure gross of value adjustments value; 
(b) 100% if value adjustments are no less th an 20% of the unsecured part of the 
exposure gross of value adjustments; 
(c) 50%, subject to the discretion of compet ent authorities, if value adjustments are 
no less than 50% of the unsecured part  of the exposure gross of value 
adjustments. 
59. For the purpose of defining the secured po rtion of the past due item, eligible 
collateral and guarantees shall be those elig ible for credit risk mitigation purposes. 
60. Nonetheless, where a past due item is fully  secured by forms of collateral other then 
those eligible for credit risk mitigati on purposes, a 100% risk weight may apply 
subject to the discretion of competen t authorities based upon strict operational 
criteria to ensure the good quality of th e collateral when value adjustments reach 
15% of the exposure gross of value adjustments. 
61. Exposures indicated in paragr aphs 43 to 47 shall be assi gned a risk weight of 100% 
net of value adjustments if they are pa st due for more than 90 days. If value 
adjustments are no less than 20% of the e xposures gross of value adjustments, the 
risk weight applicable to the remainder of  the exposure may be reduced to 50% at the 
discretion of competent authorities. 
62. Exposures indicated in paragraphs 48 to 57 sh all be assigned a risk weight of 100% if 
they are past due for more than 90 days. 
11. ITEMS  BELONGING  TO REGULATORY  HIGH-RISK  CATEGORIES 
63. Subject to the discretion of competent au thorities, exposures associated with 
particularly high risks such as  investments in venture capit al firms and private equity 
investments shall be assigne d a risk weight of 150%. 
64. Competent authorities may permit non past due items receiving a 150% risk weight 
according to the provisions of the previous sections and for which value adjustments 
have been established to be  assigned a risk weight of: 
(a) 100% if value adjustments are no less th an 20% of the exposure value gross of 
value adjustments; 
(b) 50%, if value adjustments are no less than 50% of the exposure value gross of 
value adjustments. 
12. EXPOSURES IN THE FORM OF COVERED BONDS 
65. ‘Covered bonds’, shall mean bonds as de fined in Article 22(4) of Directive 
 85/611/EEC and collateralised by any of the following eligible assets: 
 
EN 17   EN (a) exposures to or guaranteed by central  governments, central banks, multilateral 
development banks, international organisations that qualify for the credit 
quality assessment step 1 as  set out in this Annex; 
(b) exposures to or guaranteed by public sector entities, regional governments and 
local authorities that are risk weighted as exposures to institutions or central 
governments and central banks according to paragraphs 15, 9 or 10 
respectively and that qualify for the credit quality assessment step 1 as set out 
in this Annex; 
(c) exposures to institutions that qualify for the credit quality assessment step 1 as 
set out in this Annex. The total exposure  of this kind shall not exceed 10% of 
the nominal amount of outstanding c overed bonds of the issuing credit 
institution. Exposures caused by transmi ssion of payments from the obligors of 
loans secured by real esta te to the holders of covered bonds shall not be 
comprised by the 10% limit; 
(d) loans secured by residential real estate or shares in Finnish residential housing 
companies as referred to in paragrap h 44 where only liens that are combined 
with any prior liens within 80% of the value of the pledged property; 
(e) loans secured by commercial real estate or shares in Finnish housing 
companies as referred to in paragrap h 49 where only liens that are combined 
with any prior liens within 60% of the value of the pl edged property. The 
competent authorities may recognise loan s secured by commercial real estate 
as eligible where the Loan to Value ra tio of 60% is exceed ed up to a maximum 
level of 70% if the value of the total assets pledged as collateral for the covered 
bonds exceed the nominal amount outstanding on the covered bond by at least 
10%, and the bondholders' claim meets the legal certainty requirements set out 
in Annex IX. The bondholders' claim must take priority over all other claims 
on the collateral . 
66. Credit institutions shall for real estate  collateralising covered bonds meet the 
minimum requirements set out in Annex VIII part 2, paragraph 8 and the valuation 
rules set out in Annex VIII, Part 3, paragraphs 63 to 66. 
67. Notwithstanding paragraphs 65 and 66, c overed bonds meeting the definition of 
Article 22(4) of Directive 85/611/EEC and issued before 31 December 2007 are also 
eligible for the preferential treatment until their maturity. 
68. Covered bonds shall be assigned a risk we ight on the basis of  the risk weight 
attributed to senior unsecured exposures to  the credit instituti on which issues them. 
The following correspondence between  risk weights shall apply: 
(a) if the exposures to the institution r eceive a risk weight of 20%, the covered 
bond shall receive a risk weight of 10%; 
(b) if the exposures to the institution r eceive a risk weight of 50%, the covered 
bond shall receive a risk weight of 20%; 
 
EN 18   EN (c) if the exposures to the institution re ceive a risk weight of 100%, the covered 
bond shall receive a risk weight of 50%; 
(d) if the exposures to the institution re ceive a risk weight of 150%, the covered 
bond shall receive a risk weight of 100%; 
13. ITEMS  REPRESENTING  SECURITISATION  POSITIONS 
69. Risk weights exposure amounts for securiti sation positions shall be determined in 
accordance with the provisi ons of Articles 94 to 101. 
14. SHORT-TERM  EXPOSURES  ON  CREDIT  INSTITUTIONS  AND  
CORPORATES   
70. Short-term exposures on an institution or corporate for which a credit assessment by 
a nominated ECAI is available shall be assi gned a risk weight according to Table 6 in 
accordance with the mapping by the competent authorities of the credit assessments 
of eligible ECAIs to six steps in  a credit quality assessment scale: 
Table 6 
Credit Quality Step 1 2 3 4 5 6 
Risk weight 20% 50% 100% 150% 150% 150% 
 
15. EXPOSURES  IN THE  FORM  OF COLLECTIVE  INVESTMENT  
UNDERTAKINGS  (CIUS) 
71. Without prejudice to paragraphs 72 to 78, exposures in collective investment 
undertakings (CIUs) shall be a ssigned a risk weight of 100%. 
72. Exposures in the form of CIUs for which a credit assessment by a nominated ECAI is 
available shall be assigned a risk weight according to Table 7 in accordance with the 
assignment by the competent authorities of th e credit assessments of eligible ECAIs 
to six steps in a credit quality assessment scale. 
Table 7 
Credit quality step 1 2 3 4 5 6 
Risk weight 20% 50 100% 100% 150% 150% 
 
73. Where competent authorities consider that a position in a CIU is associated with 
particularly high risks they shall require that  that position is assigne d a risk weight of 
150%. 
 
EN 19   EN 74. Credit institutions may determine the risk weight for a CIU as set out in paragraphs 
76 to 78, if the following e ligibility criteria are met: 
(a) the CIU is managed by a company which is subject to supervision in a Member 
State or, subject to approval of the cred it institution's competent authority, if:  
(i) they are managed by a company which is subject to supervision that is 
considered equivalent to that la id down in Community law; and  
(ii) co-operation between competent au thorities is sufficiently ensured; 
(b) the CIU’s prospectus or e quivalent document includes: 
– the categories of assets the CIU is authorised to invest in, 
– if investment limits apply, the relative lim its and the methodologies to calculate 
them; 
(c) the business of the CIU is reported on at least an annual basis to enable an 
assessment to be made of the assets and liabilities, income and operations over 
the reporting period. 
75. If a competent authority approves a third country CIU as eligible, as set out in 
paragraph 74, point (a), th en a competent authority in another Member State may 
make use of this recognition wit hout conducting their own assessment. 
76. Where the credit institution is aware of the underlying exposures of a CIU, it may 
look though to those underlying exposures in  order to calculate an average risk 
weight for the CIU in accordance with the methods set out in Article 78 to 83. 
77. Where the credit institution is not aware of  the underlying exposures of a CIU, it may 
calculate an average risk weight for the CIU in accordance with the methods set out 
in Articles 78 to 83 subject to the following rules: it will be assumed that the CIU 
first invests, to the maximum extent a llowed under its manda te, in the exposure 
classes attracting the highest capital re quirement, and then continues making 
investments in descending order until the maximum total investment limit is reached. 
78. Credit institutions may rely on a third party to calculate and report, in accordance 
with the methods set out in paragraphs 76 and 77, a risk weight for the CIU provided 
that the correctness of the calculation and report shall be adequately ensured. 
16. OTHER  ITEMS 
16.1. Treatment 
79. Tangible assets within the m eaning of Article 4(10) of Directive 86/635/EEC shall be 
assigned a risk weight of 100%. 
80. Prepayments and accrued income for which an institution is unable to determine the 
counterparty in accordance with Directiv e 86/635/EEC, shall be assigned a risk 
weight of 100%. 
 
EN 20   EN 81. Cash items in the process of collection shall receive a 20% risk weight. Cash in hand 
and equivalent cash items sha ll receive a 0% risk weight; 
82. Member States may allow a risk weight  of 10% for exposur es to institutions 
specialising in the inter-bank and public-debt markets in their home Member States 
and subject to close supervis ion by the competent authorities where those asset items 
are fully and completely secured, to the sa tisfaction of the competent authorities of 
the home Member States, by a items assi gned a 0% or a 20% risk weight and 
recognised by the latter as consti tuting adequate collateral.  
83. Holdings of equity and other participati ons except where deducted from own funds 
shall be assigned a risk weight of at least 100%. 
84. Gold bullion held in own vaults or on an allocated basis to the extent backed by 
bullion liabilities shall receive a 0% risk weight. 
85. In the case of asset sale and repurchase agreements and outright forward purchases, 
the risk weight shall be those attached to the assets in question and not to the 
counterparties to the transactions. 
86. Where a credit institution provides credit pr otection for a number of exposures under 
terms that the nth default among the exposures shall trigger payment and that this 
credit event shall terminate the contract , if the product has an external credit 
assessment from an eligible ECAI the risk weights prescribed Articles 78 to 83 shall 
be applied. If the product is  not rated by an eligible EC AI, the risk weights of the 
exposures included in the basket will be aggregated, excluding n-1 exposures, up to a 
maximum of 1250% and multiplied by the nominal amount of the protection 
provided by the credit derivative to obtai n the risk weighted  asset amount. The n-1 
exposures to be excluded from the aggregati on shall be determined on the basis that 
they shall include those e xposures each of which produ ces a lower risk-weighted 
exposure amount than the risk-weighted e xposure amount of any of the exposures 
included in the aggregation. 
 
EN 21   EN Part 2 - Recognition of ECAIs and mapping of their credit assessments  
1. METHODOLOGY 
1.1. Objectivity 
1. Competent authorities shall verify th at the methodology for assigning credit 
assessments is rigorous, systematic, conti nuous and subject to validation based on 
historical experience. 
1.2. Independence 
2. Competent authorities shall verify that  the methodology is free from external 
political influences or constraints, and from economic pressures that may influence 
the credit assessment. 
3. Independence of the ECAI’s methodology sh all be assessed by competent authorities 
according to factors such as the following: 
(a) ownership and organisati on structure of the ECAI; 
(b) financial resources of the ECAI; 
(c) staffing and expertise of the ECAI; 
(d) corporate governance of the ECAI. 
1.3. Ongoing review 
4. Competent authorities shall verify that ECAI’s credit assessmen ts are subject to 
ongoing review and shall be responsive to changes in the financial conditions. Such 
review shall take place after all signi ficant events and at least annually. 
5. Before any recognition, competent author ities shall verify that the assessment 
methodology for each market segment is esta blished according to standards such as 
the following: 
(a) the backtesting must be esta blished for at least one year; 
(b) the regularity of the review proces s by the ECAI must be monitored by the 
competent authorities; 
(c) the competent authorities must be able to receive from the ECAI the extent of 
its contacts with the senior manage ment of the entities which it rates. 
6. Competent authorities shall take the necessary  measures to be promptly informed by 
ECAIs of any material changes in the methodology they use for assigning credit 
assessments.  
 
EN 22   EN 1.4. Transparency and disclosure 
7. Competent authorities shall take the necessary  measures to assure that the principles 
of the methodology employed by the ECAI for the formulation of its credit 
assessments are publicly available as to al low all potential users to decide whether 
they are derived in a reasonable way. 
2. INDIVIDUAL  CREDIT  ASSESSMENTS 
2.1. Credibility and market acceptance: 
8. Competent authorities shall verify that ECAIs’ individual cred it assessments are 
recognised in the market as credible and reliable by the users of such credit 
assessments. 
9. Credibility shall be assessed by competent authorities according to factors such as 
the following: 
(a) market share of the ECAI; 
(b) revenues generated by the ECAI, and more  in general financia l resources of the 
ECAI; 
(c) whether there is any pric ing on the basis of the rating. 
2.2. Transparency and Disclosure 
10. Competent authorities shall verify that i ndividual credit assessments are accessible at 
equivalent terms at least to all parties havi ng a legitimate interest  in these individual 
credit assessments. 
11. In particular, competent authorities shall ve rify that individual credit assessments are 
available to non-domestic parties on equivalent terms as to domestic parties having a 
legitimate interest in these individual credit assessments. 
3. ‘MAPPING’ 
12. In order to differentiate between the rela tive degrees of risk expressed by each credit 
assessment, competent authorities shall c onsider quantitative fa ctors such as the 
long-term default rate associated with all items assigned the same credit assessment. 
For recently established ECAIs and for thos e that have compiled only a short record 
of default data, competent authorities shall ask the ECAI what it believes to be the 
long-term default rate associated with a ll items assigned the same credit assessment. 
13. In order to differentiate between the rela tive degrees of risk expressed by each credit 
assessment, competent authorities shall cons ider qualitative fact ors such as the pool 
of issuers that the ECAI covers, the range  of credit assessments that the ECAI 
assigns, each credit assessment meaning and the ECAI’s definition of default. 
 
EN 23   EN 14. Competent authorities shall compare default rates experienced for each credit 
assessment of a particular ECAI and co mpare them with a benchmark built on the 
basis of default rates experi enced by other ECAIs on a population of issuers that the 
competent authorities believes to presen t an equivalent le vel of credit risk. 
15. When competent authorities believe that th e default rates experienced for the credit 
assessment of a particular ECAI are materi ally and systematically higher then the 
benchmark, competent authorities shall assign a higher risk step in  the credit quality 
assessment scale to the ECAI credit assessment. 
16. When competent authorities have increased th e associated risk weight for a specific 
credit assessment of a particular ECAI, if  the ECAI demonstrates that the default 
rates experienced for its credit a ssessment are no longer materially and 
systematically higher than the benchmar k, competent authorities may decide to 
restore the original step in the credit qu ality assessment scale for the ECAI credit 
assessment.  
 
EN 24   EN Part 3 - Use of ECAIs’ credit assessment s for the determination of risk weights   
1. TREATMENT  
1. An institution may nominate one or more eligible ECAIs to be used for the 
determination of risk weights applicable  to asset and off-balance sheet items. 
2. A credit institution which decides to use the credit assessments produced by an 
eligible ECAI for a certain class of items must use those credit assessments 
consistently for all exposures  belonging to that class. 
3. An institution which decides to use the cr edit assessments produced by an eligible 
ECAI must use them in a conti nuous and consistent way over time. 
4. A credit institution can only use ECAIs credit  assessments that take into account all 
amounts both in principal and in interest owed to it. 
5. If only one credit assessment  is available from a nominated ECAI for a rated item, 
that credit assessment shall be used to determine the risk weight for that item. 
6. If two credit assessments are availabl e from nominated ECAIs and the two 
correspond to different risk we ights for a rated item, the hi gher risk weight shall be 
applied. 
7. If more than two credit assessments are av ailable from nominated ECAIs for a rated 
item, the two assessments generating the two lowest risk weights shall be referred to. 
If the two lowest risk weights are different,  the higher risk weight shall be applied. If 
the two lowest risk weights are the same, that risk weight shall be applied. 
8. Credit institutions shall use solicited credit assessments.  The competent authorities 
may allow credit institutions to use unsolicited credit assessments. 
2. ISSUER AND ISSUE CREDIT ASSESSMENT  
9. Where a credit assessment exists for a specific issuing program or facility to which 
the item constituting the exposure belongs, th is credit assessment shall be used to 
determine the risk weight applicable to that item. 
10. Where no directly applicable credit assessm ent exists for a certain item, but a credit 
assessment exists for a specific issuing program or facility to which the item 
constituting the exposure does not belong or a general credit assessment exists for the 
issuer, then that cred it assessment shall be used if it produces a highe r risk weight 
than would other wise be the case or if it produces a lower risk weight and the 
exposure in question ranks pari passu or senior in all respects to the specific issuing 
program or facility or to senior unsecured exposures of  that issuer as relevant. 
11. Paragraphs 9 and 10 are not to prevent the ap plication of paragraphs 65 to 68 of Part 
1 of this Annex. 
 
EN 25   EN 12. Credit assessments for issuer s within a corporate group ca nnot be used as credit 
assessment of another issuer w ithin the same corporate group. 
3. LONG-TERM AND SHORT -TERM CREDIT ASSESSMENTS  
13. Short-term credit assessments may only be used for short-term asset and off-balance 
sheet items constituting exposures to institutions and corporates. 
14. Any short-term credit assessment shall only apply to the item the short-term credit 
assessment refers to, and it shall not be used to derive risk weights for any other 
item. 
15. Notwithstanding paragraph 14, if a short-te rm rated facility receives a 150% risk 
weight, then all unrated unsecured exposures on that obligor whet her short-term or 
long-term shall also receive a 150% risk weight. 
16. Notwithstanding paragraph 14, if a short-term rated facility attracts a 50% risk-
weight, no unrated short-term exposure shal l attract a risk wei ght lower than 100%. 
4. DOMESTIC AND FOREIGN CURRENCY ITEMS  
17. A credit assessment that refers to an item denominated in the obligor’s domestic 
currency cannot be used to derive a risk weight for another exposure on that same 
obligor that is denominated  in a foreign currency. 
18. Notwithstanding paragraph 17, when an exposure arises through a bank's 
participation in a loan that has been extended by a Multilateral Development Bank 
whose preferred creditor status is recogni sed in the market, competent authorities 
may allow the credit assessment on the obligor’s domestic currency item to be used 
for risk weighting purposes. 
 
EN 26   EN ANNEX VII  
 
Internal Ratings based Approach  
 
Part 1 - Risk weighted exposure amounts and expected loss amounts  
1. CALCULATION OF RISK WEIGHTED EXPOSURE AMOUNTS FOR CREDIT RISK  
1. Unless noted otherwise,  the input parameters probability of default (PD), loss given 
default (LGD), and maturity value (M) shall be determined as set out in Part 2, the 
exposure value shall be determined as set out in Part 3.  
2. The risk weighted exposure amount for each exposure shall be calculated in 
accordance with the following formulas:  
1.1. Risk weighted exposure amounts for expo sures to corporates, institutions and 
central governments and central banks. 
3. Subject to paragraphs 4 to 8 the risk weighted exposure amounts for exposures to 
corporates, institutions and central governme nts and central banks shall be calculated 
according to the following formulas:  
Correlation (R) = ( ) ( ) () ( )
()() ( ) () [] 50 1/ *50 11*24.0 50 1/ *50 1 12.0
−− −−−+−− −−×
EXP PD EXPEXP PD EXP
 
Maturity factor (b) = () ()2ln* 05478.0 11852.0 PD −  
Risk weight (RW) = 
() ( ) ()()() [ ] ( )
() ( ) () 06.1*5.12**5.2 1* *5.11* * 999.0* 1/ * 1 *
15.0 5.0
b M bLGD PD G R R PDG R N LGD
−+ −− −+ −
−−
 
N(x) denotes the cumulative distribution f unction for a standard normal random 
variable (i.e. the probability that a nor mal random variable with mean zero and 
variance of one is less than or equal to x). )(zG  denotes the inverse cumulative 
distribution function for a standard normal random variable (i.e. the value x such that 
)(xN = z).  
Risk-weighted exposure amount = RW * exposure value 
4. For exposures to companies wh ere the total annual sales for the consolidated group 
of which the firm is a part is less than EUR 50 million credit inst itutions may use the 
following correlation formula for the calcu lation of risk weights for corporate 
exposures. In this formula S is expressed as total annual sales in millions of Euros 
with EUR 5 million <= S <= EUR 50 million. Reported sales of less than EUR 
5 million shall be treated as if they were equivalent to EUR 5 million. For purchased 
receivables the total annual sales shall be  the weighted average by individual 
exposures of the pool. 
 
EN 27   EN Correlation (R) =( ) () () ( )
()() ( ) () []
()() 45/5 1*04.050 1/ *50 11*24.0 50 1/ *50 1 12.0
−− −−− −−−+−− −−×
SEXP PD EXPEXP PD EXP
 
Credit institutions shall substitute total a ssets of the consolid ated group for total 
annual sales when total annual sales are not a meaningful indicator of firm size and 
total assets are a more meaningful indicator than  total annual sales.  
5. For specialised lending exposures that a credit institution cannot demonstrate that its 
PD estimates meet the minimum requirements set out in Part 4 it shall assign risk 
weights to these exposures according to table 1.  
Table 1:  
Remaining 
Maturity category
1 category 
2 category 
3 category 
4 category 
5 
Less than 2.5 
years 50% 70% 115% 250% 0% 
Equal or more 
than 2.5 years 70% 90% 115% 250% 0% 
 
The competent authorities may authorise a credit institution to generally assign 
preferential risk weights of 50% to exposures in category 1, and a 70% risk weight to 
exposures in category 2, provi ded the credit institutions’ underwriting characteristics 
and other risk characteristic s are substantially strong fo r the relevant category.  
In assigning risk weights to specialised lending exposures institutions shall take into 
account the following factors: Financial st rength, political and legal environment, 
transaction and/or asset characteristics,  strength of the sponsor and developer 
including any public privat e partnership income str eam, security package.  
6. To be eligible for the corporate treatme nt purchased corporate receivables shall 
comply with the minimum requirements set out in Part 4, paragraphs 104 to 108. For 
purchased corporate receivables that comply in addition with the conditions set out in 
paragraph 12, and where it would be unduly burdensome for a credit institution to 
use the risk quantifica tion standards for corporate exposur es as set out in Part 4 for 
these receivables, the risk qua ntification standards for reta il exposures as set out in 
Part 4 may be used. 
7. For purchased corporate receivables, re fundable purchase disc ounts, collateral or 
partial guarantees that provide first-loss protection for default losses, or both, may be 
treated as first-loss positions under the IRB securitisation framework. 
8. Where an institution provides credit pr otection for a number of exposures under 
terms that the nth default among the exposures shall trigger payment and that this 
credit event shall terminate the contract , if the product has an external credit 
assessment from an eligible ECAI the risk  weights set out in Ar ticles 94-101 will be 
 
EN 28   EN applied. If the product is not rated by an eligible ECAI, the risk weights of the 
exposures included in the basket  will be aggregated, excluding n-1 exposures where 
the sum of the expected loss amount multiplied by 12.5 and the risk weighted 
exposure amount shall not exceed the nominal  amount of the protection provided by 
the credit derivative multiplied by 12.5. The n-1 exposures to be excluded from the 
aggregation shall be determined on the basi s that they shall in clude those exposures 
each of which produces a lower risk-wei ghted exposure amount than the risk-
weighted exposure amount of any of the exposures included in the aggregation. 
1.2. Risk weighted exposure amounts for retail exposures: 
9. Subject to paragraphs 10 and 11 the risk  weighted exposure  amounts for retail 
exposures shall be calculated according to the following formulas:  
Correlation (R) = ( ) () () ( )
()() ( ) () [] 35 1/ *35 11*16.0 35 1/ *35 1 03.0
−− −−−+−− −−×
EXP PD EXPEXP PD EXP 
Risk weight: 
() ( ) ()()() [ ] ( ) 06.1*5.12* * 999.0* 1/ * 1 *5.0 5.0LGD PD G R R PDG R N LGD − −+ −−
 
N(x) denotes the cumulative distribution f unction for a standard normal random 
variable (i.e. the probability that a nor mal random variable with mean zero and 
variance of one is less than or equal to x). )(zG  denotes the inverse cumulative 
distribution function for a standard normal random variable (i.e. the value x such that 
)(xN = z).  
Risk-weighted exposure amount = RW * exposure value 
10. For retail exposures secured by real estate collateral a correlation (R) of 0.15 shall 
replace the figure produced by the corre lation formula in paragraph 9.  
11. For qualifying revolving retail exposures as de fined in (a) to (e), a correlation (R) of 
0.04 shall replace the figure produced by th e correlation formula in paragraph 9. 
Exposures shall qualify as qualifying revolvi ng retail exposures if they meet the 
following conditions: 
(a) The exposures are to individuals 
(b) The exposures are revolving, unsecured , and to the extent they are not drawn 
immediately and unconditionally cancellable by the credit institution (In this 
context revolving exposures are defined as those where customers outstanding 
balances are permitted to fluctuate based on their decisions to borrow and 
repay, up to a limit established by the credit institution). Undrawn 
commitments may be consid ered as unconditionally cancellable if the terms 
permit the credit institution to cancel th em to the full extent allowable under 
consumer protection and related legislation. 
(c) The maximum exposure to a single indi vidual in the sub- portfolio is EUR 
100,000 or less. 
 
EN 29   EN (d) The credit institution can demonstrate that the use of the correlation formula of 
this paragraph is constraine d to portfolios that have exhibited low volatility of 
loss rates, relative to their average level of loss rates, especially within the low 
PD bands. Supervisors shall review the relative volatility of loss rates across 
the qualifying revolving retail subportf olios, as well the aggregate qualifying 
revolving retail portfolio, and intend to share information on the typical 
characteristics of qualifying revolving retail loss rates across jurisdictions. 
(e) The competent authority concurs that treatment as a qualifying revolving retail 
exposure is consistent w ith the underlying risk characteristics of the sub-
portfolio. 
12. To be eligible for the retail treatment pur chased receivables shall comply with the 
minimum requirements set out in Part 4,  paragraphs 104 to 108 and the following 
conditions: 
(a) The credit institution has purchased the receivables from unrelated, third party 
sellers, and its exposure to the obligor of the receivable does not include any 
exposures that are directly or indirect ly originated by the credit institution 
itself. 
(b) The purchased receivables shall be ge nerated on an arm’s-length basis between 
the seller and the obligor. As such, intercompany accounts receivables and 
receivables subject to c ontra-accounts between firms that buy and sell to each 
other are ineligible. 
(c) The purchasing credit institution ha s a claim on all proceeds from the 
purchased receivables or a pro-rata  interest in the proceeds. 
(d) The portfolio of purchased receivables is sufficiently diversified.  
13. For purchased receivables, re fundable purchase discounts,  collateral or partial 
guarantees that provide first-loss protecti on for default losses, dilution losses, or 
both, may be treated as first-loss positi ons under the IRB securitisation framework. 
14. For hybrid pools of purchased retail receivables where pur chasing credit institutions 
cannot separate exposures secured by real estate collateral and qualifying revolving 
retail exposures from other retail exposures , the retail risk wei ght function producing 
the highest capital requirements fo r those exposures shall apply.  
1.3. Risk weighted exposure amounts for equity exposures: 
15. Subject to approval of the competent authorities, a credit institution may employ 
different approaches to diffe rent portfolios where the credit institution itself uses 
different approaches internally. Where a credit institution is permitted to use 
different approaches, the credit instituti on shall demonstrate to the competent 
authorities that the choice is made consis tently and is not determined by regulatory 
arbitrage considerations.  
16. Notwithstanding paragraph 15 competent author ities may allow the attribution of risk 
weighted exposure amounts for equity exposu res to ancillary serv ices undertakings 
according to the treatment of other non credit-obligation assets.  
 
EN 30   EN 1.3.1.  Simple Risk Weight Approach  
17. The risk weighted exposure amounts shall be calculated according to the following 
formula: 
Risk weight (RW) = 190% for private equi ty exposures in suffi ciently diversified 
portfolios. 
Risk weight (RW) = 290% for exch ange traded equity exposures. 
Risk weight (RW) = 370% for all other equity exposures. 
Risk-weighted exposure amount = RW * exposure value  
18. Short cash positions and derivative inst ruments held in the non-trading book are 
permitted to offset long positions in the same individual stocks provided that these 
instruments have been explicitly designate d as hedges of specific equity exposures 
and that they provide a hedge for at least a nother year. Other short positions are to be 
treated as if they are long positions with the relevant risk weight applied to the 
absolute value of each position. In the cont ext of maturity mismatched positions, the 
method is that for corporate exposures.  
19. Credit institutions may recognise unfunded credit protection obtained on an equity 
exposure in accordance with the methods set out in Articles 90 to 93.  
1.3.2.  PD/LGD Approach 
20. The risk weighted exposure amounts shall be  calculated according to the formulas in 
paragraph 3. If institutions do not have sufficient information to use the definition of 
default set out in Part 4, paragraphs 44 to 48, a scaling factor of 1.5 shall be applied 
to the risk weights.  
21. At the individual exposure level the sum of  the expected loss amount multiplied by 
12.5 and the risk weighted exposure amount shall not ex ceed the exposure value 
multiplied by 12.5. 
22. Credit institutions may recognise unfunded credit protection obtained on an equity 
exposure in accordance with the methods set out  in of Articles 90 to 93. This shall be 
subject to an LGD of 90% on the exposure to the provider of the hedge. For private 
equity exposures in sufficiently diversif ied portfolios an LGD of 65% may be used. 
For these purposes M shall be 5 years.  
1.3.3.  Internal Models Approach 
23. The risk weighted exposure amounts shall be the potential loss on the institution’s 
equity exposures as derived using internal value-at-risk models subject to the 99th 
percentile, one-tailed confidence interval of  the difference between quarterly returns 
and an appropriate risk-free rate com puted over a long-term sample period, 
multiplied by 12.5. The risk weighted exposure amounts at the individual exposure 
level shall not be less than  the sum of minimum risk  weighted exposure amounts 
required under the PD/LGD Approach and the corresponding e xpected loss amounts 
multiplied by 12.5. 
 
EN 31   EN 24. Credit institutions may recognise unfunded credit protection obtained on an equity 
position.  
1.4. Risk weighted exposure amounts for other non credit-obligation assets 
25. The risk weighted exposure amounts shall be calculated according to the formula: 
Risk-weighted exposure amount  = 100% * exposure value 
2. CALCULATION OF RISK WEIGHTED EXPOS URE AMOUNTS FOR DILUTION RISK OF 
PURCHASED RECEIVABLES  
26. Risk weights for dilution risk of purch ased corporate and retail receivables: 
The risk weights shall be calculated according to the formula in paragraph 3. The 
input parameters PD and LGD shall be determ ined as set out in Part 2, the exposure 
value shall be determined as set out in Part 3 and M shall be 1 year. If credit 
institutions can demonstrate to the comp etent authorities that dilution risk is 
immaterial, it need not be recognised.  
3. CALCULATION OF EXPECTED LOSS AMOUNTS  
27. Unless noted otherwise, the input parameters  PD and LGD shall be determined as set 
out in Part 2, the exposure value shall be determined as set out in Part 3.  
28. The expected loss amounts for exposures to corporates, in stitutions, central 
governments and central banks and retail exposures shall be calculated according to 
the following formulas:  
Expected loss (EL) = PD × LGD 
Expected loss amount = EL × exposure value 
Premiums on purchased exposur es shall be treated as EL. 
29. The EL values for specialised lending expos ures where credit in stitutions use the 
methods set out in paragraph 5 for assigni ng risk weights shall be assigned according 
to table 2.  
Table 2 
Remaining 
Maturity category 
1 category 
2 category 
3 category 
4 category 
5 
Less than 2.5 years 0% 5% 35% 100% 625% 
Equal or more than 
2.5 years EL 5% 10% 35% 100% 625% 
 
 
EN 32   EN Where competent authorities have authorised  a credit institution to generally assign 
preferential risk weights of 50% to exposures in category 1, and 70% to exposures in 
category 2, the EL value for exposures in category 1 shall be 0%, and for exposures 
in category 2 shall be 5%.  
30. The expected loss amounts for equity e xposures where the risk  weighted exposure 
amounts are calculated according to the methods  set out in paragraphs 17 to 19, shall 
be calculated according to the following formula:  
Expected loss amount = EL × exposure value 
The EL values shall be the following: 
Expected loss (EL) = 10% for private equity exposures in sufficiently 
diversified portfolios 
Expected loss (EL) = 10% for exchange traded equity exposures. 
Expected loss (EL) = 30% for all other equity exposures. 
31. The expected loss amounts for equity e xposures where the risk  weighted exposure 
amounts are calculated according to the met hods set out paragraphs 20 to 22 shall be 
calculated according to the following formulas:  
Expected loss (EL) = PD × LGD 
Expected loss amount = EL × exposure value 
32. The expected loss amounts for equity e xposures where the risk  weighted exposure 
amounts are calculated according to the methods  set out in paragraphs 23 to 24 shall 
be 0%.  
33. The expected loss amounts for dilution risk  of purchased rece ivables shall be 
calculated according to the following formula:  
Expected loss (EL) = PD × LGD 
Expected loss amount = EL × exposure value 
4. TREATMENT OF EXPECTED LOSS AMOUNTS  
34. The expected loss amounts calculated in accordance with paragraphs 28, 29 and 33 
shall be subtracted from the sum of value adjustments and provisions related to these 
exposures. Discounts on purchased exposures according to  Part 3, paragraph 1 shall 
be treated in the same manner as valu e adjustments, premiums on purchased 
exposures according to Part 3, paragra ph 1 shall be added to  the expected loss 
amounts. Expected loss amounts for securiti sed exposures and value adjustments and 
provisions related to these exposures shall not be included in this calculation.  
 
EN 33   EN Part 2 - PD, LGD and Maturity  
1. The input parameters probability of default (PD), loss given default (LGD) and 
maturity value (M) into th e calculation of risk we ighted exposure amounts and 
expected loss amounts specified in Part 1 shall be those estimated by the credit 
institution in accordance with Part 4 subject to the following provisions.  
1. EXPOSURES TO CORPORATES , INSTITUTIONS AND CENTRAL GOVERNMENTS AND 
CENTRAL BANKS  
1.1. PD 
2. The PD of an exposure to a corporate or an institution shall be at least 0.03%.  
3. For purchased corporate receivables in resp ect of which a credit  institution cannot 
demonstrate that its PD estimates meet the minimum requirements set out in Part 4, 
the PDs for these exposures shall be dete rmined according to the following methods: 
for senior claims on purchased corporat e receivables PD shall be the credit 
institutions estimate of EL divided by LGD for these rece ivables. For subordinated 
claims on purchased corporate receivables PD  shall be the credit institutions estimate 
of EL. If a credit institution is permitted to use own LGD estimates for corporate 
exposures and it can decom pose its EL estimates for purch ased corporate receivables 
into PDs and LGDs in a reliable manner, the PD estimate may be used.  
4. The PD of obligors in default shall be 100%.  
5. Credit institutions may recognise unfunded cr edit protection in the PD in accordance 
with the provisions of Articles 90 to 93 
6. Credit institutions using own LGD es timates may recognise unfunded credit 
protection by adjusting PDs subject to paragraph 11.  
7. For dilution risk of purchased corporate r eceivables PD shall be set equal to EL 
estimate for dilution risk. If a credit in stitution is permitted to use own LGD 
estimates for corporate exposures and it can  decompose its EL estimates for dilution 
risk of purchased corporate receivables in to PDs and LGDs in a reliable manner, the 
PD estimate may be used. 
1.2. LGD 
8. Credit institutions shall us e the following LGD values:  
(a) Senior exposures without eligible collateral: 45%.  
(b) Subordinated exposures without  eligible collateral: 75%.  
(c) Credit institutions may recognise f unded and unfunded credit protection in the 
LGD in accordance with the provisions of Articles 90 to 93. 
(d) Covered bonds as defined in Annex VI , Part 1, paragraphs 65 to 67 may be 
assigned an LGD value of 12.5%. 
 
EN 34   EN (e) For senior purchased corporate receivab les exposures where a credit institution 
cannot demonstrate that its PD estima tes meet the minimum requirements set 
out in Part 4, 45%. 
(f) For subordinated purchased corporat e receivables exposures where a credit 
institution cannot demonstrate that its PD estimates meet the minimum 
requirements set out in Part 4, 100%. 
(g) For dilution risk of purchas ed corporate receivables: 75% 
9. Notwithstanding paragraph 8, for dilution and default risk if a credit institution is 
permitted to use own LGD estimates for co rporate exposures and it can decompose 
its EL estimates for purchased corporate recei vables into PDs and LGDs in a reliable 
manner, the LGD estimate for purchased corporate receivables may be used.  
10. Notwithstanding paragraph 8, if a credit institution is permitted to use own LGD 
estimates for exposures to corporates, in stitutions, central governments and central 
banks, unfunded credit protection may be  recognised by adjusting PD or LGD 
estimates subject to minimum requirements as specified in Part 4 and approval of 
competent authorities. A credit institution shall not assign guaran teed exposures an 
adjusted PD or LGD such that the adjusted risk weight would be lower than that of a 
comparable, direct exposur e to the guarantor.  
1.3. Maturity 
11. Subject to paragraph 12, credit institutions  shall assign to exposures arising from 
repurchase transactions or securities or commodities lending or borrowing 
transactions a maturity value (M) of 0.5 y ears and to all other e xposures an M of 2.5 
years. Competent authorities may require all credit institutions in their jurisdiction to 
use M for each exposure as se t out under paragraph 12.  
12. Credit institutions permitt ed to use own LGDs or own conversion factors for 
exposures to corporates, institutions or central governments and central banks shall 
calculate M for each of these exposures as  set out in (a) to (e) and subject to 
paragraphs 13 to 15. In all cases, M shall be no greater than 5 years. 
(a) For an instrument subject to a cash  flow schedule M sh all be calculated 
according to the following formula: 
M = MAX{1; MIN{ ∑∑
tt t
tCF CFt / *  ; 5}} 
where CF t denotes the cash flows (principal, interest payments and fees)  
contractually payable by the obligor in period t. 
(b) For derivatives subject to a master ne tting agreement M shall be the weighted 
average remaining maturity of the exposur e, where M shall be at least 1 year. 
The notional amount of each exposure shall be used for weighting the maturity.  
(c) For exposures arising from repurch ase transactions or securities or 
commodities lending or borrowing transacti ons which are subject to a master 
netting agreement M shall be the weight ed average remaining maturity of the 
 
EN 35   EN transactions where M sha ll be at least 5 days. Th e notional amount of each 
transaction shall be used for weighting the maturity.  
(d) If a credit institution is permitted to use own PD estimates for purchased 
corporate receivables, for drawn am ounts M shall equal the purchased 
receivables exposure weight ed average maturity, wher e M shall be at least 1 
year. This same value of M shall al so be used for undrawn amounts under a 
committed purchase facility provided the facility contains effective covenants, 
early amortisation triggers, or other features that pr otect the purchasing credit 
institution against a significant deterior ation in the quality of the future 
receivables it is required to purchase over the facility’s term. Absent such 
effective protections, M for undrawn amounts shall be calculated as the sum of 
the longest-dated potential receivable  under the purchase agreement and the 
remaining maturity of the purchase facil ity, where M shall be at least 1 year.  
(e) For any other instrument than menti oned in this paragraph or when a credit 
institution is not in a position to calcula te M as set out in (a), M shall be the 
maximum remaining time (in years) that the obligor is permitted to take to 
fully discharge its contractual obligations, where M shall be at least 1 year.  
13. Notwithstanding paragraph 12 (a),  (b), (d) and (e), for shor t-term exposures specified 
by the competent authorities with a remaining maturity below one year and which are 
not part of the credit institutions ongoing financing of the obligor M shall be at least 
one-day.  
14. The competent authorities may allow for e xposures to corporates  situated in the 
Community and having consolidated sales and consolidated assets of less than EUR 
500 million the use of M as set out in paragraph 11.  
15. Maturity mismatches shall be treated as specified in Articles 90-93.  
2. RETAIL EXPOSURES  
2.1. PD 
16. The PD of an exposure shall be at least 0.03%.  
17. The PD of obligors or where an obligation approach is used those of exposures in 
default shall be 100%.  
18. For dilution risk of purchased receivables PD shall be set equal to EL estimates for 
dilution risk. If a credit institution can decompose its EL estimates for dilution risk of 
purchased receivables into PDs and LGDs in  a reliable manner, the PD estimate may 
be used.  
19. Unfunded credit protection may be recognised by adjusting PDs subject to paragraph 
21.  
 
EN 36   EN 2.2. LGD 
20. Credit institutions shall provide own es timates of LGDs subject to minimum 
requirements as specified in Part 4 and approval of competent authorities. For 
dilution risk of purchased receivables an L GD value of 75% shall be used. If a credit 
institution can decompose its EL estimates fo r dilution risk of purchased receivables 
into PDs and LGDs in a reliable manner, the PD estimate may be used. 
21. Unfunded credit protection may be recogn ised by adjusting PD or LGD estimates 
subject to minimum requirement s as specified in Part 4, paragraphs 95 to 103 and 
approval of competent authoriti es either in support of an individual exposure or a 
pool of exposures. A credit institution sh all not assign guaranteed exposures an 
adjusted PD or LGD such that the adjusted risk weight would be lower than that of a 
comparable, direct expos ure to the guarantor. 
3. EQUITY EXPOSURES SUBJECT TO PD/LGD  METHOD  
3.1. PD 
22. PDs shall be determined according to the methods for corporate exposures.  
The following minimum PDs shall apply: 
(a) 0.09% for exchange traded equity expos ures where the invest ment is part of a 
long-term customer relationship;  
(b) 0.09% for non-exchange traded equ ity exposures where the returns on the 
investment are based on regular and periodic cash flows not derived from 
capital gains;  
(c) 0.40% for exchange traded equity e xposures including other short positions as 
set out in Part 1, paragraph 17;  
(d) 1.25% for all other equity exposures including other short positions as set out 
in Part 1, paragraph 17.  
3.2. LGD 
23. Private equity exposures in sufficiently diversified portfolios may be assigned an 
LGD of 65 %. 
24. All other exposures shall be assigned an LGD of 90 %.  
3.3. Maturity 
25. M assigned to all exposu res shall be 5 years. 
 
EN 37   EN Part 3 - Exposure value  
1. EXPOSURES TO CORPORATES , INSTITUTIONS , CENTRAL GOVERNMENTS AND 
CENTRAL BANKS AND RETAIL EXPOSURES .  
1. Unless noted otherwise the exposure value of on-balance sheet exposures shall be 
measured gross of value adjustments. This rule also applies to assets purchased at a 
price different than the amount owed. For purchased assets, th e difference between 
the amount owed and the net value reco rded on the balance- sheet of credit 
institutions is denoted discount if the am ount owed is larger, and premium if it is 
smaller.  
2. Where credit institutions use Master netting agreements in relation to repurchase 
transactions/security lending or borrowing transactions the exposure value shall be 
calculated in accordance with Articles 90 to 93 
3. For on-balance sheet netting of loans and de posits credit institutions shall apply for 
the calculation of the exposure value the methods set out in Articles 90 to 93. 
4. The exposure value for leases shall be the discounted lease payment stream.  
5. In the case of any item listed in Annex IV, the exposure value shall be determined by 
means of one of the two methods set out in Annex III.  
6. The exposure value for the calculation of risk weighted exposure amounts of 
purchased receivables shall be th e outstanding amount minus the capital 
requirements for dilution risk prior to credit risk mitigation. 
7. Notwithstanding paragraph 5, c ontracts traded on recognised exchanges, and foreign-
exchange contracts (except contracts concerni ng gold) with an original maturity of 
14 calendar days or less are exempt from the application of the methods set out in 
Annex III, and will be attributed  an exposure value of zero.  
8. Notwithstanding paragraph 5, competen t authorities may exempt from the 
application of the methods set out in Anne x III and attribute an  exposure value of 
zero to over-the-counter (OTC ) contracts cleared by a clea ring house where the latter 
acts as the legal counterparty and all partic ipants fully collatera lise on a daily basis 
the exposure they present to the clearing house, th ereby providing a protection 
covering both the current replacement cost  and the potential future exposure.  
The posted collateral shall either: 
(a) qualify for a 0% risk weight 
(b) be cash deposits placed with the lending credit institution 
(c) be certificates of deposit or similar instruments issued by and lodged with the 
latter 
The competent authority shall be satisfied th at the risk of a build-up of the clearing 
house's exposures beyond the market valu e of posted collateral is eliminated. 
 
EN 38   EN 9. The exposure value for undrawn purchased commitments of revolving purchased 
corporate receivables exposures shall be  calculated as the committed but undrawn 
amount multiplied by 75%.  
10. Where an exposure takes the form of s ecurities sold, posted or lent under a 
repurchase transaction or securities or co mmodities lending or borrowing transaction, 
the exposure value shall be the value of th e securities or commodities determined in 
accordance with Article 74. Where the Financial Collateral Comprehensive Method 
as set out under Annex VIII, Part 3 is us ed, the exposure value shall be increased by 
the volatility adjustment appropriate to such securities or commodities as set out 
therein. 
11. The exposure value for the following items, shall be calculated as the committed but 
undrawn amount multiplied by a conversion factor.  
Credit institutions shall use th e following conversion factors: 
(a) For credit lines which are uncommitted,  that are unconditionally cancellable, or 
that effectively provide for automa tic cancellation, at any time by the 
institution without prior no tice, a conversion factor of 0 % shall apply. To 
apply a conversion factor of 0% credit institutions shall actively monitor the 
financial condition of the obligor, and their internal control systems shall 
enable them to immediately detect a de terioration in the credit quality of the 
obligor. Undrawn retail credit lines ma y be considered as unconditionally 
cancellable if the terms perm it the credit institution to cancel them to the full 
extent allowable under consumer prot ection and related legislation.  
(b) For short-term letters of credit ar ising from the movement of goods, a 
conversion factor of 20% shall apply for both the issuing and confirming 
institutions.  
(c) For other credit lines, note issuan ce facilities (NIFs), and revolving 
underwriting facilities (RUFs), a convers ion factor of 75% shall apply.  
(d) Credit institutions which meet the minimum requirements for the use of own 
estimates of conversion factors as sp ecified in Part 4 may use their own 
estimates of conversion factors across different product types, subject to 
approval of the competent authorities. 
12. Where a commitment refers to the extension of another commitment, the lower of the 
two conversion factors associ ated with the individual commitment shall be used. 
13. For all other off-balance sheet items than  mentioned in paragraphs 1 to 11, the 
exposure value shall be determin ed according to Annex II.  
2. EQUITY EXPOSURES  
14. The exposure value shall be the value pr esented in the financial statements. 
Admissible equity exposure measures are the following:  
 
EN 39   EN (a) For investments held at fair value with changes in value flowing directly 
through income and into own funds, the exposure value is the fair value 
presented in the balance sheet.  
(b) For investments held at fair value with changes in  value not flowing through 
income but into a tax-adjusted separa te component of equity, the exposure 
value is the fair value presented in the balance sheet.  
(c) For investments held at cost or at the lower of cost or market, the exposure 
value is the cost or market valu e presented in the balance sheet. 
3. OTHER NON CREDIT -OBLIGATION ASSETS  
15. The exposure value of other non credit-obliga tion assets shall be the value presented 
in the financial statements.  
 
EN 40   EN Part 4 - Minimum Requirements for IRB Approach  
1. RATING SYSTEMS  
1. A ‘rating system’ shall comprise all of the methods, processes, controls, data 
collection and IT systems th at support the assessment of credit risk, the assignment 
of exposures to grades or pools (rating), and the quantification of default and loss 
estimates for a certain type of exposure.  
2. If a credit institution uses multiple rating systems, the rationale for assigning an 
obligor or a transaction to a rating system shall be documented and applied in a 
manner that appropriately re flects the level of risk.  
3. Assignment criteria and processes shall be periodically reviewed to determine 
whether they remain appropriate for the current portfolio and external conditions.  
1.1. Structure of rating systems 
4. Where a credit institution uses direct estima tes of risk parameters these may be seen 
as the outputs of grades on a continuous rating scale.  
1.1.1.  Exposures to corporates, institutions  and central governments and central banks 
5. A rating system shall take into account obligor and transaction risk characteristics.  
6. A rating system shall have an obligor rating scale which reflects exclusively 
quantification of the risk of obligor defa ult. The obligor rating scale shall have a 
minimum of 7 grades for non-defaulted ob ligors and one for defaulted obligors.  
7. An ‘obligor grade’ shall mean a risk categ ory within a rating system’s obligor rating 
scale, to which obligors are assigned on the basis of a specified and distinct set of 
rating criteria, from which estimates of PD  are derived. A credit institution shall 
document the relationship between obligor grades  in terms of the level of default risk 
each grade implies and the criteria used to distinguish that level of default risk.  
8. Credit institutions with portf olios concentrated in a part icular market segment and 
range of default risk shall have enough oblig or grades within th at range to avoid 
undue concentrations of obligors in a par ticular grade. Signifi cant concentrations 
within a single grade shall be supported  by convincing empirical evidence that the 
obligor grade covers a reasonably narrow PD band and that the default risk posed by 
all obligors in the grade falls within that band.  
9. To qualify for recognition by the competen t authorities of the use for capital 
requirement calculation of own estimates of LGDs a rating system shall incorporate a 
distinct facility rating scale which exclusively reflects LGD related transaction 
characteristics.  
10. To qualify for recognition by the competen t authorities of the use for capital 
requirement calculation of own estimates of conversion fact ors a rating system shall 
incorporate a distinct faci lity rating scale which excl usively reflects conversion 
factor related transact ion characteristics.  
 
EN 41   EN 11. A ‘facility grade’ shall mean a risk category within a rating system’s facility scale, to 
which exposures are assigned on the basis of  a specified and dist inct set of rating 
criteria from which own estimates of either  LGDs or conversion factors are derived. 
The grade definition shall include both a de scription of how exposures are assigned 
to the grade and of the criteria used to di stinguish the level of risk across grades.  
12. Significant concentrations within a single facility grade shall be supported by 
convincing empirical evidence that the faci lity grade covers a reasonably narrow 
LGD or conversion factor band, respectively,  and that the risk posed by all exposures 
in the grade falls within that band.  
13. Credit institutions using the methods set out in Part 1, paragraph 5 for assigning risk 
weights for specialised lendi ng exposures are exempt from  the requirement to have 
an obligor rating scale which reflects exclus ively quantification of the risk of obligor 
default for these exposures. Notwithstandi ng paragraph 6, these institutions shall 
have for these exposures at least 4 grades for non-defaulted obli gors and at least one 
grade for defaulted obligors.  
1.1.2.  Retail exposures 
14. Rating systems shall reflect both obligor a nd transaction risk, and shall capture all 
relevant obligor and tran saction characteristics. 
15. The level of risk differentiation shall ensure  that the number of exposures in a given 
grade or pool is sufficient to allow for meaningful quantification and validation of 
the loss characteristics at the grade or pool  level. The distribution of exposures and 
obligors across grades or pools shall be such  as to avoid excessive concentrations.  
16. Credit institutions shall demonstrate that the process of assigning exposures to grades 
or pools provides for a meaningful differe ntiation of risk, provides for a grouping of 
sufficiently homogenous exposures, and allows for accurate and consistent 
estimation of loss characteristics at grade or  pool level. For purc hased receivables the 
grouping shall reflect the sell er’s underwriting practices and the heterogeneity of 
their customers.  
17. Credit institutions shall consider the followi ng risk drivers when assigning exposures 
to grades or pools:  
Obligor risk characteristics 
(a) Transaction risk charact eristics, including product or  collateral t ypes or both. 
Credit institutions shall explicitly address cases where several exposures 
benefit from the same collateral 
(b) Delinquency, unless the credit ins titution demonstrates to its competent 
authority that delinquency is not a mate rial driver of risk for the exposure 
(c) Assignment to grades or pools 
18. A credit institution shall have specific definitions, processes and criteria for 
assigning exposures to grades or pools within a rating system.  
 
EN 42   EN (a) The grade or pool definitions and criter ia shall be sufficiently detailed to allow 
those charged with assigni ng ratings to consistently assign obligors or facilities 
posing similar risk to the same grade or pool. This consistency shall exist 
across lines of business, depart ments and geographic locations.  
(b) The documentation of the rating process shall allow third parties to understand 
the assignments of exposures to grades  or pools, to replicate grade and pool 
assignments and to evaluate the appropria teness of the assignments to a grade 
or a pool. 
(c) The criteria shall also be consistent w ith the credit institution’s internal lending 
standards and its policies for handlin g troubled obligors and facilities. 
19. A credit institution shall take all releva nt information into account in assigning 
obligors and facilities to gr ades or pools. Information shall be current and shall 
enable the credit institution to forecast the future performance of the exposure. The 
less information a credit institution has, the more conservative shall be its 
assignments of exposures to obligor and facil ity grades or pools. If a credit institution 
uses an external rating as a primary factor  determining an internal rating assignment, 
the credit institution shall ensure that it considers other relevant information.  
1.2. Assignment of exposures 
1.2.1.  Exposures to corporates, institutions  and central governments and central banks 
20. Each obligor shall be assigned to an obli gor grade as part of the credit approval 
process.  
21. For those credit institutions permitted to use own estimates of LGDs or conversion 
factors, each exposure shall also be assigned to a facility grade as part of the credit 
approval process. 
22. Credit institutions using the methods set out in Part 1, paragraph 5 for assigning risk 
weights for specialised lending exposures sh all assign each of these exposures to a 
grade in accordance with paragraph 13.  
23. Each separate legal entity to which the credit institution is exposed shall be 
separately rated. A credit institution shall demonstrate to its competent authority that 
it has acceptable policies rega rding the treatment of indi vidual obligor clients and 
groups of connected clients .  
24. Separate exposures to the same obligor shall be assigned to the same obligor grade, 
irrespective of any differences in the nature of each specific transaction. Exceptions, 
where separate exposures are allowed to result in multiple grades for the same 
obligor are: 
(a) country transfer risk, this being dependent on whether the exposures are 
denominated in local or foreign currency 
(b) where the treatment of associated guar antees to an exposure may be reflected 
in an adjusted assignment to an obligor grade  
 
EN 43   EN 1.2.2.  Retail exposures 
25. Each exposure shall be assigne d to a grade or a pool as part of the credit approval 
process.  
1.2.3.  Overrides 
26. For grade and pool assignment s credit institutions shall document the situations in 
which human judgement may override the inputs or outputs of the assignment 
process and the personnel that are responsib le for approving these overrides. Credit 
institutions shall document these override s and the personnel responsible. Credit 
institutions shall analyse th e performance of the exposures whose assignments have 
been overridden. This analys is shall include assessment of the performance of 
exposures whose rating has been overridden by a particular person, accounting for all 
the responsible personnel.  
1.3. Integrity of assignment process 
1.3.1.  Exposures to corporates, institutions  and central governments and central banks 
27. Assignments and periodic reviews of assign ments shall be completed or approved by 
an independent party that does not direct ly benefit from deci sions to extend the 
credit.  
28. Credit institutions shall upda te assignments at least a nnually. High risk obligors and 
problem exposures shall be subject to more frequent review. Cred it institutions shall 
undertake a new assignment if material information on the obligor or exposure 
becomes available.  
29. A credit institution shall have an effec tive process to obtain and update relevant 
information on obligor characteristics th at affect PDs, and on transaction 
characteristics that affect L GDs and conversion factors.  
1.3.2.  Retail  exposures 
30. A credit institution shall at least annually update obligor and facility assignments or 
review the loss characteristics and delinque ncy status of each identified risk pool 
whichever applicable. A credit institution sh all also at least a nnually review in a 
representative sample the status of indivi dual exposures within each pool as a means 
of ensuring that exposures continue to be assigned to the correct pool.  
1.4. Use of models 
31. If a credit institution uses statistical models and other mechanical methods to assign 
exposures to obligors or facili ties grades or pools, then:  
(a) The credit institution shall demonstrate to its competent authority that the 
model has good predictive power and th at capital requirements are not 
distorted as a result of its  use. The input variables shall form a reasonable and 
effective basis for the resulting predictions. The model shall not have material 
biases. 
 
EN 44   EN (b) The credit institution shall have in pl ace a process for vetting data inputs into 
the model which includes an assessment of the accuracy, completeness and 
appropriateness of the data. 
(c) The credit institution shall demonstrate that the data used to build the model is 
representative of the population of th e credit institution’s actual obligors or 
exposures. 
(d) The credit institution shall have a regular cycle of model validation that 
includes monitoring of model performa nce and stability; review of model 
specification; and testing of model outputs against outcomes. 
(e) The credit institution shall comple ment the statistical model by human 
judgement and human oversight to revi ew model-based assignments and to 
ensure that the models are used appropr iately. Review procedures shall aim at 
finding and limiting errors  associated with model weaknesses. Human 
judgements shall take into account all relevant information not considered by 
the model. The credit institution shall document how human judgement and 
model results are to be combined. 
1.5. Documentation of rating systems 
32. The credit institutions shall document the design and operational details of its rating 
systems. The documentation shall evidence compliance with the minimum 
requirements in this Part, and address topics  including portfolio di fferentiation, rating 
criteria, responsibilities of parties that rate obligors and exposures, frequency of 
assignment reviews, and management oversight of the rating process.  
33. The credit institution shall document the ra tionale for and analysis supporting its 
choice of rating criteria. A credit institution shall documen t all major changes in the 
risk rating process, and such documentati on shall support identif ication of changes 
made to the risk rating process subseque nt to the last review by the competent 
authorities. The organisation of rating a ssignment including the rating assignment 
process and the internal control structure shall also be documented.  
34. The credit institutions shall document the spec ific definitions of default and loss used 
internally and demonstrate consistency with th e definitions set out in this Directive.  
35. If the credit institution employs statistical models in the rating process, the credit 
institution shall document their met hodologies. This material shall:  
(a) provide a detailed outline of the theo ry, assumptions and/or mathematical and 
empirical basis of the assignment of es timates to grades, individual obligors, 
exposures, or pools, and the data s ource(s) used to estimate the model; 
(b) establish a rigorous statistical proces s (including out-of-time  and out-of-sample 
performance tests) for validating th e model; and 
(c) indicate any circumstances under whic h the model does not work effectively 
36. Use of a model obtained from a third-part y vendor that claims proprietary technology 
is not a justification for exemption fr om documentation or any other of the 
 
EN 45   EN requirements for rating systems. The burden is on the credit institution to satisfy 
competent authorities.  
1.6. Data maintenance 
37. Credit institutions shall collect  and store data on aspects of  their internal ratings as 
required under Articles 145 to 149. 
1.6.1.  Exposures to corporates, institutions  and central governments and central banks 
38. Credit institutions shall collect and store:  
(a) Complete rating histories on obli gors and recognised guarantors,  
(b) The dates the ratings were assigned,  
(c) The key data and methodology us ed to derive the rating,  
(d) The person responsible for the rating assignment,  
(e) The identity of obligors and exposures that defaulted,  
(f) The date and circumstances of such defaults,  
(g) Data on the PDs and realised default rates associated with rating grades and 
ratings migration. 
(h) Credit institutions not using own estim ates of LGDs and/or  conversion factors 
shall collect and store data on comparisons of realised LGDs to the values as 
set out in Part 2, paragraph 8 and realis ed conversion factors to the values as 
set out in Part 3, paragraph 11.  
39. Credit institutions using own estimates of LGDs and/or conversion factors shall 
collect and store: 
(a) Complete histories of data on the facility ratings and LGD and conversion 
factor estimates associated with each rating scale,  
(b) The dates the ratings were as signed and the estimates were done, 
(c) The key data and methodology used to de rive the facility ratings and LGD and 
conversion factor estimates, 
(d) The person who assigned the facility  rating and the person who provided LGD 
and conversion factor estimates. 
(e) Data on the estimated and realised LGDs and conversion factors associated 
with each defaulted exposure.  
(f) Data on the LGD of the exposure before and after evaluation of  the effects of a 
guarantee/ or credit derivative, for those cr edit institutions that reflect the credit 
risk mitigating effects of guarantees  or credit derivatives through LGD . 
 
EN 46   EN (g) Data on the components of loss for each defaulted exposure.  
1.6.2.  Retail exposures 
40. Credit institutions shall collect and store :  
(a) Data used in the process of allo cating exposures to grades or pools, 
(b) Data on the estimated PDs, LGDs a nd conversion factors associated with 
grades or pools of exposures, 
(c) The identity of obligors and exposures that defaulted, 
(d) For defaulted exposures, data on the gr ades or pools to which the exposure was 
assigned over the year prio r to default and the realised outcomes on LGD and 
conversion factor. 
(e) Data on loss rates and margin income for qualifying revolving retail exposures.  
1.7. Stress tests used in assessment of capital adequacy  
41. A credit institution shall have in place sound  stress testing processes for use in the 
assessment of its capital adequacy. Stress testing shall involv e identifying possible 
events or future changes in economic cond itions that could have unfavourable effects 
on a credit institution’s cred it exposures and assessment of  the credit institution’s 
ability to withstand such changes.  
42. A credit institution shall regularly perform a credit risk stress test to assess the effect 
of certain specific conditions on its total cap ital requirements for credit risk. The test 
to be employed shall be one  chosen by the credit institution, subject to supervisory 
review. The test to be employed shall be  meaningful and reas onably conservative, 
considering at least the effect  of mild recession scenarios.  A credit institution shall 
assess migration in its ratings  under the stress test scenario s. Stressed portfolios shall 
contain the vast majority of a cr edit institution's total exposure.  
2. RISK QUANTIFICATION  
43. In determining the risk parameters to be a ssociated with rating grades or pools, credit 
institutions shall apply th e following requirements:  
2.1. Definition of default 
44. A ‘default’ shall be considered to have occu rred with regard to a particular obligor 
when either or both of the two fo llowing events has taken place:  
(a) The credit institution considers that th e obligor is unlikely to pay its credit 
obligations to the credit institution, the parent undertaking or any of its 
subsidiaries in full, without recourse by the credit institution to actions such as 
realising security (if held). 
 
EN 47   EN (b) The obligor is past due more than 90 days on any material credit obligation to 
the credit institution, the parent undertaking or any of its subsidiaries.  
Days past due commence once an obligor ha s breached an advised limit, has been 
advised a limit smaller than current outstandings, or has drawn credit without 
authorisation. 
An advised limit shall mean a limit which ha s been brought to th e knowledge of the 
obligor. 
In the case of retail exposures and exposur es to public sector  entities (PSE) the 
competent authorities shall set a number of days past due as specified in paragraph 
48.  
In the case of corporate exposures the competent authorities may set a number of 
days past due as specified in Article 154, paragraph 4. 
In the case of retail exposures credit instit utions may apply this definition at a facility 
level.  
45. Elements to be taken as indications of unlikeliness to pay shall include:  
(a) The credit institution puts the cr edit obligation on non-accrued status. 
(b) The credit institution makes a value adjustment resulting from a significant 
perceived decline in credit quality subse quent to the credit institution taking on 
the exposure.  
(c) The credit institution sells the credit obligation at a material credit-related 
economic loss. 
(d) The credit institution consents to a distressed restructuring of the credit 
obligation where this is likely to resu lt in a diminished financial obligation 
caused by the material forgiveness, or pos tponement, of principal, interest or 
(where relevant) fees. This includes in  the case of equity  exposures assessed 
under a PD/LGD Approach, distressed rest ructuring of the equity itself.  
(e) The credit institution has filed for the obligor’s bankruptcy or a similar order in 
respect of an obligor’s credit obligati on to the credit institution, the parent 
undertaking or any of  its subsidiaries. 
(f) The obligor has sought or has been pl aced in bankruptcy or similar protection 
where this would avoid or delay repaymen t of a credit obligation to the credit 
institution, the parent undertak ing or any of its subsidiaries. 
46. Credit institutions that use external data that is not itself consistent with the definition 
of default, shall demonstrate to their competent authorities that appropriate 
adjustments have been made to achieve broad equivalence with  the definition of 
default.  
47. If the credit instituti on considers that a previously de faulted exposure is such that no 
trigger of default continues to apply, the cr edit institution shall rate the obligor or 
 
EN 48   EN facility as they would for a non-defaulted exposure. Should the definition of default 
subsequently be triggered, another defau lt would be deemed to have occurred.  
48. For Retail and PSE exposures, the competent authorities of each Member States shall 
set the exact number of days past due that all credit institutions in its jurisdiction 
shall abide by under the definition of default set out in paragraph 44, for exposures to 
such counterparts situated within this Me mber State. The specific number shall fall 
within 90-180 days and may differ acro ss product lines. For exposures to such 
counterparts situated in th e territories of other Member States, the competent 
authorities shall set a number of days pa st due which is not higher than the number 
set by the competent authority of the respective Member State.  
2.2. Overall requirements for estimation 
49. A credit institution’s own estimates of the risk parameters PD, LGD, conversion 
factor and EL shall incorpor ate all relevant data, information and methods. The 
estimates shall be derived using both historical experience and empirical evidence, 
and not based purely on judgemental consider ations. The estimates shall be plausible 
and intuitive and shall be based on the ma terial drivers of the respective risk 
parameters. The less data a credit institution has, the more conservative it shall be in 
its estimation. 
50. The credit institution shall be able to provide a breakdown of its loss experience in 
terms of default frequency, LGD, conversi on factor, or loss where EL estimates are 
used, by the factors it sees as the drivers of  the respective risk parameters. The credit 
institution shall demonstrate that its estimates are representative of long run 
experience.  
51. Any changes in lending practice or the process for pursuing recoveries over the 
observation periods referred to  in paragraphs 66, 71, 81, 85, 92 and 94 shall be taken 
into account. A credit institution’s estimates shall reflect the impli cations of technical 
advances and new data and other information, as it becomes available. Credit 
institutions shall review their estimates wh en new information comes to light but at 
least on an annual basis.  
52. The population of exposures represented in the data used for estimation, the lending 
standards used when the data was generate d and other relevant characteristics shall 
be comparable with those of the credit institution’s exposures and standards. The 
credit institution shall also demonstrate th at the economic or market conditions that 
underlie the data is relevant to current and foreseeable conditions. The number of 
exposures in the sample and the data period used for quantification shall be sufficient 
to provide the credit institution with conf idence in the accuracy and robustness of its 
estimates. 
53. For purchased receivables the estimates shall reflect all relevant information 
available to the purchasing credit institutio n regarding the quality of the underlying 
receivables, includi ng data for similar pools provided by the seller, by the purchasing 
credit institution, or by external sources. The purchasing credit institution shall 
evaluate any data relied upon from the seller.  
 
EN 49   EN 54. A credit institution shall add to its estimates a margin of conservatism that is related 
to the expected range of estimation e rrors. Where methods and data are less 
satisfactory and the expected range of errors  is larger, the margin of conservatism 
shall be larger.  
55. If credit institutions use different estimates  for the calculation of risk weights and 
internal purposes it shall be document ed and their reasonableness shall be 
demonstrated to the competent authority.  
56. If credit institutions can demonstrate to its  competent authorities that for data that 
have been collected prior to the date of implementation of this Directive appropriate 
adjustments have been made to achieve br oad equivalence with the definitions of 
default or loss, competent authorities ma y allow the credit institutions some 
flexibility in the application of the required standards for data.  
57. If a credit institution uses  data that is pooled acros s credit institutions it shall 
demonstrate that:  
(a) The rating systems and criteria of ot her credit institutions in the pool are 
similar with its own; 
(b) The pool shall be represen tative for the portfolio for which the pooled data is 
used; 
(c) The pooled data is used consistently over time by the credit institution for its 
permanent estimates. 
58. If a credit institution uses data that is pool ed across credit institutions, it shall remain 
responsible for the integrity  of its rating systems. Th e credit institution shall 
demonstrate to the competent authority that it has suffi cient in-house understanding 
of its rating systems, including effective ability to monitor and audit the rating 
process.  
2.2.1.  Requirements specific to PD estimation 
Exposures to corporates, institutions and central governments and central banks 
59. Credit institutions shall estimate PDs by ob ligor grade from long run averages of 
one-year default rates.  
60. For purchased corporate receivables credit institutions may estimate ELs by obligor 
grade from long run averages of one -year realised default rates.  
61. If a credit institution de rives long run average estimates of PDs and LGDs for 
purchased corporate receivables from an estimate of EL, and an appropriate estimate 
of PD or LGD, the process for estimating to tal losses shall meet the overall standards 
for estimation of PD and LGD set out in  this Part, and the outcome shall be 
consistent with the concept of L GD as set out in paragraph 73.  
62. Credit institutions shall use PD estimati on techniques only with supporting analysis. 
Credit institutions shall recognise the impor tance of judgmental considerations in 
 
EN 50   EN combining results of techniques and in making adjustments for limitations of 
techniques and information.  
63. To the extent that a credit institution uses data on internal default experience for the 
estimation of PDs it shall demonstrate in its analysis that the estimates are reflective 
of underwriting standards and of any differen ces in the rating system that generated 
the data and the current rating system . Where underwriting standards or rating 
systems have changed, the credit institution shall add a greater margin of 
conservatism in its estimate of PD  
64. To the extent that a credit institution associ ates or maps its internal grades to the 
scale used by an ECAI or similar organisations and then attributes the default rate 
observed for the external organisation’s gr ades to the credit institution’s grades, 
mappings shall be based on a comparison of in ternal rating criteria to the criteria 
used by the external organi sation and on a comparison of the internal and external 
ratings of any common obligors. Biases or inconsistencies in the mapping approach 
or underlying data shall be avoided. The external organisation’ s criteria underlying 
the data used for quantification shall be orie nted to default risk only and not reflect 
transaction characteristics. The credit  institution’s analysis shall include a 
comparison of the default definitions used, subject to the requirements in paragraphs 
44 to 48. The credit institution shall document the basis for the mapping.  
65. To the extent that a credit institution uses statistical default prediction models it is 
allowed to estimate PDs as the simple av erage of default-probability estimates for 
individual obligors in a given grade. The cr edit institution’s use of default probability 
models for this purpose shall meet the standards specified in paragraph 31.  
66. Irrespective of whether a credit institution is using exte rnal, internal, or pooled data 
sources, or a combination of the three, for its PD estimation, the length of the 
underlying historical observation period used sh all be at least five years for at least 
one source. If the available observation period spans a longer period for any source, 
and this data is relevant, this longer period shall be used. This paragraph also applies 
to the PD/LGD Approach to equity.  
Retail exposures 
67. Credit institutions shall estimate PDs by obligor grade or pool from long run 
averages of one-year default rates.  
68. Notwithstanding paragraph 67, PD estimates may also be derived from realised 
losses and appropriate estimates of LGDs.  
69. Credit institutions shall rega rd internal data for assigni ng exposures to grades or 
pools as the primary source of information fo r estimating loss characteristics. Credit 
institutions are permitted to use external da ta (including pooled data) or statistical 
models for quantification provided a st rong link can be demonstrated between: 
(a) the credit institution’s process of assigning exposures to grades or pools and 
the process used by the external data source 
 
EN 51   EN (b) the credit institution’s internal risk pr ofile and the composition of the external 
data.  
For purchased retail receivables credit inst itutions may use external and internal 
reference data. Credit institutions shall use all relevant data sources as points of 
comparison.  
70. If a credit institution derives long run av erage estimates of PD and LGD for retail 
from an estimate of total losses, and an appropriate estimate of PD or LGD, the 
process for estimating total losses shall meet the overall standards for estimation of 
PD and LGD set out in this Part, and the outcome shall be consistent with the 
concept of LGD as set out in paragraph 73.  
71. Irrespective of whether a credit institution is using external, internal, pooled data 
sources or a combination of the three, for their estimation of loss characteristics, the 
length of the underlying historic al observation period used sh all be at least five years 
for at least one source. If the availabl e observation spans a longer period for any 
source, and these data are relevant, this longer period shall be used. A credit 
institution need not give equal importance  to historic data if it can convince its 
competent authority that more recent data  is a better predictor of loss rates. 
72. Credit institutions shall identify and anal yse expected changes of risk parameters 
over the life of credit expo sures (seasoning effects). 
2.2.2.  Requirements specific to own-LGD estimates 
73. Credit institutions shall estimate LGDs by f acility grade or pool on the basis of the 
average realised LGDs by facility grade or  pool using all observed defaults within 
the data sources (default weighted average).  
74. Credit institutions shall use LGD estimates  that are appropriate for an economic 
downturn if those are more conservative than  the long-run average. To the extent a 
rating system is expected to deliver cons tant realised LGDs by grade or pool over 
time, credit institutions shall make adjustme nts to their estimates of risk parameters 
by grade or pool to limit the capital impact of an economic downturn.  
75. A credit institution shall consider the extent of any dependence between the risk of 
the obligor with that of the collateral or collateral provider. Cases where there is a 
significant degree of dependence shall be addressed in a conservative manner.  
76. Currency mismatches between the underlying obligation and the collateral shall be 
treated conservatively in the credit institution’s assessment of LGD.  
77. To the extent, that LGD estimates take into  account the existence of collateral, these 
estimates shall not solely be based on the collateral’s estimated market value. LGD 
estimates shall take into account the effect of the potential inability of credit 
institutions to expeditiousl y gain control of their co llateral and liquidate it.  
78. To the extent, that a credit institution doe s not meet the minimum requirements for 
collateral set out in Annex VIII any amount expected to be recovered from such 
collateral shall not be taken into account in its LGD estimates.  
 
EN 52   EN 79. For the specific case of exposures already in default, the credit institution shall use its 
best estimate of expected loss fo r each exposure given current economic 
circumstances and exposure status.  
80. To the extent that unpaid late fees have been capitalised in the credit institution’s 
income statement, they shall be added to the credit in stitution’s measure of exposure 
and loss.  
Exposures to corporates, institutions and central governments and central banks 
81. Estimates of LGD shall be based on data ove r a minimum of seven years for at least 
one data source. If the available observ ation period spans a longer period for any 
source, and the data is relevant, th is longer period shall be used.  
Retail exposures 
82. Notwithstanding paragraph 73, LGD estimates may be derived from realised losses 
and appropriate estimates of PDs.  
83. Notwithstanding paragraph 88, cr edit institutions may reflect future drawings either 
in its conversion factor or in its LGD estimates.  
84. For purchased retail receivables credit inst itutions may use external and internal 
reference data to estimate LGDs. 
85. Estimates of LGD shall be based on data over a minimum of five years. 
Notwithstanding paragraph 73, a credit instit ution needs not give equal importance to 
historic data if it can demonstrate to its co mpetent authority that more recent data is a 
better predictor of loss rates.  
2.2.3.  Requirements specific to own- conversion factor estimates 
86. Credit institutions shall estimate conversion factors by facility grade or pool on the 
basis of the average realised  conversion factors by facility  grade or pool using all 
observed defaults within the data sources (default weighted average).  
87. Credit institutions shall use conversion factor estimates th at are appropriate for an 
economic downturn if those are more conserva tive than the long-run average. To the 
extent a rating system is exp ected to deliver co nstant realised conversion factors by 
grade or pool over time, credit institutions shall make adjustments to their estimates 
of risk parameters by grade or pool to  limit the capital imp act of an economic 
downturn.  
88. Credit institutions estimates of conversio n factor shall reflect  the possibility of 
additional drawings by the obligor up to and after the time a default event is 
triggered.  
The conversion factor estimate shall incor porate a larger margin of conservatism 
where a stronger positive correlation can reas onably be expected between the default 
frequency and the magnitude of conversion factor.  
 
EN 53   EN 89. In arriving at estimates of c onversion factors credit instit utions shall consider their 
specific policies and strategies adopted in  respect of account monitoring and payment 
processing. Credit institutions shall also consider their ability and willingness to 
prevent further drawings in circumstances s hort of payment default, such as covenant 
violations or other tec hnical default events.  
90. Credit institutions shall ha ve adequate systems and procedures in place to monitor 
facility amounts, current outstandings against committed lines and changes in 
outstandings per obligor and per grade. The cr edit institution shall be able to monitor 
outstanding balances on a daily basis.  
91. If credit institutions use diffe rent estimates of conversio n factors for the calculation 
of risk weighted exposure amounts and inte rnal purposes it shall be documented and 
their reasonableness shall be demonstr ated to the competent authority.  
Exposures to corporates, institutions and central governments and central banks 
92. Estimates of conversion factor shall be ba sed on data over a minimum of seven years 
for at least one data source. If the ava ilable observation period spans a longer period 
for any source, and the data is releva nt, this longer period shall be used. 
Retail exposures 
93. Notwithstanding paragraph 88, cr edit institutions may reflect future drawings either 
in their conversion factors or in their LGD estimates.  
94. Estimates of conversion factors shall be ba sed on data over a minimum of five years. 
Notwithstanding paragraph 86, a credit instit ution need not give equal importance to 
historic data if it can demonstrate to its co mpetent authority that more recent data is a 
better predictor of  draw downs.  
2.2.4.  Minimum requirements for assessing the ef fect of guarantees and credit derivatives 
Exposures to corporates, institutions a nd central governments and central banks 
where own estimates of LGD are used and retail exposures. 
95. The requirements in paragraphs 96 to 103 shall not apply for guarantees provided by 
institutions and central gove rnments and central banks if the credit institution has 
received approval to apply the rules of Articles 78 to 83 for exposures to such 
entities. In this case the requirement s of Articles 90 to 93 shall apply.  
96. For retail guarantees, these requirements also  apply to the assignm ent of exposures to 
grades or pools, and the estimation of PD.  
Eligible guarantor s and guarantees 
97. Credit institutions shall have clearly specified criteria for th e types of guarantors they 
recognise for the calculation of  risk weighted exposures.  
98. For recognised guarantors the same rules as for obligors as set out in paragraphs  18 
to 30  shall apply. 
 
EN 54   EN 99. The guarantee shall be evidenced in wri ting, non-cancellable on the part of the 
guarantor, in force until the ob ligation is satisfied in full (to the extent of the amount 
and tenor of the guarantee) and legally enforceable against the guarantor in a 
jurisdiction where the guarant or has assets to attach  and enforce a judgement. 
Guarantees prescribing condi tions under which the guarant or may not be obliged to 
perform (conditional guarantees) may be recognised subject to approval of 
competent authorities. The credit institution shall demonstrate that the assignment 
criteria adequately address any potential reduction in the risk mitigation effect.  
Adjustment criteria 
100. A credit institution shall have  clearly specified criteria fo r adjusting grades, pools or 
LGD estimates, and in the case of retail and eligible purchased receivables, the 
process of allocating exposures to grades or  pools, to reflect the impact of guarantees 
for the calculation of risk weighted asse ts. These criteria shall comply with the 
minimum requirements set out in paragraphs 18 to 30.  
101. The criteria shall be plausible and intuitive.  They shall address the guarantor’s ability 
and willingness to perform under the guarantee, the likely timing of any payments 
from the guarantor, the degree to which th e guarantor’s ability to perform under the 
guarantee is correlated with th e obligor’s ability to repay,  and the extent to which 
residual risk to the obligor remains.  
Credit derivatives 
102. The minimum requirements for guarantees in this Part shall appl y also for single-
name credit derivatives. In relation to a mismatch between the underlying obligation 
and the reference obligation of the credit derivative or the obligation used for 
determining whether a credit event has occurred the requirements set out under 
Annex VIII Part 2, paragraph 20 shall a pply. For retail expos ures and eligible 
purchased receivables, this paragraph applies to the process of allocating exposures 
to grades or pools.  
103. The criteria shall address the payout st ructure of the credit derivative and 
conservatively assess the impact this has on the level and timing of recoveries. The 
credit institution shall consider the extent  to which other forms of residual risk 
remain.  
2.2.5.  Minimum requirements for purchased receivables 
Legal certainty 
104. The structure of the facility shall ensure th at under all foreseeable circumstances the 
credit institution has effective ownership an d control of all cash remittances from the 
receivables. When the obligor  makes payments directly to a seller or servicer the 
credit institution shall verify  regularly that payments ar e forwarded completely and 
within the contractually agreed terms. Serv icer shall mean an entity that manages a 
pool of purchased receivables or the unde rlying credit exposures on a day-to-day 
basis. Credit institutions shall have pro cedures to ensure that ownership over the 
receivables and cash receipts is protec ted against bankruptcy stays or legal 
 
EN 55   EN challenges that could materially delay the lender’s ability to li quidate or assign the 
receivables or retain cont rol over cash receipts.  
Effectiveness of monitoring systems 
105. The credit institution shall monitor both the quality of the purchased receivables and 
the financial condition of the selle r and servicer. In particular:  
(a) The credit institution shall assess the correlation among the quality of the 
purchased receivables and the financ ial condition of both the seller and 
servicer, and have in place internal policies and procedures that provide 
adequate safeguards to protect agains t such contingencies, including the 
assignment of an internal risk ra ting for each seller and servicer.  
(b) The credit institution shall have clear and effective policies and procedures for 
determining seller and servicer eligibility . The credit institution or its agent 
shall conduct periodic review s of sellers and servicers in order to verify the 
accuracy of reports from the seller or servicer, detect fraud or operational 
weaknesses, and verify the qua lity of the seller’s cred it policies and servicer’s 
collection policies and procedures. The findings of these reviews shall be 
documented.  
(c) The credit institution shall assess the characteristics of the purchased 
receivables pools, including over-advances ; history of the seller’s arrears, bad 
debts, and bad debt allowances; payment terms, and potential contra accounts.  
(d) The credit institution shall have effective policies and procedures for 
monitoring on an aggregate basis single-ob ligor concentrations both within and 
across purchased receivables pools.  
(e) The credit institution shall ensure that it receives from the servicer timely and 
sufficiently detailed reports of receiv ables ageings and dilutions to ensure 
compliance with the credit institution’ s eligibility criteria and advancing 
policies governing purchased receivables, and provide an effective means with 
which to monitor and confirm the seller’s terms of sale and dilution.  
Effectiveness of work-out systems 
106. The credit institution shall have systems and procedures for detecting deteriorations 
in the seller’s financial condition and purchas ed receivables quality at an early stage, 
and for addressing emerging problems pro-activ ely. In particular the credit institution 
shall have clear and effec tive policies, procedures, and information systems to 
monitor covenant violations, and clear a nd effective policies and procedures for 
initiating legal actions and dealing wi th problem purchased receivables.  
Effectiveness of systems for controlling collateral, credit availability, and cash 
107. The credit institution shall have clear and effective policies and procedures 
governing the control of purchased receivables , credit, and cash. In particular, written 
internal policies shall specify all materi al elements of the receivables purchase 
programme, including the advancing rate s, eligible collateral, necessary 
documentation, concentration limits, and the way cash receipts are to be handled. 
 
EN 56   EN These elements shall take appropriate accoun t of all relevant and material factors, 
including the seller’s and servicer’s fina ncial condition, risk concentrations, and 
trends in the quality of the purchased rece ivables and the seller’s customer base, and 
internal systems shall ensure that f unds are advanced only against specified 
supporting collateral and documentation. 
Compliance with the credit institution’ s internal policies and procedures 
108. The credit institution shall have an effective internal process for assessing 
compliance with all internal policies an d procedures. The process shall include 
regular audits of all criti cal phases of the credit inst itution’s receivables purchase 
programme, verification of the separation of  duties between firstly the assessment of 
the seller and servicer  and the assessment of the ob ligor and secondly between the 
assessment of the seller and servicer and the field audit of the seller and servicer , 
and evaluations of back office operations, with particular focus on qualifications, 
experience, staffing levels, and supporting automation systems.  
3. VALIDATION OF INTERNAL ESTIMATES  
109. Credit institutions shall have robust system s in place to validate the accuracy and 
consistency of rating systems, processes, and the estimation of all relevant risk 
parameters. A credit institution shall demonstr ate to its competent authority that the 
internal validation process enables it to a ssess the performance of internal rating and 
risk estimation systems consistently and meaningfully.  
110. Credit institutions shall regularly compare realised default rates with estimated PDs 
for each grade and where realised default rate s are outside the expected range for that 
grade credit institutions shall specifically  analyse the reasons for the deviation. 
Credit institutions using own estimates of LGDs or conversion factors shall also 
perform analogous analysis for these estimate s. Such comparisons shall make use of 
historical data that cover as long a period as possible. The credit institution shall 
document the methods and data used in such comparisons. This analysis and 
documentation shall be updated at least annually.  
111. Credit institutions shall also use other qua ntitative validation tools and comparisons 
with relevant external data  sources. The analysis shall be based on data that are 
appropriate to the portfolio, are updated regularly, and cover a relevant observation 
period. Credit institutions’ internal assessm ents of the performance of their rating 
systems shall be based on as long a period as possible.  
112. The methods and data used for quantitati ve validation shall be  consistent through 
time. Changes in estimation and validation methods and data (both data sources and 
periods covered) shall be documented.  
113. Credit institutions shall have sound internal standards for situations where deviations 
in realised PDs, LGDs, conve rsion factors and total losses where EL is used from 
expectations become signifi cant enough to call the validi ty of the estimates into 
question. These standards shall take account of business cycles and similar 
systematic variability in default experience.  Where realised values continue to be 
 
EN 57   EN higher than expected values, credit inst itutions shall revise estimates upward to 
reflect their default and loss experience.  
4. CALCULATION OF RISK WEIGHTED EXPOSURE AMOUNTS FOR EQUITY EXPOSURES 
UNDER THE INTERNAL MODELS APPROACH  
4.1. Capital requirement and risk quantification 
114. Credit institutions shall meet for the pur pose of calculating capital requirements the 
following standards:  
(a) The estimate of potential loss shall be robust to adverse market movements 
relevant to the long-term risk profile of the credit institution’s specific 
holdings. The data used to represent return  distributions shall reflect the longest 
sample period for which data is availa ble and meaningful in representing the 
risk profile of the credit institution’s sp ecific equity exposures. The data used 
shall be sufficient to provide conservativ e, statistically reli able and robust loss 
estimates that are not based purely on subjective or judgmental considerations. 
Credit institutions shall demonstrate to  competent authorities that the shock 
employed provides a conservative estimate of potential losses over a relevant 
long-term market or business cycle. The credit institution shall combine 
empirical analysis of available data with adjustments based on a variety of 
factors in order to attain model output s that achieve appropriate realism and 
conservatism. In constructi ng Value at Risk (VaR) models estimating potential 
quarterly losses, credit institutions ma y use quarterly data or convert shorter 
horizon period data to a quarterly equivale nt using an analytically appropriate 
method supported by empirical eviden ce and through a well-developed and 
documented thought process and analysis. Such an approach shall be applied 
conservatively and consistently over time.  Where only limited relevant data is 
available the credit institution shall add appropriate margins of conservatism.  
(b) The models used shall be able to capture adequately all of the material risks 
embodied in equity returns including bot h the general market risk and specific 
risk exposure of the credit institution’s equity portfo lio. The internal models 
shall adequately explain historical price variation, capture both the magnitude 
and changes in the composition of potenti al concentrations, and be robust to 
adverse market environments. The populati on of risk exposures represented in 
the data used for estimation shall be clos ely matched to or at least comparable 
with those of the credit institution’s equity exposures.  
(c) The internal model shall be appropriate for the risk profile and complexity of a 
credit institution's equity portfolio. Wh ere a credit institution has material 
holdings with values that are highly non- linear in nature the internal models 
shall be designed to capt ure appropriately the risks associated with such 
instruments.  
(d) Mapping of individual positions to proxi es, market indices, and risk factors 
shall be plausible, intuitive , and conceptually sound.  
 
EN 58   EN (e) Credit institutions shall demonstrate through empirical analyses the 
appropriateness of risk factors, includi ng their ability to cover both general and 
specific risk.  
(f) The estimates of the return volatilit y of equity exposures  shall incorporate 
relevant and available data, informati on, and methods. Independently reviewed 
internal data or data from external sources (including pooled data) shall be 
used.  
(g) A rigorous and comprehensive stress-te sting programme shall be in place.  
4.2. Risk management process and controls 
115. With regard to the development and use of internal models for capital requirement 
purposes, credit institutions shall establish policies, procedures, and controls to 
ensure the integrity of the model and modelling process. These policies, procedures, 
and controls shall include the following:  
(a) Full integration of the internal model into the overall management information 
systems of the credit institution and in the management of the banking book 
equity portfolio. Internal models shal l be fully integrated into the credit 
institution’s risk management infrastructure if they are particularly used in: 
measuring and assessing equity portfo lio performance (including the risk-
adjusted performance); allocating econom ic capital to equity exposures and 
evaluating overall capital ad equacy and the investment management process. 
(b) Established management systems, procedures, and control functions for 
ensuring the periodic and independent revi ew of all elements of the internal 
modelling process, including approval of model revisions, vetting of model 
inputs, and review of model results, su ch as direct verification of risk 
computations. These reviews shall assess the accuracy, completeness, and 
appropriateness of model inputs and re sults and focus on both finding and 
limiting potential errors a ssociated with known wea knesses and identifying 
unknown model weaknesses. Su ch reviews may be condu cted by an internal 
independent unit, or by an indepe ndent external third party.  
(c) Adequate systems and procedures for m onitoring investment limits and the risk 
exposures of equity exposures.  
(d) The units responsible for the design and application of the model shall be 
functionally independent from the units  responsible for managing individual 
investments.  
(e) Parties responsible for any aspect of the modelling process sh all be adequately 
qualified. Management shall allocate sufficient skilled and competent resources 
to the modelling function. 
4.3. Validation and documentation  
116. Credit institutions shall have a robust syst em in place to validate the accuracy and 
consistency of their internal models and modelling processes. All material elements 
of the internal models and the modelling pr ocess and validation shall be documented.  
 
EN 59   EN 117. Credit institutions shall use the internal validation process to assess the performance 
of its internal models and processes in  a consistent and meaningful way.  
118. The methods and data used for quantitati ve validation shall be  consistent through 
time. Changes in estimation and validation methods and data (both data sources and 
periods covered) shall be documented.  
119. Credit institutions shall regularly compar e actual equity returns (computed using 
realised and unrealised gains and losses) with modelled estimates. Such comparisons 
shall make use of historical data that is over as long a period as possible. The credit 
institution shall document the methods and data used in such comparisons. This 
analysis and documentation shall be updated at least annually.  
120. Credit institutions shall make use of other quantitative va lidation tools and 
comparisons with external data sources. The analysis shall be based on data that are 
appropriate to the portfolio, are updated regularly, and cover a relevant observation 
period. Credit institutions’ internal assessmen ts of the performance of their models 
shall be based on as long a period as possible.  
121. Credit institutions shall have sound internal standards for situations where 
comparison of actual equity returns with the models estimates calls the validity of the 
estimates or of the models as such into question. These standards shall take account 
of business cycles and similar systematic  variability in equity returns. All 
adjustments made to internal models in response to mode l reviews shall be 
documented and consistent with the credit institution’s model review standards.  
122. The internal model and the modelling pro cess shall be documen ted, including the 
responsibilities of parties involved in th e modelling, and the model approval and 
model review processes.  
5. CORPORATE GOVERNANCE AND OVERSIGHT  
5.1. Corporate Governance 
123. All material aspects of the rating and es timation processes shall be approved by the 
credit institution’s board of  directors or a designated committee thereof and senior 
management. These parties shall possess a general understanding of the credit 
institution’s rating systems and detailed comp rehension of its associated management 
reports. 
124. Senior management shall provide notice to  the board of directors or a designated 
committee thereof of material changes or ex ceptions from established policies that 
will materially impact the operations of th e credit institution’s rating systems.  
125. Senior management shall have a good unde rstanding of the rating systems designs 
and operations. Senior management shall en sure, on an ongoing basis that the rating 
systems are operating properly. Senior mana gement shall be regularly informed by 
the credit risk control units about the pe rformance of the rating process, areas 
needing improvement, and the status of ef forts to improve previously identified 
deficiencies.  
 
EN 60   EN 126. Internal ratings-based analysis of the credit institution's credit risk profile shall be an 
essential part of the management reporting to  these parties. Reporting shall include at 
least risk profile by grade, migration acr oss grades, estimation of the relevant 
parameters per grade, and comparison of re alised default rates and own estimates of 
LGDs and conversion factors against expectations and st ress-test results. Reporting 
frequencies shall depend on the significance a nd type of information and the level of 
the recipient.  
5.2. Credit risk control 
127. The credit risk control unit shall be inde pendent from the personal and management 
functions responsible for originating or rene wing exposures and th at reports directly 
to senior management. The unit shall be responsible for the design or selection, 
implementation, oversight and performance of  the rating systems. It shall regularly 
produce and analyse reports on the ou tput of the rating systems.  
128. The areas of responsibility for the cred it risk control unit (s) shall include:  
(a) Testing and monitoring grades and pools; 
(b) Production and analysis of summary repor ts from the credit institution’s rating 
systems;  
(c) Implementing procedures to verify that grade and pool definitions are 
consistently applied across depa rtments and geographic areas;  
(d) Reviewing and documenting any change s to the rating process, including the 
reasons for the changes; 
(e) Reviewing the rating criteria to evaluate if they remain predictive of risk. 
Changes to the rating process, criteria or  individual rating pa rameters shall be 
documented and retained; 
(f) Active participation in the design or selection, implementation and validation 
of models used in the rating process;  
(g) Oversight and supervision of mode ls used in the rating process;  
(h) Ongoing review and alterations to models used in the rating process .  
129. Notwithstanding paragraph 128, credit ins titutions using pooled data according to 
paragraphs 57 and 58 may outs ource the following tasks:  
(a) Production of information relevant to testing and monitoring grades and pools; 
(b) Production of summary re ports from the credit institution’s rating systems; 
(c) Production of information relevant to revi ew of the rating crite ria to evaluate if 
they remain predictive of risk; 
(d) Documentation of changes to the rating process, criteria or  individual rating 
parameters; 
 
EN 61   EN (e) Production of information relevant to ongoing review and alte rations to models 
used in the rating process . 
Credit institutions making use of this pa ragraph shall ensure that the competent 
authorities have access to all relevant in formation from the third party that is 
necessary for examining compliance with the minimum requirements and that the 
competent authorities may perform on-site ex aminations to the same extend as within 
the credit institution. 
5.3. Internal Audit 
130. Internal audit shall review at least annually the credit institution’s rating systems and 
its operations, including the operations of the credit function and the estimation of 
PDs, LGDs, ELs and conversion factors. Areas  of review shall include adherence to 
all applicable minimum requirements. 
 
EN 62   EN ANNEX VIII – Credit risk mitigation  
 
Part 1- Eligibility  
1. This Part sets out eligible forms of credit risk mitigation for the purposes of Article 
92. 
2. For the purposes of this Annex: 
‘Secured lending transaction’ shall mean a ny transaction giving rise to an exposure 
secured by collateral which does not include a provision conferring upon the credit 
institution the right to receive margin frequently. 
‘Capital market-driven transaction’ shall m ean any transaction giving rise to an 
exposure secured by collateral which in cludes a provision conf erring upon the credit 
institution the right to receive margin frequently.  
1. FUNDED CREDIT PROTECTION  
1.1. On-balance sheet netting 
3. The on-balance sheet netting of mutual clai ms between the credit institution and its 
counterparty may be recognised.  
4. Without prejudice to paragraph 5,  eligibility is limited to reciprocal cash balances 
between the credit instituti on and the counterparty. Only loans and deposits of the 
lending credit institution may be  subject to a modification of risk-weighted exposure 
amounts and, as relevant, expected loss amoun ts as a result of an on-balance sheet 
netting agreement.  
1.2. Master netting agreements covering repur chase transactions and/or securities 
or commodities lending or borrowing transactions and/or other capital market-
driven transactions 
5. For credit institutions adopting the Financial Collateral Comprehensive Method 
under Part 3 of this Annex, the effects of bilateral netti ng contracts covering 
repurchase transactions, securities or co mmodities lending or borrowing transactions, 
and/or other capital market-driven tran sactions with a counterparty may be 
recognised. Without prejudice to Annex II of  Directive [93/6/EEC] to be recognised 
the collateral taken and securities or co mmodities borrowed within such agreements 
must comply with the eligibility requirements  for collateral set out at paragraphs 7 to 
11. 
1.3. Collateral 
6. Where the credit risk mitigation technique used relies on the right of the credit 
institution to liquidate or retain asse ts, eligibility depends upon whether risk-
weighted exposure amounts, and, as relevant , expected loss amount s, are calculated 
under Articles 78 to 83 or Articles 84 to 89.  Eligibility further depends upon whether 
the Financial Collateral Simple Method is used or the Financial Collateral 
 
EN 63   EN Comprehensive Method under Part 3. In re lation to repurchase transactions and 
securities or commodities lending or borrowi ng transactions, eligibility also depends 
upon whether the transaction is  booked in the non-tradi ng book or the trading book. 
1.3.1.  Eligibility under all approaches and methods 
7. The following financial items may be recogn ised as eligible collateral under all 
approaches and methods: 
(a) Cash on deposit with, or cash assim ilated instruments held by, the lending 
credit institution. 
(b) Debt securities issued by central gove rnments or central banks which securities 
have a credit assessment by an ECAI or export credit agency recognised as 
eligible for the purposes of Articles 78 to 83 which has been determined by the 
competent authority to be associated w ith credit quality step 4 or above under 
the rules for the risk weighting of expos ures to central governments and central 
banks under Articles 78 to 83. 
(c) Debt securities issued by institutions which securities have a credit assessment 
by an eligible ECAI which has been determined by the competent authority to 
be associated with credit quality step 3 or above under the rules for the risk 
weighting of exposures to credit in stitutions under Articles 78 to 83. 
(d) Debt securities issued by other entit ies which securities have a credit 
assessment by an eligible ECAI which has been determined by the competent 
authority to be associated with credit qua lity step 3 or above  under the rules for 
the risk weighting of exposures to corporates under Articles 78 to 83; 
(e) Debt securities with a short-term cr edit assessment by an eligible ECAI which 
has been determined by the competent auth ority to be associated with credit 
quality step 3 or above under the rules for the risk weighting of short term 
exposures under Articles 78 to 83; 
(f) Equities or convertible bonds that  are included in a main index;  
(g) Gold. 
For the purposes of sub-paragraph (b), ‘deb t securities issued by central governments 
or central banks shall be deemed to include – 
(i) debt securities issued by  regional governments or lo cal authorities exposures to 
which are treated as exposures to the cen tral government in whose jurisdiction 
they are established under Annex VI; 
(ii) debt securities issued by multilateral development banks to which a 0% risk 
weight is applied unde r Articles 78 to 83; 
(iii) debt securities issued by interna tional organisations wh ich are assigned a 0% 
risk weight under Articles 78 to 83; 
For the purposes of sub-paragraph (c), ‘debt securities issued by institutions’ include 
 
EN 64   EN (i) ebt securities issued by regional go vernments or local authorities other than 
those exposures to which ar e treated as exposures to the central government in 
whose jurisdiction they are esta blished under Articles 78 to 83; 
(ii) debt securities issued by public sector en tities, exposures to  which are treated 
as exposures to credit institutions under Articles 78 to 83; 
(iii) debt securities issued by multilateral development banks other than those to 
which a 0% risk weight  is applied under; 
8. Debt securities issued by institutions whic h securities do not have a credit assessment 
by an eligible ECAI may be recognised as eligible collateral if they fulfil the 
following criteria: 
(a) they are listed on a recognised exchange; 
(b) they qualify as senior debt; 
(c) all other rated issues by the issuing institution of the same seniority having a 
credit assessment by a recognised ECAI have a credit assessment by an eligible 
ECAI which has been determined by the competent authorities to be associated 
with credit quality step 3 or above under the rules fo r the risk weighting of 
exposures to institutions or short te rm exposures under Articles 78 to 83. 
(d) the lending credit instit ution has no information to s uggest that the issue would 
justify a credit assessment below that indicated in (c);   
(e) the credit institution can demonstrate to the competent authorities that the 
market liquidity of the instrument is sufficient for these purposes. 
9. Units in collective investment  undertakings may be recognise d as eligible collateral 
if the following condi tions are satisfied: 
(a) they have a daily public price quote; 
(b) the collective investment undertaking is limited to investing in instruments that 
are eligible for recogniti on under paragraphs 7 and 8. 
The use (or potential use) by a collectiv e investment undertak ing of derivative 
instruments to hedge permitted investme nts shall not prevent units in that 
undertaking from being eligible. 
10. In relation to points (b) to (e) of Paragr aph 7, where a security has two credit 
assessments by eligible ECAIs, the less fa vourable assessment shall be deemed to 
apply. In cases where a security has more  than two credit assessments by eligible 
ECAIs, the two most favourable assessments shall be deemed to apply. If the two 
most favourable credit assessments are differe nt, the less favourable  of the two shall 
be deemed to apply.  
 
EN 65   EN 1.3.2.  Additional eligib ility under the Financial Coll ateral Comprehensive Method  
11. In addition to the collateral set out in para graphs 7 to 10, where a credit institution 
uses the Financial Collateral Comprehe nsive Method under Part 3, the following 
financial items may be recogni sed as eligible  collateral: 
(a) Equities or convertible bonds not incl uded in a main index but traded on a 
recognised exchange. 
(b) Units in collective investment undertak ings if the following conditions are met: 
(i) they have a daily public price quote; and 
(ii) the collective investment  undertaking is limited to i nvesting in instruments that 
are eligible for recognition under paragra ph 7 and 8 and the items mentioned in 
the point (a) of this paragraph. 
The use (or potential use) by a collectiv e investment undertak ing of derivative 
instruments to hedge permitted investme nts shall not prevent units in that 
undertaking from being eligible. 
1.3.3.  Additional eligib ility for calculations  underArticles 84 to 89 
12. In addition to the collateral set out above the provisions of  paragraphs 13 to 22 apply 
where a credit institution calculates risk -weighted exposure amounts and expected 
loss amounts under the approach se t out in Articles 84 to 89: 
(a) Real estate collateral 
13. Residential real estate propert y which is or will be occupied or let by the owner and 
commercial real estate i.e. offices and other commercial premises may be recognised 
as eligible collateral where th e following conditions are met: 
(a) The value of the property does not ma terially depend upon the credit quality of 
the obligor. This requirement is not intended to preclude situations where 
purely macro-economic factors affect bot h the value of the property and the 
performance of the borrower. 
(b) The risk of the borrower does not materially depend upon the performance of 
the underlying property or project, but rather on the underlyi ng capacity of the 
borrower to repay the debt from othe r sources. As such, repayment of the 
facility does not materially depe nd on any cash flow generated by the 
underlying property serv ing as collateral. 
14. Credit institutions may also recognise as eligible collateral shares in Finnish 
residential housing companies operating in  accordance with the Finnish Housing 
Company Act of 1991 or subseque nt equivalent legislation in respect of residential 
property which is or will be occupied or le t by the owner, as residential real estate 
collateral, provided that these conditions are met. 
15. The competent authorities may also authoris e their credit institutions to recognise as 
eligible collateral shares in Finnish housing companies operating in accordance with 
 
EN 66   EN the Finnish Housing Company Act of 1991 or subsequent equivale nt legislation as 
commercial real estate collateral, prov ided that these conditions are met. 
16. The competent authorities may waive the requirement for their credit institutions to 
comply with condition (b) in paragraph 13 for exposures secured by residential real 
estate property situated within the territory  of that Member State, if the competent 
authorities have evidence that the rele vant market is we ll-developed and long-
established with loss-rates which are sufficien tly low to justify such action. This shall 
not prevent the competent authorities of a Member State, wh ich do not use this 
waiver from recognising as eligible reside ntial real estate pr operty recognised as 
eligible in another Member State by virt ue of the waiver. Member States shall 
disclose publicly the use they make of this waiver. 
17. The competent authorities of the Member St ates may waive the requirement for their 
institutions to comply with condition (b) in paragraph 13 for comm ercial real estate 
property situated within the territory of  that Member State, if the competent 
authorities have evidence that the rele vant market is we ll-developed and long-
established and that loss-rates stemming from lending secured by commercial real 
estate propery satisfy the following conditions: 
(a) up to 50 % of the market value (or wh ere applicable and if lower 60 % of the 
mortgage-lending-value) does not exceed  0.3 % of the outstanding loans 
secured by commercial real esta te property in any given year. 
(b) overall losses stemming from lendi ng secured by commercial real estate does 
not exceed 0.5 % of the outstandi ng loans in any given year.  
18. If either of these conditions is not satisfied in a given year, the e ligibility to use this 
treatment will cease until th e conditions are satisfied in a subsequent year.  
19. The competent authorities of a Member State, which do not use the waiver in 
paragraph 17, may recognise as eligible commercial real estate property recognised 
as eligible in another Member State by virtue of the waiver.  
(b) Receivables 
20. The competent authorities may recognise as  eligible collateral amounts receivable 
linked to a commercial transaction or transact ions with an original maturity of less 
than or equal to one year. Eligible receiv ables do not include those associated with 
securitisations, sub-participations or credit  derivatives or amounts owed by affiliated 
parties. 
(c) Other physical collateral 
21. The competent authorities may recognise as eligible collateral physical items of a 
type other than those types indicated in pa ragraphs 13 to 19 if satisfied as to the 
following: 
(a) the existence of liquid markets for dispos al of the collateral in an expeditious 
and economically efficient manner; and 
 
EN 67   EN (b) the existence of well-established, publicly available market prices for the 
collateral. The institution must be able to demonstrate that there is no evidence 
that the net prices it receives when colla teral is realised deviates significantly 
from these market prices. 
(d) Leasing 
22. Subject to the provisions of Part 3, Paragraph 73, where the requirements set out in 
Part 2, paragraph 11 are met, exposures arising from transactions whereby a credit 
institution leases property to a third party will be treated the same as loans 
collateralised by the type of property leased.  
1.4. Other funded credit protection 
1.4.1.  Cash on deposit with, or cash assimilate d instruments held by, a third party 
institution. 
23. Cash on deposit with, or cash assimilated instruments held by, a third party 
institution in a non-custodial arrangeme nt and pledged to the lending credit 
institution may be recognised as  eligible credit protection.  
1.4.2.  Life insurance policies pledged to the lending credit institution 
24. Life insurance policies pledged to the lendi ng credit institution may be recognised as 
eligible credit protection.  
1.4.3.  Institution instruments repurchased on request 
25. Instruments issued by third party institutions which w ill be repurchased by that 
institution on request may be recogn ised as eligible credit protection. 
2. UNFUNDED CREDIT PROTECTION  
2.1. Eligibility of protection providers under all approaches 
26. The following parties may be recognised as eligible provi ders of unfunded 
protection: 
(a) Central governments and central banks;  
(b) regional governments or  local authorities;  
(c) multi-lateral development banks; 
(d) international organisations exposures to which receive a 0% risk weight under 
Articles 78 to 83; 
(e) public sector entities, claims on whic h are treated by the co mpetent authorities 
as claims on institutions  under Articles 78 to 83; 
(f) institutions; 
 
EN 68   EN (g) Other corporate entities, including parent, subsidiary and affiliate corporate 
entites of the credit institution, that  
(i) have a credit assessment by a recognis ed ECAI which has b een determined by 
the competent authorities to be associated with credit  quality step 2 or above 
under the rules for the risk weighting of exposures to corporates under Articles 
78 to 83;  
(ii) in the case of credit institutions calculating risk-weighted exposure amounts 
and expected loss amounts under Artic les 84 to 89, do not have a credit 
assessment by a recognised ECAI and are internally rated as having a 
probability of default equivalent to that associated with the credit assessments 
of ECAIs determined by the competent authorities to be associated with credit 
quality step 2 or above under the rules fo r the risk weighting of exposures to 
corporates under Articles 78 to 83. 
27. Where risk-weighted exposure amounts a nd expected loss amounts are calculated 
under Articles 84o 89, to be eligible a guarant or must be internally rated by the credit 
institution in accordance with the pr ovisions of Annex VII, Part 4. 
28. By way of derogation from paragraph 26, th e Member States may also recognise as 
eligible providers of unfunded protection, other financial institutions authorised and 
supervised by the competent authorities responsible for the authorisation and 
supervision of credit institutions and subjec t to prudential requirements equivalent to 
those applied to credit institutions. 
3. TYPES OF CREDIT DERIVATIVES  
29. The following types of credit derivatives, a nd instruments that may be composed of 
such credit derivatives or that are ec onomically effectively similar, may be 
recognised as eligible. 
(a) credit default swaps 
(b) total return swaps 
(c) credit linked notes to th e extent of their cash funding 
30. Where a credit institution buys  credit protection through a total return  swap and 
records the net payments received on the swap as net income, but does not record 
offsetting deterioration in th e value of the asset that is protected (either through 
reductions in fair value or by an addition to  reserves), the credit protection shall not 
be recognised.  
3.1. Internal hedges 
31. When a credit institution conducts  an internal hedge using a credit derivative - i.e. 
hedges the credit risk of an exposure in the non-trading book with a credit derivative 
booked in the trading book - in order for th e protection to be recognised for the 
purposes of this Annex the credit risk transferred to the trading book shall be 
transferred out to a third party or partie s. In such circumstances, subject to the 
 
EN 69   EN compliance of such transfer with the requi rements for the recognition of credit risk 
mitigation set out in this Annex, the ru les for the calculation of risk-weighted 
exposure amounts and expected loss amount s where unfunded credit protection is 
acquired set out in Parts 3 to 6 shall be applied. 
 
EN 70   EN Part 2 - Minimum Requirements  
1. The credit institution must satisfy the competen t authorities that it  has adequate risk 
management processes to control those risk s to which the credit institution may be 
exposed as a result of carrying out  credit risk mitigation practices.  
2. Notwithstanding the presence of credit ri sk mitigation taken into account for the 
purposes of calculating risk-weighted expos ure amounts and as re levant expected 
loss amounts, credit institutions shall c ontinue to undertake full credit risk 
assessment of the underlying exposure and be in a position to demonstrate the 
fulfilment of this requirement to the comp etent authorities. In the case of repurchase 
transactions and/or securities or commodities lending or borrowing transactions the 
underlying exposure shall, for the purposes of  this paragraph only, be deemed to be 
the net amount of the exposure.  
1. FUNDED CREDIT PROTECTION  
1.1. On-balance sheet netting (other than  master netting agreements covering 
repurchase transactions, securities or commodities lending or borrowing 
transactions and/or other capital market-driven transactions) 
3. For on-balance sheet netting agreements - other than master netting agreements 
covering repurchase transactions, securitie s or commodities lending or borrowing 
transactions and/or other capita l market-driven transactions - to be recognised for the 
purposes of Articles 90 to 93 the follow ing conditions shall be satisfied:  
(a) they must have a well-founded legal basis and be legally enforceable under 
applicable law, including in the event of the insolvency or bankruptcy of a 
counterparty; 
(b) the credit institution must be able to  determine at any time those assets and 
liabilities that are subject to the netting agreement; 
(c) the credit institution must monitor and control the risks associated with the 
termination of the credit protection;  
(d) the credit institution must monitor and control the relevant exposures on a net 
basis. 
1.2. Master netting agreements covering repur chase transactions and/or securities 
or commodities lending or borrowing transactions and/or other capital market 
driven transactions 
4. For master netting agreements covering repu rchase transactions and/or securities or 
commodi.ties lending or borrowi ng transactions and/or othe r capital market driven 
transactions to be recognis ed for the purposes of Articles 90 to 93, they shall:  
(a) have a well founded legal basis and be legally enforceable under applicable 
law, including in the event of the bankruptcy or insolv ency of the counterparty  
 
EN 71   EN (b) give the non-defaulting party the right  to terminate and close-out in a timely 
manner all transactions under the ag reement upon the event of default, 
including in the event of  the bankruptcy or insolv ency of the counterparty 
(c) provide for the netting of gains and losses on transactions closed out under a 
master agreement so that a single net am ount is owed by one party to the other. 
5. In addition the minimum requirements for the recognition of financial collateral 
under the Financial Collateral  Comprehensive Method set ou t in paragraph 6 shall be 
fulfilled. 
1.3. Financial collateral 
1.3.1.  Minimum requirements for the recogni tion of financial collateral under all 
Approaches and Methods 
6. For the recognition of financial collateral an d gold, the following conditions shall be 
met: 
(a) Low correlation 
The credit quality of the obligor and the value of the collatera l must not have a 
material positive correlation.  
Securities issued by the ob ligor, or any related group entity are not eligible. 
(b) Legal certainty 
Credit institutions shall fulfil any contract ual and statutory requirements in respect 
of, and take all steps necessary to ensure , the enforceability of the collateral 
arrangements under the law applicable to  their interest in  the collateral. 
Credit institutions shall have conducted su fficient legal review confirming the 
enforceability of the collateral arrangements in all relevant jurisdictions. They shall 
re-conduct such review as necessary to ensure continuing enforceability. 
(c) Operational requirements  
The collateral arrangements shall be prope rly documented, with a clear and robust 
procedure for the timely liquidation of collateral. 
Credit institutions shall employ robust pro cedures and processe s to control risks 
arising from the use of collateral – incl uding risks of failed or reduced credit 
protection, valuation risks,  risks associated with the termination of the credit 
protection, concentration risk  arising from the use of collateral and the interaction 
with the credit institution’s overall risk profile. 
The credit institution shall have documented  policies and practices concerning the 
types and amounts of collateral accepted. 
Credit institutions shall calculate the market  value of the collateral, and revalue it 
accordingly, with a minimum frequency of once every six months and whenever the 
 
EN 72   EN credit institution has reason to believe that there has occurred a significant decrease 
in its market value.  
Where the collateral is held by a third party, credit institutions must take reasonable 
steps to ensure that the third party segr egates the collateral from its own assets. 
1.3.2.  Additional minimum requirements for the recognition of financial collateral under 
the Financial Collatera l Simple Method  
7. In addition to the requirements set out in  paragraph 6 above, for the recognition of 
financial collateral under the Financial Collateral Simple Method the residual 
maturity of the protection must be at leas t as long as the resi dual maturity of the 
exposure. 
1.4. Minimum requirements for the recogn ition of real estate collateral  
8. For the recognition of real estate collateral the following conditions shall be met: 
(a) Legal certainty 
The mortgage or charge shall be legally en forceable in all relevant jurisdictions, and 
the mortgage or charge shall be properly filed on a timely basis. The arrangements 
shall reflect a perfected lien (i.e. all lega l requirements for esta blishing the pledge 
shall been fulfilled). The protection agreement and the legal process underpinning it 
shall enable the credit institution to r ealise the value of the protection within a 
reasonable timeframe. 
(b) Monitoring of property values 
The value of the property shall be monito red on a frequent basi s and at a minimum 
once every year. More frequent monitoring sh all be carried out where the market is 
subject to significant changes in conditions . Statistical methods may be used to 
monitor the value of the property and to id entify property that needs revaluation. The 
property shall be valued by an  independent valuer when information indicates that 
the value of the property may have declined  materially relative to general market 
prices. For loans exceeding EUR 3 million or  5% of the own f unds of the credit 
institution, the property shall be evaluate d by an independent valuer at least every 
three years.  
‘Independent valuer’ shall m ean a person who possesses th e necessary qualifications, 
ability and experience to execute a valuati on and who is independent from the credit 
decision process. 
(c) Documentation 
The types of residential and commercial real  estate accepted by the credit institution 
and its lending policies in this regard shall be clearly documented. 
(d) Insurance 
The credit institution shall have procedures  to monitor that the property taken as 
protection is adequately insured against damage. 
 
EN 73   EN 1.5. Minimum requirements for the recogn ition of receivables as collateral 
9. For the recognition of receivables th e following conditions shall be met: 
(a) Legal certainty 
(i) The legal mechanism by which the collateral is provided shall be robust and 
effective and ensure that the lender has clear rights over the proceeds.  
(ii) Credit institutions must take all step s necessary to fulfil local requirements in 
respect of the enforceability of secur ity interest. There shall be a framework 
which allows the lender to have a first priority claim over the collateral subject 
to national discretion to allow such clai ms to be subject to the claims of 
preferential creditors provided for in legislative or implementing provisions. 
(iii) Credit institutions shal l have conducted sufficient le gal review confirming the 
enforceability of the collat eral arrangements in all relevant jurisdictions. 
(iv) The collateral arrangements must be  properly documented, with a clear and 
robust procedure for the timely collecti on of collateral. Credit institutions 
procedures shall ensure that any lega l conditions required for declaring the 
default of the customer and timely collec tion of collateral ar e observed. In the 
event of the borrower’s financial distress or default, the credit institution shall 
have legal authority to sell or assign the receivables to other parties without 
consent of the receivables obligors.  
(b) Risk management 
(i) The credit institution must have a sound process for determining the credit risk 
associated with the receivables. Such  a process shall include, among other 
things, analyses of the borrower’s bus iness and industry and the types of 
customers with whom the borrower does business. Where the credit institution 
relies on the borrower to ascertain the cr edit risk of the customers, the credit 
institution must review the borrower’s  credit practices to ascertain their 
soundness and credibility.  
(ii) The margin between the amount of the exposure and the value of the 
receivables must reflect all appropriate f actors, including the cost of collection, 
concentration within the receivables pool pledged by an individual borrower, 
and potential concentration risk within the credit institution’s total exposures 
beyond that controlled by the credit in stitution’s general methodology. The 
credit institution must maintain a con tinuous monitoring process appropriate to 
the receivables. Observance of the credit institution’s overall concentration 
limits shall be monitored. Additionally, compliance with loan covenants, 
environmental restrictions, and other lega l requirements shall be reviewed on a 
regular basis. 
(iii) The receivables pledged by a borrowe r shall be diversif ied and not be unduly 
correlated with the borrower. Where ther e is material positive correlation, the 
attendant risks shall be ta ken into account in the se tting of margins for the 
collateral pool as a whole.  
 
EN 74   EN (iv) Receivables from affiliates of the borrower (including subsidiaries and 
employees) shall not be recognised as risk mitigants.  
(v) The credit institution shall have a docu mented process for collecting receivable 
payments in distressed situations. The re quisite facilities for collection shall be 
in place, even when the credit institution normally looks to  the borrower for 
collections. 
1.6. Minimum requirements for the recognit ion of other physical collateral  
10. For the recognition of other physical collateral the followi ng conditions shall be met: 
(a) The collateral arrangement shall be legally enforceable under all applicable 
laws and shall enable the credit institution to realise the value of the property 
within a reasonable timeframe. 
(b) With the sole exception of permissible prior claims referred to in paragraph 
9(a)(ii), only first liens on, or charges ove r, collateral are permissible. As such, 
the credit institution shall have priority over all other lenders to the realised 
proceeds of the collateral.  
(c) The value of the property shall be monitored on a frequent basis and at a 
minimum once every year. More frequent monitoring shall be  required where 
the market is subject to signi ficant changes in conditions.  
(d) The loan agreement shall include detail ed descriptions of the collateral plus 
detailed specifications of the manne r and frequency of revaluation.  
(e) The types of physical collateral accep ted by the credit institution and policies 
and practices in respect of the appropria te amount of each type of collateral 
relative to the exposure amount shall be clearly documented in internal credit 
policies and procedures available for examination. 
(f) The credit institution’s credit policies w ith regard to the transaction structure 
shall address appropriate collateral requirements relativ e to the exposure 
amount, the ability to liquidate the colla teral readily, the ab ility to establish 
objectively a price or market value, th e frequency with which the value can 
readily be obtained (including a profe ssional appraisal or valuation), and the 
volatility of the value of the collateral. 
(g) Both initial valuation and revalua tion shall take fully into account any 
deterioration or obsolescence of the collate ral. Particular attention must be paid 
in valuation and revaluation to the effect s of the passage of time on fashion- or 
date-sensitive collateral. 
(h) The credit institution must have the right to phsically inspect the property. It 
shall have policies and procedures addr essing its exercise of the right to 
physical inspection. 
(i) The credit institution must have proce dures to monitor that the property taken 
as protection is adequately insured against damage. 
 
EN 75   EN 1.7. Minimum requirements for treating lease exposures as collateralised 
11. For the exposures arising from leasing trans actions to be treated as collateralised by 
the type of property leased, the following conditions shall be met: 
(a) The conditions set out in paragraphs 8 or 10 as appropriate for the recognition 
as collateral of the type of  property leased shall be met; 
(b) There shall be robust risk management on the part of the lessor with respect to 
the location of the asset, the use to  which it is put, its age, and planned 
obsolescence; 
(c) There shall be in place a robust legal framework esta blishing the lessor’s legal 
ownership of the asset and its ability to ex ercise its rights as owner in a timely 
fashion; and 
(d) The difference between the rate of de preciation of the physical asset and the 
rate of amortisation of the lease payments  must not be so large as to overstate 
the credit risk mitigation attri buted to the leased assets. 
1.8. Minimum requirements for the recognitio n of other funded credit protection 
1.8.1.  Cash on deposit with, or cash assimilate d instruments held by, a third party 
institution 
12. To be eligible for the treatment set out at Part 3, Paragraph 80, the protection referred 
to in Part 1, paragraph 23 must  satisfy the following conditions: 
(a) The borrower’s claim against the third party institution is openly pledged or 
assigned to the lending credit institution; 
(b) The third party institution is no tified of the pledge or assignment; 
(c) As a result of the notification, the third party institution is able to make 
payments solely to the lending credit in stitution or to other parties with the 
lending credit institution’s consent. 
(d) The pledge or assignment is unconditional and irrevocable. 
1.8.2.  Life insurance policies pledged to the lending credit institution. 
13. For life insurance policies pledged to the lending credit institution to be recognised 
the following conditions shall be met: 
(a) the company providing the life insura nce may be recognised as an eligible 
unfunded protection provider unde r Part 1, paragraph 26; 
(b) the life insurance policy is openly pl edged or assigned to  the lending credit 
institution; 
 
EN 76   EN (c) the company providing the life insu rance is notified of the pledge or 
assignment and as a result may not cancel  the contract or pay amounts payable 
under the contract without the consen t of the lending credit institution; 
(d) the policy must have a declared surrender value which is a non-reducible 
amount; 
(e) the lending credit institution must have the right to cancel the policy and 
receive the surrender value in a timely way in the event of the default of the 
borrower; 
(f) the lending credit institution is in formed of any non-payments under the policy 
by the policy-holder; 
(g) the credit protection must be provided for the maturity of the loan; and  
(h) the pledge must be legally enforceable in all relevant jurisdictions. 
2. UNFUNDED CREDIT PROTECTION AND CREDIT LINKED NOTES  
2.1. Requirements common to guarantees and credit derivatives 
14. Subject to paragraph 16, for the credit prot ection deriving from a guarantee or credit 
derivative to be rec ognised the following c onditions shall be met: 
(a) The credit protection shall be direct.  
(b) The extent of the credit protection sha ll be clearly defined and incontrovertible. 
(c) The credit protection cont ract shall not contain any clause, the fulfilment of 
which is outside the direct control of the lender, that: 
(i) would allow the protection provider un ilaterally to cancel the protection;  
(ii) would increase the effective cost of pr otection as a result of deteriorating credit 
quality of the protected exposure; 
(iii) could prevent the protec tion provider from being oblig ed to pay out in a timely 
manner in the event that the original obli gor fails to make any payments due; or 
(iv) could allow the maturity of the credit  protection to be re duced by the protection 
provider. 
(d) It must be legally enforceable in all relevant jurisdictions. 
2.1.1.  Operational requirements 
15. The credit institution shall satisfy its supe rvisor that it has systems in place to 
manage potential concentration of risk ar ising from the credit institution’s use of 
guarantees or credit derivatives. The credit institution must be able to demonstrate 
how its strategy in respect of  its use of credit  derivatives and guarantees interacts 
with its management of its overall risk profile.  
 
EN 77   EN 2.2. Sovereign and other public sector counter-guarantees 
16. Where an exposure is protected by a gua rantee which is counter-guaranteed by a 
central government or central bank, a regiona l government or local authority claims 
on which are treated as claims on the s overeign in whose jurisdiction they are 
established under Articles 78 to 83, a multi- lateral development bank to which a 0% 
risk weight is applied under or by virtue of  Articles 78 to 83, or a public sector entity 
claims on which are treated as claims on cr edit institutions under Articles 78 to 83, 
the exposure may be treated as protected by a guarantee provided by the entity in 
question provided the followi ng conditions are satisfied: 
(a) the counter-guarantee covers all cr edit risk elements of the claim; 
(b) both the original guarantee and the counter-guarantee meet  the requirements 
for guarantees set out in paragraphs 14,  15 and 17, except  that the counter-
guarantee need not be direct; 
(c) the competent authority is satisfied th at the cover is robus t and that nothing in 
the historical evidence sugge sts that the coverage of  the counter-guarantee is 
less than effectively equivalent to that of a direct guarantee by the entity in 
question. 
2.3. Additional requirements for guarantees  
17. For a guarantee to be recognised the fo llowing conditions shall also be met: 
(a) On the qualifying default/non-payment of  the counterparty, the lending credit 
institution shall have the right to purs ue, in a timely manner, the guarantor for 
any monies due under the claim in respect  of which the protection is provided. 
Payment by the guarantor shall not be s ubject to the lending credit institution 
first having to pursue the oligor. 
(b) The guarantee shall be an explicit ly documented obligation assumed by the 
guarantor.  
(c) Subject to the following sentence, the guarantee shall c over all types of 
payments the obligor is expected to make  in respect of the claim. Where certain 
types of payment are excluded from the guarantee, the recognised value of the 
guarantee shall be adjusted to reflect the limited coverage.  
18. In the case of guarantees provided in the context of mutual guarantee schemes 
recognised for these purposes by the co mpetent authorities or provided by or 
counter-guaranteed by entities referred to in paragraph 16, the requirements in 
paragraph (a) may be considered to be satisfied where either of the following 
conditions are met:  
(a) the competent authorities are satisfied that the lendi ng credit institution has the 
right to obtain in a timely manner a provisional payment by the guarantor 
calculated to represent a robust estimate of the am ount of the economic loss, 
including losses resu lting from the non-payment of interest and other types of 
payment which the borrower is obliged to make, likely to be incurred by the 
lending credit institution pr oportional to the coverage of the guarantee;  
 
EN 78   EN (b) the competent authorities are otherwise satisfied as to the loss-protecting 
effects of the guarantee, including losses resulting from the non-payment of 
interest and other types of payment wh ich the borrower is obliged to make.  
2.4. Additional requirements for credit derivatives 
19. For a credit derivative to be recognised the following conditions shall also be met: 
(a) Subject to (b), the credit events spec ified under the credit derivative shall at a 
minimum include: 
(i) the failure to pay the amounts due unde r the terms of the underlying obligation 
that are in effect at the time of such failure (with a grace pe riod that is closely 
in line with or shorter than the grace period in the underlying obligation); and 
(ii) the bankruptcy, insolvency or inability  of the obligor to pay its debts, or its 
failure or admission in writing of its inability generally to pay its debts as they 
become due, and analogous events. 
(iii) the restructuring of the underlyi ng obligation involving forgiveness or 
postponement of principal, interest or fees  that results in a credit loss event (i.e. 
value adjustment or other similar de bit to the profit and loss account).  
(b) Where the credit events specified under the credit derivative do not include 
restructuring of the underlying obligation as described in the thir d indent of (a), 
the credit protection may nonetheless be r ecognised subject to a reduction in 
the recognised value as specified in Part 3, paragraph 84.  
(c) In the case of credit derivatives allo wing for cash settlement a robust valuation 
process shall be in place in order to estimate loss reliably. There shall be a 
clearly specified period for obtaining post-credit-event valuations of the 
underlying obligation.  
(d) If the protection purchaser’s right and ability to transfer the underlying 
obligation to the protection provider is required for settlement, the terms of the 
underlying obligation shall provide that a ny required consent to such transfer 
may not be unreasonably withheld.  
(e) The identity of the parties responsib le for determining whether a credit event 
has occurred shall be clearly  defined. This determina tion shall not be the sole 
responsibility of the prot ection seller. The protecti on buyer shall have the 
right/ability to inform the protection provider of the occurrence of a credit 
event; 
20. A mismatch between the underlying obligati on and the reference obligation under the 
credit derivative (i.e. the obligation us ed for the purposes of determining cash 
settlement value or the deliverable obliga tion) or between the underlying obligation 
and the obligation used for purposes of determining whether a credit event has 
occurred is permissible only if  the following conditions are met: 
 
EN 79   EN (a) the reference obligation or the oblig ation used for purposes of determining 
whether a credit event has occurred, as the case may be, ranks pari passu with 
or is junior to the underlying obligation; 
(b) the underlying obligation and the refere nce obligation or the obligation used 
for purposes of determining whether a cr edit event has occurred, as the case 
may be, share the same obligor (i.e., the same legal entity) and there are in 
place legally enforceable cross-defau lt or cross-acceleration clauses.  
 
EN 80   EN Part 3 - Calculating the effect s of credit ri sk mitigation  
1. Subject to Parts 4 to 6, where the provi sions in Parts 1 and 2 are satisfied, the 
calculation of risk-weighted exposure amount s under Subsection 1 Articles 78 to 83 
and the calculation of risk -weighted exposure amounts and expected loss amounts 
under Articles 84 to 89 may be modified in accordance with the provisions of this 
Part. 
2. Cash, securities or commodities purchased, borrowed or received under a repurchase 
transaction or securities or commodities lending or borrowing transaction shall be 
treated as collateral.  
1. FUNDED CREDIT ROTECTION  
1.1. Credit linked notes. 
3. Investments in credit linked notes issued  by the lending credit institution may be 
treated as cash collateral. 
1.2. On-balance sheet netting  
4. Loans and deposits with the lending cred it institution subject to on-balance sheet 
netting are to be treated as cash collateral. 
1.3. Master netting agreements covering repur chase transactions and/or securities 
or commodities lending or borrowing transactions and/or other capital market-
driven transactions 
1.3.1.  Calculation Of the fully -adjusted exposure value 
(a) Using the ‘Supervisory’ volatility adju stments or the ‘Own Estimates’ volatility 
adjustments approaches 
5. Subject to paragraphs 12 to  22, in calculating the ‘fully  adjusted exposure value’ 
(E*) for the exposures subjec t to an eligible master netting agreement covering 
repurchase transactions and/or securities or commodities lending or borrowing 
transactions and/or other capital mark et-driven transactions, the volatility 
adjustments to be applied shall be calculated in the manner set out below either using 
the Supervisory volatility adjustments a pproach or the Own estimates volatility 
adjustments approach as set out in paragr aphs 35 to 60 for the Financial Collateral 
Comprehensive Method. For the use of the Own estimates approach the same 
conditions and requirements shall apply as apply under the Fi nancial Collateral 
Comprehensive Method. 
6. The net position in each type of security shall be calculated by subtracting from the 
total value of the securities  of that type lent, sold or provided under the master 
netting agreement, the total value of securi ties of that type borrowed, purchased or 
received under the agreement. 
7. For the purposes of paragraph 6, type of s ecurity means securities which are issued 
by the same entity, have the same issue date , the same maturity and are subject to the 
 
EN 81   EN same terms and conditions and are subjec t to the same liquidation periods as 
indicated in paragraphs 35 to 60. 
8. The net position in each currency other than  the settlement currency of the master 
netting agreement, shall be calculated by subtracting from the total value of securities 
denominated in that currency lent, sold  or provided under the master netting 
agreement added to the amount of cash in that currency le nt or transferred under the 
agreement, the total value of securities denominated in that currency borrowed, 
purchased or received under the agreemen t added to the amount of cash in that 
currency borrowed or received under the agreement. 
9. The volatility adjustment appropriate to a gi ven type of security or cash position shall 
be applied to the positive or negative net position in the securities of that type. 
10. The foreign exchange risk (fx) volatility adjustment shall be applied to the net 
positive or negative position in each currency other than the settlement currency of 
the master netting agreement. 
11. E* shall be calculated according to the following formula: 
E* = max {0, [( ∑(E) - ∑(C)) + ∑(|net position in each security| x H sec) + + (∑|Efx| x 
Hfx)]}  
Where risk-weighted exposure amounts are cal culated under Articles 78 to 83, E is 
the exposure value for each separate expos ure under the agreement that would apply 
in the absence of the credit protection. 
Where risk-weighted exposure amounts a nd expected loss amounts are calculated 
under Articles 84 to 89, E is the exposure value for each separate exposure under the 
agreement that would apply in the absence of the credit protection. 
C is the value of the securities or commodities borrowed, purchased or received or 
the cash borrowed or received in respect of each such exposure. 
∑(E) is the sum of all Es under the agreement. 
∑(C) is the sum of all Cs under the agreement. 
Efx is the net position (positive or negative) in a given currency other than the 
settlement currency of the agreemen t as calculated under paragraph 8. 
Hsec is the volatility adjustment appropriate to a particular type of security. 
Hfx is the foreign exchange volatility adjustment. 
E* is the fully adjusted exposure value. 
(b) Using the Internal Models approach 
12. As an alternative to using the Supervisor y volatility adjustments approach or the 
Own Estimates volatility adjustments appr oach in calculating the fully adjusted 
exposure value (E*) resulting from the app lication of an eligible master netting 
 
EN 82   EN agreement covering repurchase transacti ons, securities or commodities lending or 
borrowing transactions, and/or other capital market driven transactions other than 
derivative transactions, credit institutions may be permitted to use an internal models 
approach which takes into account correlati on effects between security positions 
subject to the master netting agreement as well as the liquidity of the instruments 
concerned. Internal models used in this  approach shall provide estimates of the 
potential change in value of the unsecured exposure amount ( ∑E - ∑C). 
13. A credit institution may choose to use an inte rnal models approach independently of 
the choice it has made between the Sta ndardised Approach and the IRB Foundation 
Approach to credit risk. However, if a cred it institution seeks to use an internal 
models approach, it must do so for all counterparties and s ecurities, excluding 
immaterial portfolios where it may use the Supervisory volatility adjustments 
approach or the Own estimates volatility  adjustments approach as set out in 
paragraphs 5 to 11. 
14. The internal models approach is available to credit institutions that have received 
recognition for an internal risk-manag ement model under Anne x V of Directive 
[93/6/EEC]. 
15. Credit institutions which have not received supervisory recognition for use of such a 
model under Directive 93/6/EEC, may appl y to the competent authorities for 
recognition of an internal risk-measurement model for the purposes of these 
paragraphs. 
16. Recognition shall only be given if the compet ent authority is satisfied that the credit 
institution's risk-management system for managing the risks arising on the 
transactions covered by the master net ting agreement is c onceptually sound and 
implemented with integrity and that, in particular, the following qualitative standards 
are met: 
(a) the internal risk-measurement model used for calculation of potential price 
volatility for the transactions is clos ely integrated into the daily risk-
management process of the credit institution and serves as the basis for 
reporting risk exposures to senior management of the credit institution; 
(b) the credit institution has a risk contro l unit that is independent from business 
trading units and reports directly to senior management. The unit must be 
responsible for designing and implemen ting the credit institution's risk-
management system. It shall produce and analyse daily reports on the output of 
the risk-measurement model and on the a ppropriate measures to be taken in 
terms of position limits; 
(c) the daily reports produced by the risk-c ontrol unit are reviewed by a level of 
management with sufficient authority to enforce reductions of positions taken 
and of overall risk exposure; 
(d) the credit institution has sufficient numbers of staff skilled in the use of 
sophisticated models in the risk control unit; 
 
EN 83   EN (e) the credit institution has established procedures for monitoring and ensuring 
compliance with a documented set of internal policies and controls concerning 
the overall operation of the risk-measurement system; 
(f) the credit institution's models have a proven track record of reasonable 
accuracy in measuring risks demonstrated through the backtesting of its output 
using at least one year of data; 
(g) the credit institution frequently conducts a rigorous programme of stress testing 
and the results of these tests are review ed by senior management and reflected 
in the policies and limits it sets; 
(h) the credit institution must conduct, as  part of its regular  internal auditing 
process, an independent review of it s risk-measurement system. This review 
must include both the activities of the business trading units and of the 
independent risk-control unit; 
(i) at least once a year, th e credit institution must conduc t a review of its risk 
management system.  
17. The calculation of potential change in va lue shall be subject to the following 
minimum standards: 
(a) at least daily calculation of potential change in value; 
(b) a 99th percentile, one-tailed confidence interval; 
(c) a 5-day equivalent liquidation period, except in the case of transactions other 
than repurchase transactions or securities or commodities lending or borrowing 
transactions when a 10-day equivale nt liquidation period shall be used; 
(d) an effective historical observation pe riod of at least one year except where a 
shorter observation period is justified by a signifi cant upsurge in price 
volatility; 
(e) three-monthly data set updates. 
18. The competent authorities shall require th at the internal risk-measurement model 
captures a sufficient number of risk factors in  order to capture all material price risks. 
19. The competent authorities may allow credit institutions to use empirical correlations 
within risk categories and ac ross risk categories if they are satisfied that the 
institution's system for measuring corre lations is sound and implemented with 
integrity`. 
20. A credit institution using the internal models  approach shall be required to backtest 
the output of the model using a sample of 20 counterparties, identified on an annual 
basis. These counterparties sh all include the 10 largest as determined by the credit 
institution according to its own exposure measuremen t approach and 10 others 
selected at random. For each day and for each  counterparty, the credit institution 
should compare the actual change in the value of the exposure to the counterparty 
over a 1-day horizon with the estimated ch ange in the exposure value using the 
 
EN 84   EN internal models approach calculated as of the previous clos e of business. An 
exception occurs for each observation in which the actual change in exposure 
exceeds the internal model estimate. Depe nding on the number of exceptions in the 
observations for the 20 counterparties over the most recent 250 business days 
(encompassing 5000 observations), the estimate output of the intern al model shall be 
increased using the multiplier set out in Table 1 .  
Table 1 
Zone Number of 
exceptions Multiplier 
Green Zone  0-99  1 
  100-119  1.13 
  120-139  1.17 
Yellow Zone  140-159  1.22 
  160-179  1.25 
  180-199  1.28 
Red Zone  200 or more  1.33 
 
As part of its backtesting, the credit inst itution shall confirm that exceptions are not 
concentrated in its exposures to  one or more counterparties.  
21. The fully adjusted exposure value (E*) fo r credit institutions using the Internal 
models approach shall be calculated according to the following formula: 
E* = max {0, [( ∑E - ∑C) + (estimate output of of the internal models x multiplier as 
appropriate)]} 
Where risk-weighted exposure amounts are ca lculated under Subsection 1 Articles 
78 to 83, E is the exposure value for each separate exposure under the agreement that 
would apply in the absence of the credit protection. 
Where risk-weighted exposure amounts a nd expected loss amounts are calculated 
under Articles 84 to 89, E is the exposure value for each separate exposure under the 
agreement that would apply in the absence of the credit protection. 
C is the current market value of the securities borrowed, purchased or received or the 
cash borrowed or received in respect of each such exposure. 
∑(E) is the sum of all Es under the agreement 
∑(C) is the sum of all Cs under the agreement. 
 
EN 85   EN 22. In calculating capital requirements using internal models, credit institutions shall use 
the previous business day’s model output. 
1.3.2.  Calculating risk-weighted exposur e amounts and expected loss amounts for 
repurchase transactions and/or securities  or commodities lending or borrowing 
transactions and/or other capital market-d riven transactions covered by master 
netting agreements 
Standardised Approach 
23. E* as calculated under paragraphs 5 to 22 shall be taken as the exposure value of the 
exposure to the counte rparty arising from the trans actions subject to the master 
netting agreement for the purposes of Article 80.  
IRB Foundation Approach 
24. E* as calculated under paragr aphs 5 to 22 shall be taken as the exposure value of the 
exposure to the counte rparty arising from the trans actions subject to the master 
netting agreement for the purposes of Annex VII. 
1.4. Financial collateral 
1.4.1.  Financial Collateral Simple Method 
25. The Financial Collateral Simple Method shal l be available only where risk-weighted 
exposure amounts are calculated under Articles 78 to 83. A credit institution shall not 
use both the Financial Collateral Simple  Method and the Financial Collateral 
Comprehensive Method. 
Valuation 
26. Under this method, recognised financial coll ateral is assigned a value equal to its 
market value as determined in accordance with Part 2, paragraph 6. 
Calculating risk-wei ghted exposure amounts 
27. The risk weight that would apply under Ar ticles 78 to 83 if the lender had a direct 
exposure to the collateral instrument shall apply to those portions of claims 
collateralised by the market value of recognised collatera l. The risk weight on the 
collateralised portion shall be a minimum of 20% except as specified in paragraphs 
28 to 30. The remainder of the exposure sha ll receive the risk weight that would be 
applied to an unsecured exposure to the counterparty under Articles 78 to 83.  
Repurchase transactions and securiti es lending or borrowing transactions 
28. A risk weight of 0% shall be applied to  the collateralised portion of the exposure 
arising from transactions which fulfil the criteria enumerated in paragraphs 59 and 
60. If the counterparty to the transaction is not a core market participant a risk weight 
of 10% shall be applied. 
OTC derivative transactions s ubject to daily mark-to-market 
 
EN 86   EN 29. A risk weight of 0% shall, to the extent of the collateralisation, be applied to the 
exposure values determined under Annex III for the derivative inst ruments listed in 
Annex IV and subject to daily marking-to -market, collateralised by cash or cash-
assimilated instruments where there is no currency mismatch. A risk weight of 10% 
shall apply to the extent of  the collateralisation to th e exposure values of such 
transactions collateralised by debt securities issued by central governments or central 
banks which receive a 0% risk weight under Articles 78 to 83. 
For the purposes of this para graph ‘debt securities issued by central governments or 
central banks shall be deemed to include –  
(a) debt securities issued by  regional governments or lo cal authorities exposures to 
which are treated as exposures to the cen tral government in whose jurisdiction 
they are established und er Articles 78 to 83; 
(b) debt securities issued by multilateral development banks to which a 0% risk 
weight is applied under or by vi rtue of Articles 78 to 83; 
(c) debt securities issued by internatio nal organisations whic h are assigned a 0% 
risk weight under Articles 78 to 83. 
Other transactions 
30. A 0% risk weight may be applied wh ere the exposure and the collateral are 
denominated in the same currency, and either: 
(a) the collateral is cash on deposit or a cash assimilated instrument; or 
(b) the collateral is in the form of debt  securities issued by central governments or 
central banks eligible for a 0% risk weight under Articles 78 to 83, and its 
market value has been discounted by 20%. 
For the purposes of this para graph ‘debt securities issued by central governments or 
central banks shall be deemed to include those indicated under th e previous heading. 
1.4.2.  Financial Collateral Comprehensive Method  
31. In valuing financial collateral for the purposes of the Financial Collateral 
Comprehensive Method, ‘volatility adjustment s’ shall be applied to the market value 
of collateral, as set out in paragraphs 35 to 60 below, in order to take account of price 
volatility. 
32. Subject to the treatment for currency mism atches in the case of OTC derivatives 
transactions set out in paragraph 33, wher e collateral is denomi nated in a currency 
that differs from that in which the underlying exposure is denominated, an 
adjustment reflecting currency volatility shal l be added to the volatility adjustment 
appropriate to the collateral as set out in paragraphs 35 to 60.  
33. In the case of OTC derivatives trans actions covered by netting agreements 
recognised by the competent authorities und er Annex III, a volatility adjustment 
reflecting currency vola tility shall be applied when th ere is a mismatch between the 
collateral currency and the settlement currency. Even in the case where multiple 
 
EN 87   EN currencies are involved in the transactions  covered by the netting agreement, only a 
single volatility adjustment shall be applied. 
(a) Calculating adjusted values 
34. The volatility-adjusted value of the collateral to be taken in to account is calculated as 
follows in the case of all transactions excep t those transactions subject to recognised 
master netting agreements to which the provi sions set out in paragraphs 5 to 24 are 
be applied: 
CVA = C x (1-H C-HFX) 
The volatility-adjusted value of the exposure to be taken into account is calculated as 
follows: 
EVA = E x (1+H E), and in the case of OTC derivative transactions E VA = E. 
The fully adjusted value of the exposure, taking into account both volatility and the 
risk-mitigating effects of collateral is calculated as follows: 
E* = max {0, [E VA - CVAM]} 
Where 
E is the exposure value as would be determined under Arti cles 78 to 83 or Articles 
84 to 89 as appropriate if the exposure was not collateralised. 
EVA is the volatility-adjusted exposure amount. 
CVA is the volatility-adjusted value of the collateral. 
CVAM is C VA further adjusted for any maturity  mismatch in accordance with the 
provisions of Part 4. 
HE is the volatility adjustment appropriate  to the exposure (E), as calculated under 
paragraphs 35 to 60. 
HC is the volatility adjustment appropriate  for the collateral, as calculated under 
paragraphs 35 to 60. 
HFX is the volatility adjustment appropria te for currency mismatch, as calculated 
under paragraphs 35 to 60. 
E* is the fully adjusted e xposure value taking into acc ount volatility and the risk-
mitigating effects of the collateral. 
(b) Calculation of volatility adjustments to be applied 
35. Volatility adjustments may be calculated in two ways: the Supervisory volatility 
adjustments approach and the Own estimates of volatility adjustme nts approach (the 
‘Own estimates’ approach). 
 
EN 88   EN 36. A credit institution may choose to use th e Supervisory volatility adjustments 
approach or the Own estimates approach independently of the choice it has made 
between the Articles 78 to 83 and Article s 84 to 89 for the ca lculation of risk-
weighted exposure amounts. However, if cr edit institutions seek to use the Own 
estimates approach, they must do so for th e full range of instrument types, excluding 
immaterial portfolios where they may us e the Supervisory volatility adjustments 
approach. 
Where the collateral consis ts of a number of recogni sed items, the volatility 
adjustment shall be ∑=
ii iHa H
, where a i is the proportion of  an item to the 
collateral as a whole and H i is the volatility adjustment  applicable to that item. 
(i) Supervisory volatility adjustments 
37. The volatility adjustments to be applied under the Supervisory vol atility adjustments 
approach (assuming daily revaluation) shal l be those set out in tables 2 to 5.  
VOLATILITY ADJUSTMENTS 
Table 2 
Credit 
quality step 
with which 
the credit 
assessment 
of the debt 
security is 
associated Residual 
Maturity Volatility adjustments for debt 
securities issu ed by entities 
described in Part 1, paragraph 
7 (b)  Volatility adjustments for debt 
securities issued by entities described 
in Part 1, paragraph 7 (c) and (d) 
  20 day 
liquid- 
ation 
period 
(%) 10 day 
liquid- 
ation 
period 
(%) 5 day 
liquid- 
ation 
period 
(%) 20 day 
liquid- 
ation 
period (%) 10 day 
liquid- 
ation 
period 
(%) 5 day 
liquid- 
ation 
period (%) 
1 ≤ 1 year 0.707 0.5 0.354 1.414 1 0.707 
 >1 ≤ 5 
years 2.828 2 1.414 5.657 4 2.828 
 > 5 
years 5.657 4 2.828 11.314 8 5.657 
2-3 ≤ 1 year 1.414 1 0.707 2.828 2 1.414 
 >1 ≤ 5 
years 4.243 3 2.121 8.485 6 4.243 
 > 5 8.485 6 4.243 16.971 12 8.485 
 
EN 89   EN years 
4 ≤ 1 year 21.213 15 10.607 N/A N/A N/A 
 >1 ≤ 5 
years 21.213 15 10.607 N/A N/A N/A 
 > 5 
years 21.213 15 10.607 N/A N/A N/A 
Table 3 
Credit 
quality 
step with 
which the 
credit 
assessment 
of a short 
term debt 
security is 
associated Volatility adjustments for debt securities 
issued by entities described in Part 1, 
paragraph 7 (b) with short-term credit 
assessments Volatility adjustments for debt securities 
issued by entities described in Part 1, 
paragraph 7 (c) and (d) with short-term 
credit assessments 
 
 20 day 
liquidation 
period (%) 10 day 
liquidation 
period (%) 5 day 
liquidation 
period (%) 20 day 
liquidation 
period (%) 10 day 
liquidation 
period (%) 5 day 
liquidation 
period (%) 
1 0.707 0.5 0.354 1.414 1 0.707 
2-3 1.414 1 0.707 2.828 2 1.414 
Table 4 
Other collateral or ex posure t ypes
 20 day 
liquidation period 
(%) 10 day 
liquidation period 
(%) 5 day liquidation 
period (%) 
Main Index Equities, Main Index 
Convertible Bonds 21.213 15 10.607 
Other Equities or Convertible 
Bonds listed on a recognised 
exchange  35.355 25 17.678 
Cash 0 0 0 
Gold 21.213 15 10.607 
Table 5 
 
EN 90   EN Volatility adjustment for currency mismatch 
20 day liquidation period 
(%) 20 day liquidation period 
(%) 5 day liquidation period (%) 
11.314 8 5.657 
38. For secured lending transactions the liquida tion period shall be 20 business days. For 
repurchase transactions (excep t insofar as such transactions involve  the transfer of 
commodities or guaranteed rights relating to title to commodities) and securities 
lending or borrowing transactions the liquida tion period shall be 5 business days. For 
other capital market driven transactions, the liquidation period shall be 10 business 
days. 
39. In tables 2 to 5 and in paragraphs 40 to 42,  the credit quality step with which a credit 
assessment of the debt security is associated  is the credit quality step with which the 
external credit assessment is determin ed by the competent authorities to be 
associated under Articles 78 to 83. For these purposes Part 1, paragraph  10 also 
applies. 
40. For non-eligible securities lent or sold under repurchase transactions or securities 
lending or borrowing transactions, the volati lity adjustment is the same as for non-
main index equities listed on a recognised exchange. 
41. For eligible units in collective investment  undertakings the volatility adjustment is 
the highest volatility adjustment that would be apply, having regard to the liquidation 
period of the transaction as specified in pa ragraph 38, to any of the assets in which 
the fund has the right to invest. 
42. For unrated debt securities issued by institu tions and satisfying the eligibility criteria 
in Part 1, paragraph  8 the volatility adjustments shall be the same as for securities 
issued by institutions or corporates with an  external credit assessment associated with 
credit quality steps 2 or 3. 
(ii) Own estimates of volatility adjustments 
43. The competent authorities may permit instit utions complying with the requirements 
set out in paragraphs 48 to 57 to use their own estimates  of volatility for calculating 
the volatility adjustments to be appl ied to collateral and exposures.  
44. When debt securities have a credit assessmen t from a recognised ECAI equivalent to 
investment grade or better, the competent au thorities may allow credit institutions to 
calculate a volatility estimate for each category of security.  
45. In determining relevant categories, credit in stitutions shall take into account the type 
of issuer of the security the external credit assessment of the securities, their residual 
maturity, and their modified duration. Volatility estimates must be representative of 
the securities included in the category by the credit institution. 
 
EN 91   EN 46. For debt securities having a credit assessm ent from a recognised ECAI equivalent to 
below investment grade and for other elig ible collateral the volatility adjustments 
must be calculated for each individual item. 
47. Credit institutions using the Own estimates approach must estimate volatility of the 
collateral or foreign exchange mismatch w ithout taking into account any correlations 
between the unsecured exposure, collat eral and/or exch ange rates.  
Quantitative Criteria 
48. In calculating the volatility adjustments, a 99th percentile one-tailed confidence 
interval$ shall be used. 
49. The liquidation period shall be 20 business days for secu red lending transactions; 5 
business days for repurchase tr ansactions except insofar as such transactions involve 
the transfer of commodities or guaranteed ri ghts relating to title to commodities and 
securities lending or borrowi ng transactions; an d 10 business days for other capital 
market driven transactions.  
50. Credit institutions may use volatility adju stment numbers calculated according to 
shorter or longer liquidation periods, scaled up or down to  the liquidation period set 
out in paragraph 49 for the type of transac tion in question, using the square root of 
time formula: 
N M N M TTH H /= 
where T M is the relevant liquidation period; 
HM is the volatility adjustment under the relevant liquidation period; 
HN is the volatility adjustment based on the liquidation period T N; 
51. Credit institutions shall take into account the illiquidity of lower-quality assets. The 
liquidation period shall be adjusted upwards in cases where there is doubt concerning 
the liquidity of the collateral. They shall also identify where historical data may 
understate potential vo latility, e.g. a pegged currency. Su ch cases shall be dealt with 
by means of a stress scenario. 
52. The historical observation period (sample period) for calculating volatility 
adjustments shall be a minimum length of one  year. For credit institutions that use a 
weighting scheme or other methods for the historical obser vation period, the 
effective observation period shall be at leas t one year (that is, the weighted average 
time lag of the individual observations sh all not be less than 6 months). The 
competent authorities may also require a cred it institution to cal culate its volatility 
adjustments using a shorter observation pe riod if, in the competent authorities’ 
judgement, this is justified by a signi ficant upsurge in price volatility. 
53. Credit institutions shall update their data se ts no less frequently than once every three 
months and shall also reassess them whenev er market prices are subject to material 
changes. This implies that volatility adju stments shall be computed at least every 
three months.  
 
EN 92   EN Qualitative Criteria 
54. The volatility estimates shall be used in th e day-to-day risk management process of 
the credit institution includi ng in relation to its internal exposure limits. 
55. If the liquidation period used by the credit institution in its day-to-day risk 
management process is longer than that set out in this Part for the type of transaction 
in question, the credit institution’s volat ility adjustments shall be scaled up in 
accordance with the square root of ti me formula set out in paragraph 50. 
56. The credit institution shall have established procedures for monitoring and ensuring 
compliance with a documented set of policie s and controls for the operation of its 
system for the estimation of volatility adjustments and for the integration of such 
estimations into its risk management process.  
57. An independent review of the credit institution’s system for the estimation of 
volatility adjustments shall be carried out regularly in the cred it institution´s own 
internal auditing process. A review of the overall system for the estimation of 
volatility adjustments and for integration of those adjustments into the credit 
institution’s risk management process shal l take place at least once a year and shall 
specifically address, at a minimum: 
(a) the integration of estimated volatility adjustments into daily risk management; 
(b) the validation of any significant change  in the process for the estimation of 
volatility adjustments; 
(c) the verification of the consistency, tim eliness and reliability of data sources 
used to run the system for the estimatio n of volatility adjustments, including 
the independence of such data sources; 
(d) the accuracy and appropriatene ss of the volatility assumptions. 
(iii) Scaling up of volatility adjustments 
58. The volatility adjustments set out in paragraphs 37 to 42 are the volatility 
adjustments to be applied where there is da ily revaluation. Similarly where an credit 
institution uses its own estimates of the volatility adjustments in accordance with 
paragraphs 43 to 57, these must be calcula ted in the first instance on the basis of 
daily revaluation. If the frequency of reva luation is less than daily, larger volatility 
adjustments shall be applied. These sh all be calculated by scaling up the daily 
revaluation volatility adjustme nts, using the following ‘square root of time’ formula : 
MM R
MTT N HH)1 (−+=
 
where 
H is the volatility adjustment to be applied 
HM is the volatility adjustment where there is daily revaluation 
 
EN 93   EN NR is the actual number of busin ess days betwee n revaluation 
TM is the liquidation period for the ty pe of transaction in question. 
(iv) Conditions for applying a 0% volatility adjustment  
59. In relation to repurchase transactions and securities lend ing or borrowing 
transactions, where a credit institution us es the Supervisory volatility adjustments 
approach or the Own Estimates approach and where the conditions set out in points 
(a) to (h) are satisfied, the competent auth orities may allow credit institutions not to 
apply the volatility adjust ments calculated under paragra phs 35 to 58 and to instead 
apply a 0% volatility adjustment. This optio n is not available in respect of credit 
institutions using the internal models a pproach set out in paragraphs 12 to 22. 
(a) Both the exposure and the collateral are cash or securities falling within Part 1, 
paragraph 7(b);  
(b) Both the exposure and the collateral are denominated in the same currency.  
(c) Either the maturity of the transact ion is no more than one day or both the 
exposure and the collateral are subject to daily marking-to-market or daily 
remargining; 
(d) It is considered that the time between the last marking-to-market before a 
failure to remargin by the counterparty and the liquidation of the collateral 
shall be no more than four business days; 
(e) The transaction is settled across a sett lement system proven for that type of 
transaction; 
(f) The documentation covering the agreemen t is standard market documentation 
for repurchase transactions or securitie s lending or borrowi ng transactions in 
the securities concerned; 
(g) The transaction is governed by documentation specifying that if the 
counterparty fails to satisfy an obligati on to deliver cash or securities or to 
deliver margin or otherwise defaults, then the transaction is immediately 
terminable;  
(h) The counterparty is considered a ‘cor e market participan t’ by the competent 
authorities. Core market participants  may include the following entities : 
– The entities mentioned in paragraph 7(b) of Part 1 exposures to which receive a 
0% risk weight under Articles 78 to 83;  
– institutions;  
– other financial companies (including in surance companies) exposures to which 
receive a 20 % risk weight under Articl es 78 to 83 or which, in the case of 
credit institutions calculating risk-w eighted exposure amounts and expected 
loss amounts under Articles 83 to 89, do not have a credit assessment by a 
recognised ECAI and are internally rate d as having a probability of default 
 
EN 94   EN equivalent to that associated with the credit assessments of ECAIs determined 
by the competent authorities to be associat ed with credit quality  step 2 or above 
under the rules for the risk weighting of exposures to corporates under Articles 
78 to 83. 
– regulated collective invest ment undertakings that ar e subject to capital or 
leverage requirements; 
– regulated pension funds; and 
– recognised clearing organisations. 
60. Where a competent authority permits the tr eatment set out in paragraph 59 to be 
applied in the case of repurchase transac tions or securities lending or borrowing 
transactions in securities  issued by its domestic government, then other competent 
authorities may choose to allow credit institutio ns incorporated in their jurisdiction to 
adopt the same approach to the same transactions. 
(c) Calculating risk-weighted exposur e amounts and expected loss amounts 
Standardised Approach 
61. E* as calculated under paragraph 34 shal l be taken as the exposure value for the 
purposes of Article 80. 
IRB Foundation Approach 
62. LGD* (the effective Loss Given Default) calc ulated as set out in this paragraph shall 
be taken as the LGD for the purposes of Annex VII. 
LGD* = Max {0, LGD x [(E*/E]}  
where  
LGD is the loss given fault that would apply to the exposure under Articles 84 to 89 
if the exposure was not collateralised; 
E is the exposure value under Articles 84 to 89; 
E* is as calculated under paragraph 34. 
1.5. Other eligible collateral for Articles 84 to 89 
1.5.1.  Valuation 
(a) Real estate collateral 
63. The property shall be valued by an indepe ndent valuer at or less than the market 
value. In those Member States that have laid down rigorous criteria for the 
assessment of the mortgage lending value in statutory or regul atory provisions the 
property may instead be valued by an independent valuer at  or less than the mortgage 
lending value. 
 
EN 95   EN 64. Market value means the estimated amount for which the property should exchange 
on the date of valuation between a willing buyer and a willing seller in an arm’s-
length transaction after proper marketi ng wherein the parties had each acted 
knowledgeably, prudently and without compulsion. The market value shall be 
documented in a transparent and clear manner. 
65. Mortgage lending value means the value of the property as determined by a prudent 
assessment of the future marketability of the property taking into account long-term 
sustainable aspects of the property, th e normal and local market conditions, the 
current use and alternative appropriate uses  of the property. Speculative elements 
shall not be taken into acc ount in the assessment of the mortgage lending value. The 
mortgage lending value shall be documente d in a transparent and clear manner.  
66. The value of the collateral shall be the market value or mortgage lending value 
reduced as appropriate to re flect the results of the mon itoring required under Part 2, 
paragraph 8 and to take account of the any prior claims on the property. 
(b) Receivables 
67. The value of receivables sha ll be the amount receivable. 
(c) Other physical collateral 
68. The property shall be valued at its market  value – that is the estimated amount for 
which the property would exchange on the da te of valuation between a willing buyer 
and a willing seller in an arm’s-length transaction. 
1.5.2.  Calculating risk-weighted exposur e amounts and expected loss amounts 
(a) General treatment 
69. LGD* (the effective Loss Given Default) calcu lated as set out in paragraphs 70 to 73 
shall be taken as the LGD for the purposes of Annex VII. 
70. Where the ratio of the value of the collateral (C) to the exposure value (E) is below a 
threshold level of C* (the required minimu m collateralisation level for the exposure) 
as laid down in Table 6, LGD* shall be the LGD laid down in Annex VII for 
uncollateralised exposures to the counterparty. 
71. Where the ratio of the value of the collate ral to the exposure value exceeds a second, 
higher threshold level of C** (i.e. the required level of collateralisation to receive 
full LGD recognition) as laid down in Table 6,  LGD* shall be that prescribed in the 
following table.  
72. For these purposes, where the required level of collateralisation C** is not achieved 
in respect of the exposure as a whole, the exposure shall be considered to be two 
exposures – that part in respect of which th e required level of co llateralisation C** is 
achieved and the remainder. 
73. Table 6 sets out the applicable LGD* and required collateralisation levels for the 
secured parts of exposures: 
 
EN 96   EN Table 6 
Minimum LGD for secure d portion of exposures 
 LGD* for 
senior claims or 
contingent 
claims LGD* for 
subordinated 
claims or 
contingent 
claims Required 
minimum 
collateralisation 
level of the 
exposure (C*) Required 
minimum 
collateralisation 
level of the 
exposure (C**) 
Receivables 35% 65% 0% 125% 
Residential real 
estate/commercial 
real estate 35% 65% 30% 140% 
Other collateral 40%  70% 30% 140% 
 
By way of derogation, until 31 December 2012 the competent authorities may, 
subject to the indicated levels of collateralisation 
(a) allow credit institutions to assign a 30%  LGD for senior exposures in the form 
of Commercial Real Estate leasing; and  
(b) allow credit institutions to assign a 35%  LGD for senior exposures in the form 
of equipment leasing. 
At the end of this period, this  derogation shall be reviewed.  
(b) Alternative treatment for real estate collateral 
74. Subject to the requirements of this paragr aphs and paragraph 75 a nd as an alternative 
to the treatment in paragraphs 69 to 73, th e competent authorities of a Member State 
may authorise credit institutions to apply a 50% risk weighting to the part of the 
exposure fully collateralised by residential r eal estate property or commercial real 
estate property situated within the territory of the Member State if they have 
evidence that the relevant markets are well-developed and long-established with loss-
rates from lending collateralised by reside ntial real estate property or commercial 
real estate property respectively that do not exceed the following limits: 
(a) up to 50 % of the market value (or wh ere applicable and if lower 60 % of the 
mortgage-lending-value) must not exceed  0.3 % of the outstanding residential 
real estate and/or commercial real  estate loans in any given year. 
(b) overall losses stemming from lending collateralised by residential real estate 
property or commercial real estate prope rty respectively must not exceed 0.5 % 
of the outstanding loans colla teralised by that form of real estate property in 
any given year.  
 
EN 97   EN 75. If either of the conditions  in paragraph 74 is not satis fied in a given year, the 
eligibility to use this treatment shall ce ase until the conditions are satisfied in a 
subsequent year.  
76. The competent authorities, which do not authorise the treatment in paragraph 73, 
may authorise credit institutions to apply the risk weights permitted under this 
treatment in respect of  exposures collateralis ed by residential real  estate property of 
commercial real estate property respectively located in the territory of those Member 
States the competent authorities of which au thorise this treatment subject to the same 
conditions as apply in that Member State. 
1.6. Calculating risk-weighted exposure amo unts and expected loss amounts in the 
case of mixed pools of collateral 
77. Where risk-weighted exposure amounts a nd expected loss amounts are calculated 
under Articles 84 to 89, and an exposure is co llateralised by both financial collateral 
and other eligible collateral, LGD* (the ef fective Loss Given Default) to be taken as 
the LGD for the purposes of Annex V II shall be calculated as follows. 
78. The credit institution shall be required to subdivide the volatility-adjusted value of 
the exposure (i.e. the value after the applica tion of the volatility adjustment as set out 
in paragraph 34) into portions each covered by only one type of collateral. That is, 
the credit institution must divide the e xposure into the portion covered by eligible 
financial collateral, the portion covered by receivables, the portions covered by 
commercial real estate property collateral and/or residential real estate property 
collateral, the portion covere d by other eligible collatera l, and the unsecured portion, 
as relevant.  
79. LGD* for each portion of exposure shall be calculated separately in accordance with 
the relevant provisions of this Annex.  
1.7. Other funded credit protection 
1.7.1.  Deposits with third party institutions 
80. Where the conditions set out in  Part 2, paragraph 12 are sa tisfied, credit protection 
falling within the terms of Part 1, paragr aph 23 may be treated as a guarantee by the 
third party institution. 
1.7.2.  Life insurance policies pledged to the lending credit institution 
81. Where the conditions set out in  Part 2, paragraph 13 are sa tisfied, credit protection 
falling within the terms of Part 1, paragr aph 24 may be treated as a guarantee by the 
company providing the life insurance. The va lue of the credit protection recognised 
shall be the surrender value of the life insurance policy. 
1.7.3.  Institution instruments repurchased on request 
82. Instruments eligible under Pa rt 1, paragraph 25 may be treated as a guarantee by the 
issuing institution.  
 
EN 98   EN 83. For these purposes the value of the credit protection recognised shall be the 
following: 
(a) where the instrument will be repurchased at its face value, the value of the 
protection shall be that amount; 
(b) where the instrument will be repurchased at market price, the value of the 
protection shall be the value of the instrument valued in the same way as the 
debt securities specified in Part 1, paragraph 8. 
2. UNFUNDED CREDIT PROTECTION  
2.1. Valuation 
84. The value of unfunded credit protection (G ) shall be the amount that the protection 
provider has undertaken to pay in the even t of the default or non-payment of the 
borrower or on the occurrence of  other specified credit events. In the case of credit 
derivatives which do not include as a cred it event restructuring of the underlying 
obligation involving forgiveness or postponement  of principal, inte rest or fees that 
result in a credit loss event (e.g. value adjustment, the making of a value adjustment 
or other similar debit to th e profit and loss account), the value of the credit protection 
calculated under the first sentence of th is paragraph shall be reduced by 40%. 
85. Where unfunded credit protection is denominated in a currenc y different from that in 
which the exposure is denominated (a curre ncy mismatch) the value of the credit 
protection shall be reduced by the application of a volatility adjustment H FX as 
follows: 
G* = G x (1-H FX) 
where  
G is the nominal amount of the credit protection;  
G* is G adjusted for any foreign exchange risk, and  
Hfx is the volatility adjustment for any currency mismatch between the credit 
protection and the underlying obligation. 
Where there is no currency mismatch 
G* = G 
86. The volatility adjustments to be app lied for any currency mismatch may be 
calculated based on the Supervisory vola tility adjustments approach or the Own 
estimates approach as set out in paragraphs 35 to 58. 
 
EN 99   EN 2.2. Calculating risk-weighted exposure amounts and expected loss amounts 
2.2.1.  Partial protection – tranching  
87. Where the credit institution transfers a portion of the risk of a loan in one or more 
tranches, the rules set out in Articles 94 to  101 shall apply. Materiality thresholds on 
payments below which no payment shall be made in the event of loss are considered 
to be equivalent to retained first loss positi ons and to give rise to  a tranched transfer 
of risk. 
2.2.2.  Standardised Approach 
(a) Full protection 
88. For the purposes of Article 80, g shall be the risk weight to be assigned to an 
exposure which is fully prot ected by unfunded protection (G A),  
where 
g is the risk weight of exposures to the protection provider as specified under 
Articles 78 to 83; and 
GA is the value of G* as calculated unde r paragraph 85 furthe r adjusted for any 
maturity mismatch as laid down in Part 4.  
(b) Partial protection – equal seniority 
89. Where the protected amount is less than the exposure value a nd the protected and 
unprotected portions are of equal seniorit y – ie the credit institution and the 
protection provider share losses on a pro-ra ta basis, proportiona l regulatory capital 
relief shall be afforded. For the purpos es of Article 80 risk-weighted exposure 
amounts shall be calculated in acco rdance with the following formula: 
(E-G A) x r + G A x g 
where  
E is the exposure value; 
GA is the value of G* as calculated unde r paragraph 85 furthe r adjusted for any 
maturity mismatch as laid down in Part 4; 
r is the risk weight of expos ures to the obligor as specifi ed under Articles 78 to 83; 
g is the risk weight of exposures to the protection provider as specified under 
Articles 78 to 83.  
(c) Sovereign guarantees  
90. The competent authorities may extend th e treatment provided for in Annex VI, 
paragraphs 4 to 6 to exposures or portions  of exposures guaranteed by the central 
 
EN 100   EN government or central bank, where the guarantee is denominated in the domestic 
currency of the borrower and the expo sure is funded in that currency. 
2.2.3.  IRB Foundation Approach 
Full protection / Partial pr otection – equal seniority 
91. For the covered portion of the exposure (b ased on the adjusted value of the credit 
protection G A), the PD for the purposes of Annex VII, Part 2 may be the PD of the 
protection provider, or a PD between that of  the borrower and that of the guarantor if 
a full substitution is deemed not to be  warranted. In the case of subordinated 
exposures and non-subordinated unfunded prot ection, the LGD to be applied for the 
purposes of Annex VII, Part 2 may be th at associated with senior claims.  
92. For any uncovered portion of th e exposure the PD shall be that of the borrower and 
the LGD shall be that of the underlying exposure. 
93. GA is the value of G* as calculated under paragraph 85 above further adjusted for 
any maturity mismatch as laid down in Part 4. 
 
EN 101   EN Part 4 - Maturity Mismatches  
1. For the purposes of calcu lating risk-weighted expos ure amounts, a maturity 
mismatch occurs when the residual maturity of the credit protection is less than that 
of the protected exposure. Protection of le ss than three months residual maturity, the 
maturity of which is less than the matur ity of the underlying exposure, shall not be 
recognised.  
2. Where there is a maturity mismatch the credit protection sha ll not be recognised 
where 
(a) the original maturity of the protection is less than 1 year; or 
(b) the exposure is a short term exposure specified by the competent authorities as 
being subject to a one–day fl oor rather than a one-year  floor in respect of the 
maturity value (M) under Annex VII, Part 2, paragraph 13. 
1. DEFINITION OF MATURITY  
3. Subject to a maximum of 5 y ears, the effective maturity of the underlying shall be 
the longest possible remaining time before the obligor is scheduled to fulfil its 
obligations. Subject to paragraph 4, the matu rity of the credit protection shall be the 
time to the earliest date at which the protection may terminate or be terminated.  
4. Where there is an option to terminate the pr otection which is at the discretion of the 
protection seller, the maturity of the protection shall be taken to be the time to the 
earliest date at which that option may be exercised. Where there is an option to 
terminate the protection which is at the discretion of the protection buyer and the 
terms of the arrangement at origination of  the protection contain a positive incentive 
for the credit institution to call the transa ction before contractual maturity, the 
maturity of the protection shall be taken to  be the time to the earliest date at which 
that option may be exercised; otherwise su ch an option may be considered not to 
affect the maturity of the protection. 
5. Where a credit derivative is not prevented fr om terminating prior to expiration of any 
grace period required for a default on the unde rlying obligation to occur as a result of 
a failure to pay the maturity of the prot ection shall be reduced by the amount of the 
grace period. 
2. VALUATION OF PROTECTION  
2.1. Transactions subject to funded credit pr otection – Financial Collateral Simple 
Method 
6. Where there is a mismatch between the matur ity of the exposure and the maturity of 
the protection, the collateral  shall not be recognised. 
 
EN 102   EN 2.2. Transactions subject to funded credit  protection - Financial Collateral 
Comprehensive Method 
7. The maturity of the credit prot ection and that of the exposur e must be reflected in the 
adjusted value of the collateral according to the following formula: 
CVAM = C VA x (t-t*)/(T-t*) 
where  
CVA is the volatility adjusted value of th e collateral as specified in Part 3, 
paragraph 34 or the amount of the exposure, whichever is the lowest; 
t is the number of years remaining to the maturity date of the credit protection 
calculated in accordance with paragraphs 3 to  5, or the value of T, whichever is the 
lower; 
T is the number of years rema ining to the maturity date of the exposure calculated in 
accordance with paragraphs 3 to 5, or 5 years, whichever is the lower; and 
t* is 0.25. 
CVAM shall be taken as C VA further adusted for maturity mismatch to be included in 
the formula for the calculation of the fully ad justed value of the exposure (E*) set out 
at Part 3, paragraph 34. 
2.3. Transactions subject to unfunded credit protection  
8. The maturity of the credit prot ection and that of the exposur e must be reflected in the 
adjusted value of the credit protectio n according to the following formula  
GA = G* x (t-t*)/(T-t*) 
where  
G* is the amount of the protection ad justed for any currency mismatch  
GA is G* adjusted for any maturity mismatch 
t is the number of years remaining to the maturity date of the credit protection 
calculated in accordance with paragraphs 3 to  5, or the value of T, whichever is the 
lower; 
T is the number of years rema ining to the maturity date of the exposure calculated in 
accordance with paragraphs 3 to 5, or 5 years, whichever is the lower; and 
t* is 0.25. 
GA is then taken as the value of the protection for the purposes of Part 3, 
paragraphs 84 to 93.  
 
EN 103   EN Part 5 - Combinations of credit risk mi tigation in the Standardised Approach  
9. In the case where a credit institution calcula ting risk-weighted exposure amounts 
under Articles 78 to 83 has more than one form of credit risk mitigation covering a 
single exposure (e.g. a credit  institution has both collate ral and a guarantee partially 
covering an exposure), the credit institution shall be required to subdivide the 
exposure into portions covered by each type of credit risk mitigation tool (e.g. a 
portion covered by collateral and a porti on covered by guarantee) and the risk-
weighted exposure amount for each portion must be calculated separately in 
accordance with the provisions of Ar ticles 78 to 83 and this Annex.  
10. When credit protection pr ovided by a single protection provider has differing 
maturities, a similar approach to that de scribed in paragraph 1 shall be applied. 
 
EN 104   EN Part 6 - Basket CRM techniques  
1. FIRST-TO-DEFAULT CREDIT DERIVATIVES  
1. Where a credit institution obtains credit pr otection for a number of exposures under 
terms that the first default among the exposur es shall trigger payment and that this 
credit event shall terminate the contract , the credit institution may modify the 
calculation of the risk-weighted exposure amo unt and, as relevant, the expected loss 
amount of the exposure which would in the absence of the credit protection produce 
the lowest risk-weighted expos ure amount under Articles 78 to 83 or Articles 84 to 
89 as appropriate in accordance with this Annex, but only if the exposure value is 
less than or equal to the value of the credit protection. 
2. nTH-TO-DEFAULT CREDIT DERIVATIVES  
2. In the case where the nth default among the exposures triggers payment under the 
credit protection, the cred it institution purchas ing the protection may only recognise 
the protection for the calculation of risk-w eighted exposure amounts and, as relevant, 
expected loss amounts if protection has also been obtained for defaults 1 to n-1 or 
when n-1 defaults have already occurred. In such cases the methodology shall follow 
that set out in paragraph 1 for first-to-def ault derivatives appropr iately modified for 
nth-to-default products. 
 
EN 105   EN ANNEX IX – Securitisation  
 
Part 1 - Definitions for purposes of Annex X  
1. For the purposes of this Annex 
– ‘Excess spread’ means finance charge  collections and other fee income 
received in respect of the securitise d exposures net of costs and expenses. 
– ‘Clean-up call option’ means a contra ctual option for the originator to 
repurchase or extinguish the securitisation positions before all of the 
underlying exposures have been repaid , when the amount of outstanding 
exposures falls below a specified level. 
– ‘Liquidity facility’ means the securitisation position arising from a contractual 
agreement to provide funding to ensure timeliness of cashflows to investors. 
– ‘Kirb’ means 8% of the risk-weighted exposure amounts that would be 
calculated under Articles 84 to 89 in re spect of the securitised exposures had 
they not been securitised plus the amount  of expected losse s associated with 
those exposures calculated under those Articles. 
– ‘Ratings based method’ means the method of calculating risk-weighted 
exposure amounts for securitisation posi tions in accordance with Part 4, 
paragraphs 45 to 49. 
– ‘Supervisory formula method’ means th e method of calculating risk-weighted 
exposure amounts for securitisation posi tions in accordance with Part 4, 
paragraphs 50 to 52. 
– ‘Unrated position’ means a securitisation position which does not have an 
eligible credit assessment by an eligible ECAI as defined in Article 97. 
– ‘Rated position’ means a securitisation position which has an eligible credit 
assessment by an eligible ECAI as defined in Article 97.  
– ‘Asset-backed commercial paper progr amme’ (‘ABCP’ programme) means a 
programme of securitisations the securiti es issued by which predominantly take 
the form of commercial paper with an or iginal maturity of one year or less. 
 
EN 106   EN Part 2 - Minimum requirements for recognition of significant credit risk transfer and 
calculation of risk-weighted exposure amount s and expected loss amounts for securitised 
exposures  
1. MINIMUM REQUIREMENTS FOR RECOGNIT ION OF SIGNIFICANT CREDIT RISK 
TRANSFER IN A TRADITIONAL SECURITISATION  
1. The originator credit institution of a tradi tional securitisation may exclude securitised 
exposures from the calculat ion of risk-weighted exposur e amounts and expected loss 
amounts if significant credit risk associated  with the securitised exposures has been 
transferred to third parties and the transfer complies with the following conditions:  
(a) The securitisation documentation reflects the economic substance of the 
transaction. 
(b) The securitised exposures are put be yond the reach of the originator credit 
institution and its creditors, including in bankruptcy and receivership. This 
shall be supported by the opini on of qualified legal counsel 
(c) The securities issued do not represent payment obligations of the originator 
credit institution.  
(d) The transferee is a securitisat ion special-purpose entity (SSPE). 
(e) The originator credit institution does not  maintain effective or indirect control 
over the transferred exposur es. An originator shall be considered to have 
maintained effective control over the tran sferred exposures if it has the right to 
repurchase from the transferee the previous ly transferred exposures in order to 
realise their benefits or if it is oblig ated to re-assume transferred risk. The 
originator credit institution’s retention of servicing rights or obligations in 
respect of the exposures shall not of its elf constitute indirect control of the 
exposures.  
(f) Where there is a clean-up call option,  the following conditions are satisfied: 
(i) The clean-up call option is exercisable at the discretion of the originator credit 
institution; 
(ii) The clean-up call option may only be  exercised when 10% or less of the 
original value of the exposures securitised remains unamortised; and 
(iii) The clean-up call option is not structur ed to avoid allocating losses to credit 
enhancement positions or other positions he ld by investors an d is not otherwise 
structured to provide  credit enhancement. 
(g) The securitisation documentati on does not contain clauses that 
(i) other than in the case of early amortis ation provisions, requi re positions in the 
securitisation to be improved by the originator credit institution institution 
including but not limited to altering the underlying credit exposures or 
 
EN 107   EN increasing the yield payable to investors in response to a deterioration in the 
credit quality of the securitised exposures, or 
(ii) increase the yield payable to holde rs of positions in the securitisation in 
response to a deterioration in th e credit quality of the underlying pool. 
2. MINIMUM REQUIREMENTS FOR RECOGNIT ION OF SIGNIFICANT CREDIT RISK 
TRANSFER IN A SYNTHETIC SECURITISATION  
2. An originator credit institution of a synthetic securitisation may calculate risk-
weighted exposure amounts, and, as rele vant, expected loss amounts, for the 
securitised exposures in accordance with paragraphs 3 and 4 below, if significant 
credit risk has been transferred to thir d parties either thro ugh funded or unfunded 
credit protection and the transfer co mplies with the following conditions.  
(a) The securitisation documentation reflects the economic substance of the 
transaction. 
(b) The credit protection by which the cred it risk is transferred complies with the 
eligibility and othe r requirements under Articles 90 to 93 for the recognition of 
such credit protection. For these purposes , special purpose entities shall not be 
recognised as eligible unf unded protection providers.  
(c) The instruments used to transfer cred it risk do not contain terms or conditions 
that  
(i) impose significant materiality thresholds below which credit protection is 
deemed not to be triggered if a credit event occurs ; 
(ii) allow for the termination of the protection due to deterioration of the credit 
quality of the underlying exposures; 
(iii) other than in the case of early amor tisation provisions, requi re positions in the 
securitisation to be improved by the originator credit institution; 
(iv) increase the credit institutions’ cost of  credit protection or the yield payable to 
holders of positions in the securitisation in response to a deterioration in the 
credit quality of the underlying pool. 
(d) An opinion is obtained from qualified legal counsel confirming the 
enforceability of the credit protecti on in all relevant jurisdictions. 
3. ORIGINATOR CREDIT INSTITUTIONS ’ CALCULATION OF RISK -WEIGHTED EXPOSURE 
AMOUNTS FOR EXPOSURES SECURITISED IN A SYNTHETIC SECURITISATION  
3. In calculating risk-weighted exposure amounts for the securitised exposures, where 
the conditions in paragraph 2 are met, the or iginator credit institution of a synthetic 
securitisation shall, subject to paragra phs 5 to 8, use the relevant calculation 
methodologies set out in Part 4 and not those set out in Arti cles 78 to 89. For credit 
institutions calculating ri sk-weighted exposure amounts and expected loss amounts 
 
EN 108   EN under Articles 84 to 89, the expected loss am ount in respect of such exposures shall 
be zero. 
4. For clarity, paragraph 3 refers to the en tire pool of exposures included in the 
securitisation. Subject to paragraphs 5 to 8, the originator credit institution is 
required to calculate risk-wei ghted exposure amounts in respect  of all tranches in the 
securitisation in accordance with the provisions  of Part IV includi ng those relating to 
the recognition of credit risk mitigation. Fo r example, where a tranche is transferred 
by means of unfunded credit protection to a thir d party, the risk we ight of that third 
party shall be applied to the tranche in the calculation of the originator credit 
institution’s risk-wei ghted exposure amounts. 
3.1. Treatment of maturity mismatches  in synthetic securitisations  
5. For the purposes of calculating risk-weight ed exposure amounts in  accordance with 
paragraph 3, any maturity mismatch be tween the credit protection by which the 
tranching is achieved and the securitised exposures shall be  taken into consideration 
in accordance with paragraphs 6 to 8. The maturity of the securitised exposures shall 
be taken to be the longest maturity of a ny of those exposures subject to a maximum 
of five years.  
6. The maturity of the securitied exposures shal l be taken to be the longest maturity of 
any of those exposures subject to a maximu m of five years. The maturity of the 
credit protection shall be determined in accordance with Annex VIII .  
7. Where an originator credit institution us es Part 4, paragraphs 6 to 35 for the 
calculation of risk-weighted exposure amounts, it shall i gnore any maturity mismatch 
in calculating risk-w eighted exposure amounts for tranch es that are unrated or rated 
below investment grade. For all other tranches the maturity mismatch treatment set 
out in Annex VIII shall be applied in accordance with the following formula: 
RW* is [RW(SP) x (t-t*)/(T-t*)]  + [RW(Ass) x (T-t)/(T-t*)]  
Where  
RW* is Risk-weighted exposure amounts for the purposes of Article 75(a) ; 
RW(Ass) is Risk-weighted exposure amounts for exposures if they had not been 
securitised calculated on a pro-rata basis; 
RW(SP) is Risk-weighted exposure amounts calculated under paragraph 3 if there 
was no maturity mismatch; 
T is maturity of the underlying exposures expressed in years; 
t is maturity of credit protection. expressed in years; 
t* is 0.25. 
8. Where an originator credit institution us es Part 4, paragraphs 36 to 74 for the 
calculation of risk-weighted exposure amounts, it shall i gnore any maturity mismatch 
in calculating risk-weighted exposure amount s for tranches or parts of tranches 
 
EN 109   EN which are associated with a risk weight  of 1250% under those paragraphs. For all 
other tranches or parts of tranches the ma turity mismatch treatment set out in Annex 
VIII shall be applied in accordance with the formula in paragraph 7. 
 
EN 110   EN Part 3 - External credit assessments  
1. REQUIREMENTS TO BE MET BY THE CREDIT ASSESSMENTS OF ECAIS 
1. To be used for the purpos es of calculating risk-w eighted exposure amounts under 
Part 4 of this Annex, a credit assessment of an eligible ECAI shall comply with the 
following conditions. 
(a) There shall be no mismatch between th e types of payments  reflected in the 
credit assessment and the types of paym ent to which the credit institution is 
entitled under the contract giving rise to  the securitisation po sition in question. 
(b) It shall be available publicly to th e market. Credit ssessments are c$onsidered 
to be publicly available only if they  have been published in a publicly 
accessible forum and they are included in  the ECAI’s transition matrix. Credit 
assessments that are made available only to a limited number of entities shall 
not be considered to be publicly available. 
2. USE OF CREDIT ASSESSMENTS  
2. A credit institution may nominate one or more  eligible ECAIs the credit assessments 
of which shall be used in the calculati on of its risk-weighted exposure amounts under 
Articles 94 to 101 (a ‘nominated ECAI’). 
3. Subject to paragraphs 5 to 7 below, a cred it institution must use credit assessments 
from nominated ECAIs consistently in re spect of its securitisation positions.  
4. Subject to paragraphs 5 and 6, a credit institution may not use an ECAI’s credit 
assessments for its positions in some tranch es and another ECAI’s credit assessments 
for its positions in other tranches within the same structure that may or may not be 
rated by the first ECAI.  
5. In cases where a position has two credit as sessments by nominated ECAIs, the credit 
institution shall use the less favourable credit assessment. 
6. In cases where a position has more than two credit assessments by nominated ECAIs, 
the two most favourable credit assessments sh all be used. If the two most favourable 
assessments are different, the least favourable of the two shall be used. 
7. Where credit protection eligible under Artic les 90 to 93 is provided directly to the 
SSPE, and that protection is reflected in the credit assessment of a position by a 
nominated ECAI, the risk weight associated with that credit assessment may be used. 
If the protection is not elig ible under Articles 90 to 93, the credit assessment shall not 
be recognised. In the situation where th e credit protection is not provided to the 
SSPE but rather directly to a securitisati on position, the credit assessment shall not 
be recognised. 
 
EN 111   EN 3. MAPPING  
8. The competent authorities shall determine with  which credit quality step in the tables 
set out in Part 4 each credit assessment of an eligible ECAI shal l be associated. In 
doing so the competent authorities shall diffe rentiate between the relative degrees of 
risk expressed by each assessment. They shal l consider quantitativ e factors, such as 
default and/or loss rates, and qualitative factors such as the range of transactions 
assessed by the ECAI and the meaning of the credit assessment. 
9. The competent authorities shall seek to ensu re that securitisatio n positions to which 
the same risk weight is applied on the ba sis of the credit asse ssments of eligible 
ECAIs are subject to equivalent degrees of credit risk. This shall include modifying 
their determination as to the credit qual ity step with which a particular credit 
assessment shall be associated as appropriate. 
 
EN 112   EN Part 4 - Calculation  
1. CALCULATION OF RISK -WEIGHTED EXPOSURE AMOUNTS  
1. For the purposes of Article 96, the risk-w eighted exposure amount of a securitisation 
position shall be calculated by applying to the exposure value of the position the 
relevant risk weight as set out in this Part.  
2. Subject to paragraph 3,  
(a) where a credit institution calculate s risk-weighted exposure amounts under 
paragraphs 6 to 35, the exposure value of an on-balance sheet securitisation 
position shall be its balance sheet value;  
(b) where a credit institution calculate s risk-weighted exposure amounts under 
paragraphs 36 to 74, the e xposure value of an on-bala nce sheet securitisation 
position shall be measured gross of value adjustments; and  
(c) the exposure value of an off-balance sheet securitisation po sition shall be its 
nominal value multiplied by a conversion figure as prescribed in this Annex. 
This conversion figure shall be 100% unless otherwise specified. 
3. The exposure value of a securitisation posit ion arising from a de rivative instrument 
listed in Annex IV, shall be determ ined in accordance with Annex III.  
4. Where a securitisation position is subject to funded credit  protection, the exposure 
value of that position may be modified in  accordance with and subject to the 
requirements in Annex VIII as furt her specified in this Annex. 
5. Where a credit institution has two or more ove rlapping positions in a securitisation, it 
will be required to the extent that they ove rlap to include in its calculation of risk-
weighted exposure amounts only the positi on or portion of a pos ition producing the 
higher risk-weighted exposure amounts. For these purposes ‘overlapping’ means that 
the positions, wholly or partia lly, represent an exposure to th e same risk such that to 
the extent of the overlap th ere is a single exposure. 
2. CALCULATION OF RISK -WEIGHTED EXPOSURE AMOUNTS UNDER THE 
STANDARDISED APPROACH  
6. Subject to paragraph 8 and 9, the ri sk-weighted exposure amount of a rated 
securitisation position shall be calculated  by applying to the e xposure value the risk 
weight associated with the credit quality step with which the credit assessment has 
been determined to be associated by th e competent authorities in accordance with 
Article 98 as laid down in the following tables 1 and 2.  
Table 1 
Positions other than ones with short-term credit assessments 
 
EN 113   EN Credit 
quality step 1 2 3 4 5 and below 
Risk weight  20% 50% 100% 350% 1250% 
Table 2 
Positions with short-term credit assessments 
Credit quality step 1 2 3 All other credit 
assessments 
Risk weight 20% 50% 100% 1250% 
 
7. Subject to paragraphs 10 to 16 , the risk -weighted exposure amount of an unrated 
securitisation position shall be calcula ted by applying a risk weight of 1250%. 
2.1. Originator and sponsor credit institutions 
8. Originator credit institutions and sponsor cr edit institutions shall apply a risk weight 
of 1250% to all retained and repurchased s ecuritisation positions which have a credit 
assessment by a nominated ECAI which ha s been determined by the competent 
authorities to be associated with a credit qua lity step below credit quality step 3. In 
determining whether a position has such a credit assessment the provisions of Part 3, 
paragraphs 2 to 7 shall apply. 
9. For an originator credit institution or sponsor credit credit institution, the risk-
weighted exposure amounts calculated in resp ect of its positions in a securitisation 
may be limited to the risk-weighted exposur e amounts which would be calculated for 
the securitised exposures had they not b een securitised subject  to the presumed 
application of a 150% risk weight to a ll past due items and items belonging to 
‘regulatory high risk categories’ am ongst the securitised exposures.  
2.2. Treatment of unrated positions 
10. Competent authorities may permit a credit in stitution having an unr ated securitisation 
position to apply the treatment set out in  paragraph 11 for calculating the risk-
weighted exposure amount for that position provided the composition of the pool of 
exposures securitised is known at all times.  
11. A credit institution may apply the weighted -average risk weight that would be 
applied to the securitised e xposures Articles 78 to 83 by a credit institution holding 
the exposures multiplied by a concentration ratio . This concentration ratio is equal to 
the sum of the nominal amounts of all the tr anches divided by the sum of the nominal 
amounts of the tranches junior to or pari passu with the tranche in which the position 
is held including that tranche itself. The resulting risk weight shall not be higher than 
1250% or lower than any risk weight applic able to a rated more senior tranche. 
Where the credit institution is unable to determine the risk weights that would be 
 
EN 114   EN applied to the securitised exposures under Articles 78 to 83, it shall apply a risk 
weight of 1250% to the position. 
2.3. Treatment of securitisation positions in  a second loss tranche or better in an 
ABCP programme 
12. Subject to the availability of a more favour able treatment by virt ue of the provisions 
concerning liquidity facilities in  paragraphs 14 to 16, a cred it institution may apply to 
securitisation positions meeting the conditions  set out in paragraph 13 a risk weight 
that is the greater of (i) 100% or (ii) the highest of the risk weights that would be 
applied to any of the secu ritised exposures under Articles 78 to  83 by a credit 
institution holding the exposures. 
13. For the treatment in the paragraph 12 to be  available, the securitisation position shall 
be 
(a) in a tranche which is economically in a second loss position or better in the 
securitisation and the first loss tran che must provide meaningful credit 
enhancement to the second loss tranche; 
(b) of a quality the equivalent of investment grade or better; and 
(c) held by a a credit institution which does not hold a position in the first loss 
tranche.  
2.4. Treatment of unrated liquidity facilities 
2.4.1.  Eligible liquidity facilities 
14. When the following conditions are met, to determine its exposure value a conversion 
figure of 20% may be applied to the nominal amount of a  liquidity facility with an 
original maturity of one y ear or less and a conversion fi gure of 50% may be applied 
to the nominal amount of a liqui dity facility with an original maturi ty of more than 
one year.  
(a) The liquidity facility documentation shall clearly identify and limit the 
circumstances under which the facility may be drawn.  
(b) The facility shall not be able to be  drawn so as to provide credit support by 
covering losses already incurred at the time of draw – for example, by 
providing liquidity in respect of exposures in default at the time of draw or by 
acquiring assets at more than fair value. 
(c) The facility shall not be  used to provide permanent or regular funding for the 
securitisation. 
(d) Repayment of draws on the facility sha ll not be subordinated to the claims of 
investors other than to claims arising in respect of interest rate or currency 
derivative contracts, fees or other such payments, nor be subject to waiver or 
deferral..  
 
EN 115   EN (e) It shall not be possible for the facility  to be drawn after all applicable credit 
enhancements from which the liquidity facility would benefit are exhausted; 
(f) The facility must include a provision that results in an automatic reduction in 
the amount that can be drawn by the amount  of exposures that are in default, 
where default has the meaning given to it under Articles 84 to 89, or where the 
pool of securitised exposures consists of rated instruments, that terminates the 
facility if the average quality of th e pool falls below investment grade. 
The risk weight to be applied shall be the highest risk weight th at would be applied 
to any of the securitised exposures under Articles 78 to 83 by a cr edit institution 
holding the exposures. 
2.4.2.  Liquidity facilities that may be drawn only in the event of a general market 
disruption 
15. To determine its exposure value a conversio n figure of 0% may be applied to the 
nominal amount of a liquidity facility th at may be drawn only in the event of a 
general market disruption (i.e. where more than one SPE across different transactions 
are unable to roll over maturing commercial pape r and that inability is not the result 
of an impairment of the SPE’s credit quali ty of the credit quality of the securitised 
exposures), provided that th e conditions set out in paragraph 14 are satisfied. 
2.4.3.  Cash advance facilities 
16. To determine its exposure value, a convers ion figure of 0% may be applied to the 
nominal amount of a liquidity facility that is unconditi onally cancellable provided 
that the conditions set out at paragraph 14 are satisfied and that repayment of draws 
on the facility are senior to any other claims on the cash flows arising from the 
securitised exposures. 
2.5. Additional capital requirements for securi tisations of revolving exposures with 
early amortisation provisions 
17. In addition to the risk-weighted exposur e amounts calculated in respect of its 
securitisation positions, an originator credit  institution shall calcu late a risk-weighted 
exposure amount according to the method set out in paragraphs 18 to 32 when it sells 
revolving exposures into a securitisation that contai ns an early amortisation 
provision. 
18. The credit institution shall calculate a risk-weighted exposure amount in respect of 
the sum of the originator’s interest and the investors’ interest.  
19. For securitisation structures where the secu ritised exposures comprise revolving and 
non-revolving exposures, an originator credit institution shall apply the treatment set 
out below to that portion of the underl ying pool containing re volving exposures.  
20. For these purposes, ‘originato r’s interest’ means the nomin al amount of that notional 
part of a pool of drawn am ounts sold into a securitisati on, the proportion of which in 
relation to the amount of the total pool so ld into the structure determines the 
proportion of the cashflows generated by prin cipal and interest collections and other 
 
EN 116   EN associated amounts which are not availabl e to make payments to those having 
securitisation positions in the securitisation.  
To qualify as such the originator’s interest  may not be subordinat e to the investors’ 
interest.  
‘Investors’ interest’ means the nominal amount of the remaining notional part of the 
pool of drawn amounts.  
21. The exposure of the originator  credit institution associated with its rights in respect 
of the originator’s interest shall not be considered a securitisa tion position but as a 
pro rata exposure to the securitised exposur es as if they had not been securitised. 
2.5.1.  Exemptions from early amortisation treatment 
22. Originators of the following types of s ecuritisaton are exempt from the capital 
requirement in paragraph 17: 
(a) Securitisations of revolving exposures whereby investors remain fully exposed 
to all future draws by borrowers so th at the risk on the underlying facilities 
does not return to the originator cr edit institution even after an early 
amortisation event has occurred are exempt from the early amortisation 
treatment, and 
(b) securitisations where any early amor tisation provision is solely triggered by 
events not related to the pe rformance of the securitised assets or the originator 
credit institution, such as material  changes in tax laws or regulations. 
2.5.2.  Maximum capital requirement  
23. For an originator credit institution subjec t to the requirement in paragraph 17 the 
total of the risk-weighted exposure amounts in respect of its positions in the 
investors’ interest and the risk-wei ghted exposure amounts calculated under 
paragraph 17 shall be no gr eater than the greater of  
(a) the risk-weighted exposure amounts calcula ted in respect of its  positions in the 
investors’ interest,  
(b) the risk-weighted exposure amounts that would be calculated in respect of the 
securitised exposures by a credit institu tion holding the exposures as if they 
had not been securitised in an amount  equal to the inve stors’ interest. 
24. Deduction of net gains, if any, arising from the capitalisation of future income 
required under Article 57 shall be treated outside the maximum amount indicated in 
paragraph 23.  
2.5.3.  Calculation of risk-w eighted exposure amounts 
25. The risk-weighted exposure amount to be calculated in accordance with paragraph 17 
shall be determined by multiplying the amount of the investors’ interest by the 
product of the appropriate conv ersion figure as indicated in  paragraphs 27 to 32 and 
 
EN 117   EN the weighted average risk weight that woul d apply to the securitised exposures if the 
exposures had not been securitised.  
26. An early amortisation provision  shall be considered to be ‘controlled’ where the 
following conditions are met. 
(a) The originator credit institution has an appropriate capital/liquidity plan in 
place to ensure that it has sufficient cap ital and liquidity available in the event 
of an early amortisation. 
(b) Throughout the duration of the transacti on there is a pro rata sharing between 
the originator’s interest and the investors’ interest of payments of interest and 
principal, expenses, losses and recoveri es based on the beginning of the month 
balance of receivables outstanding.  
(c) The amortisation period is considered sufficient for 90% of the total debt 
(originator’s and investors’ interest) out standing at the beginning of the early 
amortisation period to have been repa id or recognised as in default; 
(d) The speed of repayment is no more ra pid than would be achieved by straight-
line amortisation over the period set out in condition (c). 
27. In the case of securitisations subject to an early amortisation provision of retail 
exposures which are uncommitted and unc onditionally cancellable without prior 
notice, where the early amortisation is triggered by the excess spread level falling to 
a specified level, credit institutions sh all compare the three-month average excess 
spread level with the excess spread levels at which excess spread is required to be 
trapped. 
28. In cases where the securitisation does not require excess spread to be trapped, the 
trapping point is deemed to be 4.5 percen tage points greater than the excess spread 
level at which an early amortisation is triggered.  
29. The conversion figure to be applied shall be determined by the level of the actual 
three month average excess spread  in accordance with Table 3. 
Table 3 
 Securitisations subject to 
a controlled early 
amortisation provision Securitisations subject to a 
non-controlled early 
amortisation provision 
3 months average 
excess spread Conversion factor Conversion factor  
Above level A 0% 0% 
Level A 1% 5% 
Level B 2% 15% 
 
EN 118   EN Level C 20% 50% 
Level D 20% 100% 
Level E 40% 100% 
 
30. In Table 3, ‘Level A’ means levels of  excess spread less th an 133.33% of the 
trapping level of excess spread but not less  than 100% of that trapping level; ‘Level 
B’ means levels of excess spread less than 100% of the trapping level of excess 
spread but not less than 75% of that trapping level; ‘Level C’ means levels of excess 
spread less than 75% of the trapping level of excess spread but not less than 50% of 
that trapping level; ‘Level D’ means leve ls of excess spread less than 50% of the 
trapping level of excess spread but not less  than 25% of that trapping level; and 
‘Level E’ means levels of excess spread less  than 25% of the tra pping level of excess 
spread. 
31. All other securitisations subject to a c ontrolled early amortis ation provision of 
revolving exposures shall be subject to  a credit conversion figure of 90%. 
32. All other securitisations s ubject to a non-controlled earl y amortisation provision of 
revolving exposures shall be subject to  a credit conversion figure of 100%. 
2.6. Recognition of credit risk mitigat ion on securitisation positions 
33. Where credit protection is obtained on a s ecuritisation position, the calculation of 
risk-weighted exposure amounts may be m odified in accordance with Annex VIII. 
2.7. Reduction in risk-weighted exposure amounts 
34. As provided in Article 66(2), in respect of a securitisation position in respect of 
which a 1250% risk weight applies, credit institutions may, as an alternative to 
including the position in th eir calculation of risk-weight ed exposure amounts, deduct 
from own funds the exposur e value of the position. For these purposes, the 
calculation of the exposure value may reflec t eligible funded protection in a manner 
consistent with paragraph 33. 
35. Where a credit institution make s use of the alternative indicated in paragraph 34, 
12.5 times the amount deducted in accordance  with that paragraph shall, for the 
purposes of paragraph 9, be subtracted fr om the amount specified in that paragraph 
as the maximum risk-weighted exposure am ount to be calculated by the credit 
institutions there indicated. 
 
EN 119   EN 3. CALCULATION OF RISK -WEIGHTED EXPOSURE AMOUNTS UNDER THE INTERNAL 
RATINGS BASED APPROACH  
3.1. Hierarchy of methods 
36. For the purposes of Article 96, the risk-w eighted exposure amount of a securitisation 
positions shall be calculated in accordance with paragraphs 36 to 74. 
37. For a rated position or a position in respect of which an inferred rating may be used, 
the Ratings Based Method set out in paragrap hs 45 to 49 shall be used to calculate 
the risk-weighted exposure amount.  
38. For an unrated position the Supervisory Form ula Method as set out in paragraphs 50 
to 52 shall be used except wherethe Intern al Assessment Approach is permitted to be 
used as set out in paragraphs 42 and 43. 
39. A credit institution other than an originator credit institution or a sponsor credit 
institution may only use the Supervisory Formula Method with the approval of the 
competent authorities.  
40. In the case of an originator or sponso r credit institution unable to calculate K irb and 
which has not obtained approval to use the Internal Assessment Approach for 
positions in ABCP programmes, and in the case of other credit institutions where 
they have not obtained approval to use the Supervisory Formula Method or, for 
positions in ABCP programmes, the Internal  Assessment Approach, a risk weight of 
1250% shall be applied to securitisation positions which are unrated and in respect of 
which an inferred rating may not be used.  
3.1.1.  Use of inferred ratings 
41. When the following minimum operational requirements are satisfied a institution 
shall attribute to an unrated position an inferred credit assessment equivalent to the 
credit assessment of those rated positions (the ‘reference positions’) which are the 
most senior positions which are in a ll respects subordinate to the unrated 
securitisation position in question.  
(a) The reference positions must be subor dinate in all respects to the unrated 
securitisation tranche.  
(b) The maturity of the reference positions must be equal to or longer than that of 
the unrated position in question.  
(c) On an ongoing basis, any inferred rating must be updated to reflect any 
changes in the credit assessment of the reference securitisation positions. 
3.1.2.  The ‘Internal Assessment Approach’ for positions in ABCP programmes 
42. Subject to the approval of th e competent authorities, when the following conditions 
are satisfied a credit institution may attribute to an unrated position in an asset 
backed commercial paper programme a deri ved rating as laid down in paragraph 43. 
 
EN 120   EN (a) Positions in the commercial paper i ssued from the programme shall be rated 
positions. 
(b) The credit institution shall satisfy the competent authorities that its internal 
assessment of the credit quality of the position reflects the publicly available 
assessment methodology of one or more eligible ECAIs, for the rating of 
securities backed by the exposur es of the type securitised.. 
(c) The ECAIs, the methodology of which shall be reflected as required by the 
point (b), shall include t hose ECAIs which have provide d an external rating for 
the commercial paper issued from th e programme. Quantitative elements – 
such as stress factors – used in asse ssing the position to a particular credit 
quality must be at least as conservative as those used in the relevant assessment 
methodology of the ECAIs in question 
(d) In developing its internal assessmen t methodology the credit institution shall 
take into consideration all published ratings methodol ogies of eligible ECAIs 
for the the rating of securities backed by the exposures of the type securitised. 
This consideration shall be documente d by the credit institu tion and updated at 
least once a year. 
(e) The credit institution’s internal assessment methodology shall include rating 
grades. There shall be a corresponden ce between such rating grades and the 
credit assessments of eligible ECAIs. This correspondence shall be explicitly 
documented. 
(f) The internal assessment methodology shall be used in  the credit institution’s 
internal risk management processe s, including its decision making, 
management information and capital allocation processes. 
(g) Internal or external auditors, an ECAI, or the credit institution’s internal credit 
review or risk management function shall perform regular reviews of the 
internal assessment process and the quality  of the internal assessments of the 
credit quality of the cr edit institution’s exposures to an ABCP programme. If 
the credit institution’s internal audit, credit review, or risk management 
functions perform the review , then these functions sha ll be independent of the 
ABCP programme business line, as we ll as the customer relationship. 
(h) The credit institution shall track the performance of its internal ratings over 
time to evaluate the performance of its internal assessment methodology and 
shall make adjustments, as necessary, to that methodology when the 
performance of the exposures routinely diverges from that indicated by the 
internal ratings. 
(i) The ABCP programme shall incorporat e underwriting standards in the form of 
credit and investment guidelines. In  deciding on an asset purchase, the 
programme administrator shall consider the type of asset being purchased, the 
type and monetary value of the expos ures arising from the provision of 
liquidity facilities and credit enhancemen ts, the loss distribution, and the legal 
and economic isolation of the transferre d assets from the entity selling the 
assets. A credit analysis of the asset sell er’s risk profile shall be performed and 
 
EN 121   EN shall include analysis of past and e xpected future financial performance, 
current market position, expected future  competitiveness, leverage, cash flow, 
and interest coverage, and debt rating. In addition, a revi ew of the seller’s 
underwriting standards, servicing capabil ities, and collection processes shall be 
performed. 
(j) The ABCP programme’s underwriting st andards shall establish minimum asset 
eligibility criteria that, in particular, 
(i) excludes the purchase of assets that ar e significantly past due or defaulted; 
(ii) limits excess concentration to indi vidual obligor or geographic area; and 
(iii) limits the tenor of the assets to be purchased. 
(k) The ABCP program shall have collections  policies and processes that take into 
account the operational capability and cr edit quality of the servicer. The 
programme shall mitigate seller/servicer risk through various methods, such as 
triggers based on current credit quality  that would preclude co-mingling of 
funds. 
(l) The aggregated estimate of loss on an asset pool that the ABCP programme is 
considering purchasing must take into account all sources of potential risk, 
such as credit and dilution risk. If th e seller-provided credit enhancement is 
sized based on only credit-related losses,  then a separate reserve shall be 
established for dilution risk, if diluti on risk is material for the particular 
exposure pool. In addition, in sizing the required enhancement level, the 
program shall review several years of hi storical information, including losses, 
delinquencies, dilutions, and the tu rnover rate of the receivables.  
(m) The ABCP programme shall incorporate structural features – for example wind 
down triggers - into the purchase of e xposures in order to mitigate potential 
credit deterioration of the underlying portfolio.  
The requirement for the assessment me thodology of the ECAI to be publicly 
available may be waived by the competent au thorities where they are satisfied that 
due to the specific features of the securitisation – for ex ample its unique structure - 
there is as yet no publicly availa ble ECAI assessment methodology. 
43. The unrated position shall be assigned by th e credit institution to one of the rating 
grades described in paragraph 42. The positi on shall be attributed  a derived rating the 
same as the credit assessments corresponding to that rating grade as laid down in 
paragraph 42. Where this derived rating is, at  the inception of the securitisation at the 
level of investment grade or better, it shall be considered the same as an eligible 
credit assessment by an eligible ECAI for the purposes of calc ulating risk-weighted 
exposure amounts. 
3.2. Maximum risk-weighted exposure amounts 
44. For an originator credit institution, a spons or credit institution, or for other credit 
institutions which can calculate K IRB, the risk-weighted exposure amounts calculated 
in respect of its positions in a securiti sation may be limited to that which would 
 
EN 122   EN produce a capital requirement under Article 75(a)  equal to the sum of  8% of the risk-
weighted exposure amounts whic h would be produced if th e securitised assets had 
not been securitised and were on the balanc e sheet of the credit institution plus the 
expected loss amounts of those exposures.  
3.3. Ratings Based Method 
45. Under the Ratings Based Method, the risk -weighted exposure amount of a rated 
securitisation position shall be calculated  by applying to the e xposure value the risk 
weight associated with the credit quality step with which the credit assessment has 
been determined to be associated by th e competent authorities in accordance with 
Article 98 as set out in the Tables 4 and 5.  
Table 4 
Positions other than ones with short-term credit assessments 
Credit Quality Step 
(CQS) Risk weight 
 A B C 
CQS 1 7% 12% 20% 
CQS 2 8% 15% 25% 
CQS 3 10% 18% 35%3 
CQS 4 12% 20% 35% 
CQS 5 20% 35% 35% 
CQS 6 35% 50% 50% 
CQS 7 60% 75% 75% 
CQS 8 100% 100% 100% 
CQS 9 250% 250% 250% 
CQS 10 425% 425% 425% 
CQS 11 650% 650% 650% 
Below CQS 11 1250% 1250% 1250% 
Table 5 
Positions with short term credit assessments 
 
EN 123   EN Credit Quality Step 
(CQS) Risk weight  
 A B C 
CQS 1 7% 12% 20% 
CQS 2 12% 20% 35% 
CQS 3 60% 75% 75% 
All other credit 
assessments 1250% 1250% 1250% 
 
46. Subject to paragraph 47, the risk weights in column A of each table shall be applied 
where the position is in the most senior tr anche of a securitisation. When determining 
whether a tranche is the most senior for th ese purposes, it is not  required take into 
consideration amounts due under in terest rate or currency derivative contracts, fees 
due, or other similar payments. 
47. The risk weights in column C of each table shall be applied where the position is in a 
securitisation where the effective number of exposures securitised is less than six. In 
calculating the effective number of exposures  securitised multiple exposures to one 
obligor must be treated as one exposure.  The effective number of exposures is 
calculated as:  
∑∑
=
iiii
EADEAD
N22) (
 
where EAD i represents the sum of the exposur e values of all exposures to the 
ith obligor. In the case of resecuritisation (s ecuritisation of securi tisation exposures), 
the credit institution must look at the number of securitisation exposures in the pool 
and not the number of underl ying exposures in the original pools from which the 
underlying securitisation exposures stem. If the portfolio share associated with the 
largest exposure, C 1, is available, the credit in stitution may compute N as 1/C 1. 
48. The risk weights in Column B sha ll be applied to all other positions. 
49. Credit risk mitigation on securitisation pos itions may be recognised in accordance 
with paragraphs 58 to 60. 
3.4. Supervisory Formula Method  
50. Subject to paragraphs 56 and 57, under the Supervisory Formula Method, the risk 
weight for a securitisation position shall be th e greater of 7% or th e risk weight to be 
applied in accordance with paragraph 51. 
 
EN 124   EN 51. Subject to paragraphs 56 a nd 57, the risk weight to be applied to the exposure 
amount shall be  
12.5 x (S[L+T] – S[L]) / T 
where 
() () ⎭⎬⎫
⎩⎨⎧
< − ⋅+ −+≤=−x Kirbr when e Kirbr/ω d K[Kirbr] K[x] KirbrKirbrx when xxSx)/Kirbr ω(Kirbr1][
 
where 
τ = 1000,  
and ω = 20. 
In these expressions, Beta [x; a, b] refers to the cumulative beta distribution with 
parameters a and b evaluated at x.  
T (the thickness of the tranche in which the position is held) is measured as the ratio 
of (a) the nominal amount of the tranche to  (b) the sum of the exposure values of the 
exposures that have been securitised. Fo r these purposes the exposure value of a 
derivative instrument listed in Annex IV shal l, where the current replacement cost is 
not a positive value, be the potential futu re credit exposure cal culated in Accordance 
with Annex III; 
Kirbr is the ratio of (a) Kirb  to (b) the sum of the exposure values of the exposures 
that have been securitised. Kirbr is expressed in decimal form (e.g. Kirb equal to 
15% of the pool would be expressed as Kirbr of 0.15).  
L (the credit enhancement level) is measured as the ratio of the nominal amount of 
all tranches subordinate to th e tranche in which th e position is held to the sum of the 
exposure values of the exposures that ha ve been securitised. Capitalised future 
income shall not be included in the meas ured L. Amounts due by counterparties to 
derivative instruments listed in  Annex IV that represent tran ches more junior than the 
tranche in question may be measured at th eir current replacement cost (without the 
potential future credit exposures) in calculating the enhancement level.  
N is the effective number of exposures cal culated in accordance with paragraph 47. 
ELGD, the exposure-weighted average loss-gi ven-default, is calculated as follows:  
∑∑⋅
=
iiii i
EADEAD LGD
ELGD
 
where LGD i represents the average LGD associated with all exposures to the ith 
obligor, where LGD is determined in accordance with Articles 84 to 89. In the case 
of resecuritisation, an LGD of 100% shall be applied to the securitised positions. 
When default and dilution risk for purchase d receivables are treated in an aggregate 
 
EN 125   EN manner within a securitisation (e.g. a single reserve or over-collateralisation is 
available to cover losses from either sour ce), the LGD input shall be constructed as a 
weighted average of the LGD for credit risk and the 75% LGD for dilution risk. The 
weights shall be the stand-alone capital ch arges for credit risk and dilution risk 
respectively. 
Simplified inputs 
If the exposure value of the la rgest securitised exposure, C 1, is no more than 3% of 
the sum of the exposure values of the securitised exposures, then for the purposes of 
the Supervisory Formula Method the credit institution may set LGD= 50% and N 
equal to either 
1
11
1 }0, 1 max{1−
⎟⎟
⎠⎞
⎜⎜
⎝⎛−⎟
⎠⎞⎜
⎝⎛
−−+= CmmC CCC Nm
m
 . 
or 
N=1/ C 1. 
Cm is the ratio of the sum of the exposure va lues of the largest 'm' exposures to the 
sum of the exposure values of the exposures securitised . The level of ‘m’ may be set 
by the credit institution.  
For securitisations involvi ng retail exposures, the compet ent authorities may permit 
the Supervisory Formula Method to be implemented using the simplifications: h = 0 
and v = 0 .  
52. Credit risk mitigation on securitisation pos itions may be recognised in accordance 
with paragraphs 58, 59 and 61 to 65. 
3.5. Liquidity Facilities 
53. The provisions in paragraphs 54 and 55 apply for the purposes of determining the 
exposure value of an unrated securitisation position in the form of certain types of 
liquidity facility. 
3.5.1.  Liquidity Facilities Only Available in the Event of General Market Disruption 
54. A conversion figure of 20% may be applie d to the nominal amount of a liquidity 
facility that may only be dr awn in the event of a general market disruption and that 
meets the conditions to be an ‘eligible liqui dity facility’ set out in paragraph 14.  
3.5.2.  Cash advance facilities 
55. A conversion figure of 0% may be applie d to the nominal amount of a liquidity 
facility that meets the conditi ons set out in paragraph 16. 
Exceptional treatment where K irb cannot be calculated. 
 
EN 126   EN 56. When it is not practical for the credit in stitution to calculate the risk-weighted 
exposure amounts for the securitised exposures as if they had not been securitised, a 
credit institution may, on an exceptional basis and subject to the consent of the 
competent authorities, temporarily be a llowed to apply the following method for the 
calculation of risk-weighted exposure amount s for an unrated securitisation position 
in the form of a liquidity facility.  
57. The highest risk weight that  would be applied under Articles 78 to 83 to any of the 
securitised exposures had they not been  securitised may be applied to the 
securitisation position represented by th e liquidity facility. To determine the 
exposure value of the position a conversio n figure of 50% may be applied to the 
nominal amount of the liquidity facility if the facil ity has an original maturity of one 
year or less. If the liquidity facility co mplies with the conditions in paragraph 54 a 
conversion figure of 20% may be applied.  
3.6. Recognition of credit risk mitigation in  respect of securitisation positions 
3.6.1.  Funded protection 
58. Eligible funded protection is limited to that which is elig ible for the calculation of 
risk-weighted exposure amounts under Articl es 78 to 83 as laid down under Articles 
90 to 93 and recognition is subject to compliance with the relevant minimum 
requirements as laid do wn under those Articles. 
3.6.2.  Unfunded protection 
59. Eligible unfunded protection and unfunded pr otection providers are limited to those 
which are eligible under Articles 90 to 93 and recognition is subject to compliance 
with the relevant minimum requireme nts laid down under those Articles.  
3.6.3.  Calculation of capital requirements for se curitisation positions with credit risk 
mitigation 
Ratings Based Method 
60. Where risk-weighted exposure amounts are calculated using the Ratings Based 
Method, the exposure value and/or th e risk-weighted e xposure amount for a 
securitisation position in respect of which credit protection has been obtained may be 
modified in accordance with the provision s of Annex VIII as they apply for the 
calculation of risk-weighted exposur e amounts under Articles 78 to 83. 
Supervisory Formula Method – full protection 
61. Where risk-weighted exposure amounts ar e calculated using the Supervisory 
Formula Method, the credit institution shall determine the ‘effective risk weight’ of 
the position. It shall do this by dividing the risk-weighted exposure amount of the 
positon by the exposure value of the positi on and multiplying the result by 100.  
62. In the case of funded credit  protection, the risk-weight ed exposure amount of the 
securitisation position shall be calcula ted by multiplying the funded protection-
adjusted exposure amount of the position (E*, as calculated under Articles 90 to 93 
 
EN 127   EN for the calculation of risk-weighted expos ure amounts under Articles 78 to 83 taking 
the amount of the securitisation position to  be E) by the effective risk weight. 
63. In the case of unfunded credit protection, the risk-weighted e xposure amount of the 
securitisation position shall be calculated by multiplying G A (the amount of the 
protection adjusted for any currency mismatch and matu rity mismatch in accordance 
with the provisions of Annex VIII) by the ri sk weight of the protection provider; and 
adding this to the amount arrived at by mu ltiplying the amount of the securitisation 
position minus G A by the effective risk weight. 
Supervisory formula method - partial protection 
64. If the credit risk mitigation covers the ‘fir st loss’ or losses on a proportional basis on 
the securitisation position, the credit in stitution may apply the provisions in 
paragraphs 61 to 63. 
65. In other cases the credit institution shall tr eat the securitisation position as two or 
more positions with the uncovered portion being considered the position with the 
lower credit quality. For the purposes of calculating the risk-weighted exposure 
amount for this position, the pr ovisions in paragraphs 50 to  52 shall apply subject to 
the modifications that ‘T’ shall be adjusted to e* in the case of funded protection; and 
to T-g in the case of  unfunded protection, where e* de notes the ratio of E* to the 
total notional amount of the underlying pool,  where E* is the adjusted exposure 
amount of the securitisation position calcula ted in accordance with the provisions of 
Annex VIII as they appl y for the calculation of ri sk-weighted exposure amounts 
under Articles 78 to 83 taking the amount of th e securitisation position to be E; and g 
is the ratio of the nominal amount of cred it protection (adjusted for any currency or 
maturity mismatch in accordance with the provisions of Annex VIII) to the sum of 
the exposure amounts of the securitised e xposures. In the case of unfunded credit 
protection the risk weight of the protection provider shall be applied to that portion 
of the position not falling within  the adjusted value of ‘T’. 
3.7. Additional capital requirements for securi tisations of revolving exposures with 
early amortisation provisions 
66. In addition to the risk-weighted exposur e amounts calculated in respect of its 
securitisation positions, an originator credit institution shall be required to calculate a 
risk-weighted exposure amount according to  the methodology set out in paragraphs 
17 to 32 when it sells revolving exposures into  a securitisation that  contains an early 
amortisation provision. 
67. For the purposes of paragraph 66, paragra phs 68 and 69 shall replace paragraphs 20 
and 21. 
68. For the purposes of these provisi ons, “originator’s interest”  shall be the sum of 
(a) the nominal amount of that notional part  of a pool of drawn amounts sold into a 
securitisation, the proportion of which in relation to the amount of the total 
pool sold into the structure determin es the proportion of the cashflows 
generated by principal and interest co llections and other associated amounts 
 
EN 128   EN which are not available to make paym ents to those having securitisation 
positions in the securitisation; plus 
(b) the nominal amount of that part of the pool of undrawn amounts of the credit 
lines, the drawn amounts of which have b een sold into the securitisation, the 
proportion of which to the total amount  of such undrawn am ounts is the same 
as the proportion of the nominal amount described in point (a) to the nominal 
amount of the pool of drawn amounts sold into the securitisation. 
To qualify as such the originator’s interest  may not be subordinat e to the investors’ 
interest.  
“Investors’ interest” means the nominal am ount of the notional part of the pool of 
drawn amounts not falling within point (a) plus the nominal amount of that part of 
the pool of undrawn amounts of credit lines, the drawn amounts of which have been 
sold into the securtisation, not falling within point (b).  
69. The exposure of the originator  credit institution associated with its rights in respect 
of that part of the originator ’s interest described in para graph 68 point (a) shall not be 
considered a securitisation position but as a pro rata exposure to the securitised 
drawn amounts exposures as if  they had not been securiti sed in an amount equal to 
that described in paragraph 68 point (a). The originator credit institution shall also be 
considered to have a pro rata exposure to the undrawn amounts of the credit lines, the 
drawn amounts of which have been sold into  the securitisation, in an amount equal to 
that described in paragraph 68point (b).  
3.8. Reduction in risk-weighted exposure amounts 
70. The risk-weighted exposure  amount of a securitisati on position to which a 1250% 
risk weight is applied may be reduced by 12.5 times the amount of any value 
adjustments made by the credit institution in  respect of the securitised exposures. To 
the extent that value adjustments are taken account of for this purpose they shall not 
be taken account of for the purposes of the calculation indicated in Annex VII, Part 
1, paragraph 34. 
71. The risk-weighted exposure amount of a securitisation pos ition may be reduced by 
12.5 times the amount of any value adjust ments made by the credit institution in 
respect of the position. 
72. As provided in Article 66(2), in respect of a securitisation position in respect of 
which a 1250% risk weight applies, credit institutions may, as an alternative to 
including the position in th eir calculation of risk-weight ed exposure amounts, deduct 
from own funds the exposure  value of the position.  
73. For the purposes of paragraph 73 
(a) the exposure value of the position ma y be derived from the risk-weighted 
exposure amounts taking into account any reductions made in accordance with 
paragraphs 70 and 71; 
(b) the calculation of the exposure value ma y reflect eligible funded protection in a 
manner consistent with the methodology pr escribed in paragraphs 58 to 65; 
 
EN 129   EN (c) where the Supervisory Formula Method is used to calculate risk-weighted 
exposure amounts and L < KIRBR and [L+T] > K IRBR the position may be treated 
as two positions with L equal to K IRBR for the more senior of the positions. 
74. Where a credit institution make s use of the alternative indicated in paragraph 72, 
12.5 times the amount deducted in accordance  with that paragraph shall, for the 
purposes of paragraph 44, be subtracted fr om the amount specified in that paragraph 
as the maximum risk-weighted exposure am ount to be calculated by the credit 
institutions there indicated. 
 
EN 130   EN Annex X  
 
Operational Risk  
 
Part 1 - Basic Indicator Approach  
1. CAPITAL REQUIREMENT  
1. Under the Basic Indicator Approach, the cap ital requirement for operational risk is 
equal to 15% of the relevant indicator defined below.  
2. RELEVANT INDICATOR  
2. The relevant indicator is the average over three years of the sum of net interest 
income, and net non-interest income. 
3. The three-year average is calculated on the basis of the last six twelve-monthly 
observations at the middle and at the end of  the financial year. When audited figures 
are not available, business estimates may be used.  
4. If for any given observation, the sum of net interest income and net non-interest 
income is negative or equal to zero, this fi gure shall not be taken into account in the 
calculation of the three-year average. The rele vant indicator shall be  calculated as the 
sum of positive figures divided by the number of positive figures. 
2.1. Credit institutions subject  to Directive 86/635/EEC 
5. Based on the accounting categories for th e profit and loss acc ount of credit 
institutions under Article 27 of Directive 86 /635/EEC, the relevant  indicator shall be 
expressed as the sum of the elements list ed in Table 1. Each element shall be 
included in the sum with its positive or negative sign.  
6. These elements may need to be adjusted to  reflect the qualifications in paragraphs 7 
and 8. 
Table 1: 
1 Interest receivable and similar income 
2 Interest payable and similar charges 
3 Income from securities: 
a) from shares and other variable-yield 
securities 
b) from participating interests 
c) from shares in affiliated undertakings  
 
EN 131   EN 4 Commissions/fees receivable 
5 Commissions/fees payable 
6 Net profit or net loss on financial 
operations 
7 Other operating income 
 
2.1.1.  Qualifications: 
7. The indicator shall be calculated befo re the deduction of any provisions and 
operating expenses. 
8. The following elements shall not be used in the calculation of the indicator: 
(a) Realised profits/losses from the sale of non-trading book items 
(b) Income from extraordinary or irregular items 
(c) Income derived from insurance. 
When revaluation of trading items is part of the profit and loss st atement, revaluation 
could be included. When Article 36 (2 ) of Directive 86/635/EEC is applied, 
revaluation booked in the profit and loss account should be included. 
2.2. Credit institutions subject to a different accounting framework 
9. When credit institutions are subject to an  accounting framework different from the 
one established by Directive 86/635/EC, they  should calculate the relevant indicator 
on the basis of data that best  reflect the above definition. 
 
EN 132   EN Part 2 - Standardised Approach  
1. CAPITAL REQUIREMENT  
1. Under the Standardised Approach, the capital  requirement for operational risk is the 
simple sum of the capital requirements cal culated for each of the business lines in 
table 2 . 
2. The capital requirement for a given business line is equal to a certain percentage of a 
relevant indicator. 
3. The indicator is calculated fo r each business line individually. 
4. For each business line, the rele vant indicator is the aver age over three years of the 
sum of net interest income, and annual net non-interest income, as defined in Part 1, 
paragraphs 5 to 9. 
5. The three-year average is calculated on the basis of the last six twelve-monthly 
observations at the middle and at the end of  the financial year. When audited figures 
are not available, busine ss estimates may be used. 
6. If for any given observation, the sum of net interest income and net non-interest 
income is negative, this figure shall be assigned the value zero. 
Table 2: 
Business line List of activities Percentage 
Corporate finance Underwriting of financial instruments 
and/or placing of financial instruments 
on a firm commitment basis 
Services related to underwriting 
Investment advice 
Advice to undertakings on capital 
structure, industrial strategy and related 
matters and advice and services relating 
to the mergers and the purchase of 
undertakings 
Investment research and financial 
analysis and other forms of general 
recommendation relating to transactions 
in financial instruments 18% 
Trading and sales Dealing on own account 
Money broking 18% 
 
EN 133   EN Reception and transmission of orders in 
relation to one or more financial 
instruments 
Execution of orders on behalf of clients 
Placing of financial instruments without 
a firm commitment basis 
Operation of Multilateral Trading 
Facilities 
Retail brokerage 
(Activities with a individual 
physical persons or with small 
and medium sized entities 
meeting the criteria set out in 
Article 55 for the retail exposure 
class) Reception and transmission of orders in 
relation to one or more financial 
instruments 
Execution of orders on behalf of clients 
Placing of financial instruments without 
a firm commitment basis 12% 
Commercial banking Acceptance of deposits and other 
repayable funds 
Lending 
Financial leasing 
Guarantees and commitments 15% 
Retail banking 
(Activities with a individual 
physical persons or with small 
and medium sized entities 
meeting the criteria set out in 
Article 55 for the retail exposure 
class) Acceptance of deposits and other 
repayable funds 
Lending 
Financial leasing 
Guarantees and commitments 12% 
Payment and settlement Money transmission services, 
Issuing and administering means of 
payment 18% 
Agency services Safekeeping and administration of 
financial instruments for the account of 
clients, including custodianship and 
related services such as cash/collateral 
management 15% 
Asset management Portfolio management 12% 
 
EN 134   EN Managing of UCITS 
Other forms of asset management  
 
7. Competent authorities may authorise a cred it institution to calculate its capital 
requirement for operational risk using an al ternative standardised approach, as set out 
in paragraphs 9 to 16. 
2. PRINCIPLES FOR BUSINESS LINE MAPPING  
8. Credit institutions must develop and docum ent specific policies and criteria for 
mapping the indicator for current business lin es and activities into the standardised 
framework. The criteria must  be reviewed and adjusted as appropriate for new or 
changing business activities a nd risks. The principles fo r business line mapping are : 
(a) All activities must be mapped into th e business lines in a mutually exclusive 
and jointly exhaustive manner;  
(b) Any activity which cannot be readily mapped into the business line framework, 
but which represents an ancillary function to an activity included in the 
framework, must be allocated to the bus iness line it supports. If more than one 
business line is supported through the an cillary activity, an  objective mapping 
criteria must be used; 
(c) If an activity cannot be mapped into a particular business line then the business 
line yielding the highest percentage must be used. The same business line 
equally applies to any asso ciated ancillary activity. 
(d) Credit institutions may use internal pr icing methods to allocate the indicator 
between business lines. Costs genera ted in one business line which are 
imputable to a different business line may be reallocated to the business line to 
which they pertain, for instance by using a treatment based on internal transfer 
costs between the two business lines. 
(e) The mapping of activities into busi ness lines for operational risk capital 
purposes must be consistent with the categories used for credit and market 
risks. 
(f) Senior management is responsible fo r the mapping policy under the control of 
the governing bodies of the credit institution; 
(g) The mapping process to business lines must be subject to independent review. 
 
EN 135   EN 3. ALTERNATIVE INDICATORS FOR CERTAIN BUSINESS LINES  
3.1. Modalities 
9. The competent authorities may authorise th e credit institution to use an alternative 
indicator for the business lines: re tail banking and commercial banking. 
10. For these business lines, the relevant indica tor shall be a normalised income indicator 
equal to the three-year average of the to tal nominal amount of loans and advances 
multiplied by 0.035. 
11. For the retail banking business line, the loan s and advances shall consist of the total 
drawn amounts in the following credit portfolios: retail, SMEs treated as retail, and 
purchased retail receivables. 
12. For the commercial banking business line, the loans and advances shall consist of the 
drawn amounts in the following credit portfo lios: Corporate, Sovereign, Institutions, 
Specialised Lending, SMEs treated as  Corporate and Purchased Corporate 
Receivables. Securities held in the non- trading book shall also be included. 
3.2. Conditions 
13. The authorization to use alternative indicato rs shall be subject to the conditions in 
paragraphs 14 to 16. 
3.2.1.  General condition 
14. The credit institution meets the qualifying criteria set out in paragraph 17. 
3.2.2.  Conditions specific to reta il banking and commercial banking 
15. The credit institution is overwhelmingly active in retail and commercial banking 
activities, which shall account fo r at least 90% of its income. 
16. The credit institution is able to demonstr ate to the competent authorities that a 
significant proportion of its re tail and/or commercial ba nking activities comprise 
loans associated with a high probability of default, and that the alternative 
standardised approach provi des an improved basis for assessing the operational risk. 
4. QUALIFYING CRITERIA  
17. Credit institutions must meet the follo wing qualifying criteria listed below, in 
addition to the general risk management st andards set out in Ar ticle 22 and Annex V. 
(a) Credit institutions shall have a we ll-documented assessment and management 
system for operational risk  with clear responsibilities  assigned for this system. 
They shall identify their exposures to  operational risk a nd track relevant 
operational risk data, includi ng material loss data. This system shall be subject 
to regular independent review. 
 
EN 136   EN (b) The operational risk assessment system mu st be closely integrated into the risk 
management processes of the credit instit ution. Its output mu st be an integral 
part of the process of monitoring and controlling the cr edit institution’s 
operational risk profile. 
(c) Credit institutions shall implement a system of management reporting that 
provides operational risk reports to relevant functions within the credit 
institution. Credit institutions shall have procedures fo r taking appropriate 
action according to the information within the management reports.  
 
EN 137   EN Part 3 - Advanced Measurement Approaches  
1. QUALIFYING CRITERIA  
1. To be eligible for an Advanced Measur ement Approach, credit institutions must 
satisfy the competent authorities that they  meet the qualifying criteria below, in 
addition to the general risk management  standards in Article 22 and Annex V. 
1.1. Qualitative Standards 
2. The credit institution’s internal operational risk measurement system shall be closely 
integrated into its day-to-day risk management processes. 
3. The credit institution must have an i ndependent risk management function for 
operational risk. 
4. There must be regular repor ting of operational risk expos ures and loss experience. 
The credit institution shall have procedures for taking appropriate corrective action. 
5. The credit institution’s risk management  system must be well documented. The 
credit institution shall have  routines in place for ensu ring compliance and policies for 
the treatment of non-compliance.  
6. The operational risk management processes and measurement systems shall be 
subject to regular reviews performed by internal and/or ex ternal auditors. 
7. The validation of the operational risk measurement system by the competent 
authorities shall include the following elements: 
(a) Verifying that the internal validation processes are operating in a satisfactory 
manner;  
(b) Making sure that data flows and processes associated with the risk 
measurement system are transparent and accessible. 
1.2. Quantitative Standards 
1.2.1.  Process 
8. Credit institutions shall calculate their capital requirement as comprising both 
expected loss and unexpected loss, unless they  can demonstrate that expected loss is 
adequately captured in their internal bus iness practices. The operational risk measure 
must capture potentially severe tail events, achieving a soundness standard 
comparable to a 99.9% confidence in terval over a one year period.  
9. The operational risk measurement system of  a credit institution must have certain 
key elements to meet the soundness standa rd set out above. These elements must 
include the use of internal data, external da ta, scenario analysis and factors reflecting 
the business environment and internal control systems as set out in  paragraphs 13 to 
24 below. A credit institution needs to have a well documented approach for 
 
EN 138   EN weighting the use of these four elements in its overall operational risk measurement 
system. 
10. The risk measurement system shall capture the major drivers of risk affecting the 
shape of the tail of the loss estimates. 
11. Correlations in operational risk losses across individual operati onal risk estimates 
may be recognised only if credit institutions can demonstrate to the satisfaction of the 
competent authorities that their system s for measuring correlations are sound, 
implemented with integrity, and take in to account the uncertainty surrounding any 
such correlation estimates, particularly in  periods of stress. The credit institution 
must validate its correlation assumpti ons using appropriate quantitative and 
qualitative techniques. 
12. The risk measurement system shall be internally consistent and shall avoid the 
multiple counting of qualitative assessments or risk mitigation techniques recognised 
in other areas of the capital adequacy framework. 
1.2.2.  Internal data 
13. Internally generated operat ional risk measures shall be based on a minimum 
historical observation period of  five years. When a credit institution first moves to an 
Advanced Measurement Approach, a three- year historical obs ervation period is 
acceptable. 
14. Credit institutions must be able to map th eir historical internal loss data into the 
business lines defined in Part 2 and into th e event types defined in Part 5, and to 
provide these data to competent authoritie s upon request. There must be documented, 
objective criteria for allocating losses to the specified business lines and event types. 
The operational risk losses that are related to credit risk and have historically been 
included in the internal credit risk database s must be recorded in the operational risk 
databases and be separately identified. Such losses will not be subject to the 
operational risk charge, as long as they con tinue to be treated as credit risk for the 
purposes of calculating minimum capital requi rements. Operational risk losses that 
are related to market risks shall be include d in the scope of the capital requirement 
for operational risk. 
15. The credit institution's internal loss data must  be comprehensive in that it captures all 
material activities and exposures from a ll appropriate sub-systems and geographic 
locations. Credit institutions must be able to justify that any excluded activities or 
exposures, both individually and in combin ation, would not have a material impact 
on the overall risk estimates. An appropriate minimum loss threshold for internal loss 
data collection must be defined. 
16. Aside from information on gross loss amou nts, credit institutions shall collect 
information about the date of the event, a ny recoveries of gross loss amounts, as well 
as some descriptive information about th e drivers or causes of the loss event. 
17. There shall be specific crit eria for assigning loss data arising from an event in a 
centralised function or an activity that spans more than one business line, as well as 
from related events over time. 
 
EN 139   EN 18. Credit institutions must have documente d procedures for assessing the on-going 
relevance of historical loss data, includi ng those situations in which judgement 
overrides, scaling, or other adjustments ma y be used, to what extent they may be 
used and who is authorised to make such decisions. 
1.2.3.  External data  
19. The credit institution’s operational risk measurement system shall use relevant 
external data, especially when there is r eason to believe that the credit institution is 
exposed to infrequent, yet potentially seve re, losses. A credit in stitution must have a 
systematic process for determining the situ ations for which external data must be 
used and the methodologies used to incorpor ate the data in its measurement system. 
The conditions and practices for external data use must be regularly reviewed, 
documented and subject to pe riodic independent review. 
1.2.4.  Scenario analysis  
20. The credit institution shall use scenario an alysis of expert opi nion in conjunction 
with external data to evaluate its exposur e to high severity events. Over time, such 
assessments need to be validated and re-a ssessed through compar ison to actual loss 
experience to ensure their reasonableness. 
1.2.5.  Business environment and in ternal control factors 
21. The credit institution's firm-wide risk  assessment methodology must capture key 
business environment and internal control f actors that can change its operational risk 
profile. 
22. The choice of each factor needs to be justif ied as a meaningful driver of risk, based 
on experience and involving the expert j udgment of the affected business areas.  
23. The sensitivity of risk estimates to change s in the factors and the relative weighting 
of the various factors need to be well reasoned. In addition to capturing changes in 
risk due to improvements in risk controls, the framework must also capture potential 
increases in risk due to greater complexity  of activities or increased business volume. 
24. This framework must be documented and s ubject to independent review within the 
credit institution and by competent authorities. Over time, the process and the 
outcomes need to be validated and re-assess ed through comparison to actual internal 
loss experience, releva nt external data. 
2. IMPACT OF INSURANCE  
25. Credit institutions shall be able to recognise  the impact of insurance subject to the 
conditions set out in paragraphs 26 to 29. 
26. The provider is authorised to pr ovide insurance or  re-insurance. 
27. The provider has a minimum claims paying ability rating of A (or equivalent); 
 
EN 140   EN (a) The insurance policy must have an initial term of no less than one year. For 
policies with a residual term of less than  one year, the credit institution must 
make appropriate haircuts reflecting the declining residual te rm of the policy, 
up to a full 100% haircut for policies with a residual term of 90 days or less;  
(b) The insurance policy has a minimum notice period for cancellation of the 
contract of 90 days; 
(c) The insurance policy has no exclusions  or limitations triggered by supervisory 
actions or, in the case of a failed credit  institution, that preclude the credit 
institution, receiver or liquidator from recovering for damages suffered or 
expenses incurred by the credit institu tion, except in respect of events 
occurring after the initiation of recei vership or liquidation proceedings in 
respect of the credit institution; provid ed that the insurance policy may exclude 
any fine, penalty, or punitive damages  resulting from actions by the competent 
authorities;  
(d) The risk mitigation calculations must  reflect the insurance coverage in a 
manner that is transparent in its relationship to, and consistent with, the actual 
likelihood and impact of loss used in th e overall determina tion of operational 
risk capital; 
(e) The insurance is provided by a third party entity. In the case of insurance 
through captives and affiliates, the e xposure has to be laid off to an 
independent third party entity, for exam ple through re-insuran ce, that meets the 
eligibility criteria; 
(f) The framework for recognising insura nce is well reasoned and documented; 
28. The methodology for recognising insurance shall capture the following elements 
through discounts or haircuts in the amount of insurance recognition:  
(a) The residual term of a policy, wh ere less than one year, as noted above; 
(b) A policy’s cancellation terms, where less than one year;  
(c) The uncertainty of payment as well as mismatches in coverage of insurance 
policies.  
29. The capital alleviation arising from the recognition of insurance shall not exceed 
20% of the capital requirement for operational risk before the recognition of risk 
mitigation techniques. 
3. APPLICATION TO USE AN ADVANCED MEASUREMENT APPROACH ON A GROUP -
WIDE BASIS  
30. When an Advanced Measurement Approach is  intended to be used by the EU parent 
credit institution and its subsidiaries, or by th e subsidiaries of an EU parent financial 
holding company, the application shall in clude a description of the methodology 
used for allocating operational risk capital between the different entities of the group. 
 
EN 141   EN 31. The application shall indicate whether and how  diversification effects are intended to 
be factored in the risk measurement system. 
 
EN 142   EN Part 4 – Combined use of  different methodologies  
1. USE OF AN ADVANCED MEASUREMENT APPROACH IN COMBINATION WITH OTHER 
APPROACHES  
1. A credit institution may use an Advanced  Measurement Approach in combination 
with either the Basic Indicator Approach or the Standardised Approach, subject to 
the following conditions: 
(a) All operational risks of the credit institution are captured. The competent 
authority shall be satisfied with th e methodology used to cover different 
activities, geographical locations, legal st ructures or other relevant divisions 
determined on an internal basis. 
(b) The qualifying criteria set out in Parts 2 and 3 are fulfilled for the part of 
activities covered by the Standardised Approach and Advanced Measurement 
Approaches respectively. 
2. On a case-by case basis, the competen t authority may impose the following 
additional conditions:  
(a) On the date of implementation of an Advanced Measurement Approach, a 
significant part of the credit institution’s operational risks are captured by the 
Advanced Measurement Approach; 
(b) The credit institution takes a co mmitment to roll out the Advanced 
Measurement Approach across a material part of its operations within a time 
schedule agreed with its competent authorities. 
2. COMBINED USE OF THE BASIC INDICATOR APPROACH AND OF THE STANDARDISED 
APPROACH  
3. A credit institution may use a combination of the Basic Indicator  Approach and the 
Standardised Approach only in exceptional circumstances such as the recent 
acquisition of new business which may require  a transition period for the roll out of 
the Standardised Approach. 
4. The combined use of the Basic Indicator Approach and the Standardised Approach 
shall be conditional upon a commitment by th e credit institution to roll out the 
Standardised Approach within  a time schedule agreed with the competent authorities. 
 
EN 143   EN Part 5 - Loss event type classification  
Table 3 
Event-Type Category Definition 
Internal fraud Losses due to acts of a type in tended to defraud, misappropriate 
property or circumvent regulations, the law or company policy, 
excluding diversity/ discrimination events, which involves at least 
one internal party. 
External fraud Losses due to acts of a type in tended to defraud, misappropriate 
property or circumvent th e law, by a third party 
Employment Practices 
and Workplace Safety Losses arising from acts inconsistent with employment, health or 
safety laws or agreements, from payment of personal injury claims, 
or from diversity / discrimination events 
Clients, Products & 
Business Practices Losses arising from an unintentional or negligent failure to meet a 
professional obligation to specific  clients (includi ng fiduciary and 
suitability requirements), or from th e nature or design of a product. 
Damage to Physical 
Assets Losses arising from loss or damage to physical assets from natural 
disaster or other events. 
Business disruption and 
system failures Losses arising from disruption of business or system failures 
Execution, Delivery & 
Process Management Losses from failed transaction pr ocessing or process management, 
from relations with trade counterparties and vendors 
 
 
EN 144   EN Annex XI 
 
Technical criteria on the review and evaluation by the competent authorities 
1. In addition to credit, market and opera tional risk, the review and evaluation 
performed by competent author ities pursuant to Article 124  shall include the 
following: 
(a) the results of the stress test carried out by the credit institutions applying an 
IRB approach; 
(b) the exposure to and management of liqui dity risk and concen tration risk by the 
credit institutions, including their comp liance with the requirements laid down 
in Articles 108 to 118; 
(c) the robustness, suitability and manne r of application of the policies and 
procedures implemented by credit institutions for the management of the 
residual risk associated with the us e of recognized credit risk mitigation 
techniques; 
(d) the extent to which the own funds held  by a credit institution in respect of 
assets which it has securitised are ad equate having regard to the economic 
substance of the transaction, including the degree of risk transfer achieved. 
2. Competent authorities shall monitor whethe r a credit institution has provided implicit 
support to a securitisation. If a credit instit ution is found to have provided implicit 
support on more than one occasion the comp etent authority shall take appropriate 
measures reflective of the increased expect ation that it will provi de future support to 
its securitisations thus failing to achieve a significant transfer of risk. 
 
EN 145   EN Annex XII  
 
Technical criteria on disclosure  
 
PART 1 - GENERAL CRITERIA  
1. Information shall be regarded as material in disclosures if its omission or 
misstatement could change or influence the assessment or decision of a user relying 
on that information for the purpos e of making economic decisions. 
2. Information shall be regarded as proprietary to a credit institution if sharing that 
information with the public would undermin e its competitive position. It may include 
information on products or systems which, if shared with competitors, would render 
a credit institution's investments therein less valuable. 
3. Information shall be regarded as confidentia l if there are obligations to customers or 
other counterparty relationships binding a credit institution to confidentiality.  
4. Competent authorities shall require credit institution to assess the need to publish 
some or all disclosures more frequently th an annually in the light of the relevant 
characteristics of their business such as scale of operations, range of activities, 
presence in different countries, involveme nt in different financial sectors, and 
participation in international financial markets and payment, settlement and clearing 
systems. That assessment shall pay particular  attention to the possible need for more 
frequent disclosure of items of information laid down in Part 2, paragraphs 3(b) and 
3(e), and 4(b) to 4(f), and information on risk exposure and other items prone to 
rapid change.  
5. The disclosure requirement in Part 2, pa ragraph 4, letter (f) shall be provided 
pursuant to Article 72 (1) and (2). 
Part 2 - General requirements  
1. The risk management objectives and policies of the credit institution shall be 
disclosed for each separate category of risk, including the risks refe rred to under 
paragraphs 1 to 13. These disclosures shall include: 
(a) the strategies and processes to manage those risks; 
(b) the structure and organisation of the relevant risk management function or 
other appropriate arrangements; 
(c) the scope and nature of risk reporting and measurement systems; 
(d) the policies for hedging and mitigating risk, and the strategies and processes 
for monitoring the continuing effectiveness of hedges and mitigants. 
2. The following information shall be disclose d regarding the scope of application of 
the requirements of this Directive: 
 
EN 146   EN (a) the name of the credit institution to which the requirements of this Directive 
apply; 
(b) an outline of the differences in the basis of consolidation for accounting and 
prudential purposes, with a brief desc ription of the entities that are: 
(i) fully consolidated, 
(ii) proportionally consolidated, 
(iii) deducted from  own funds,  
(iv) neither consolidated nor deducted; 
(c) any current or foreseen material or le gal impediments to the prompt transfer of 
own funds or repayment of liabilities  among the parent undertaking and its 
subsidiaries; 
(d) the aggregate amount by which the actua l own funds are less than the required 
minimum in all subsidiaries not included in the consolidation, and the name or 
names of such subsidiaries; 
(e) if applicable, the circumstance of ma king use of the provisions laid down in 
Articles 69 and 70. 
3. The following information shall be disclosed by the credit institutions regarding their 
own funds: 
(a) summary information on the terms and conditions of the main  features of all 
own funds items and components thereof; 
(b) the amount of the original own funds, with separate disclosure of all positive 
items and deductions; 
(c) the total amount of addi tional own funds, and own f unds as defined in [Annex 
V of Directive 93/6/EEC]; 
(d) deductions from original and additional own funds pursuant to Article 66(1) 
point (c), with separate disclosure of ite ms referred to in Article 57, point (q); 
(e) total eligible own funds, net of deductions and limits laid down in Article 66. 
4. The following information shall be disclo sed regarding the compliance by the credit 
institution with the requirements  laid down in Articles 75 and 123: 
(a) a summary of the credit institution’s approach to assessing the adequacy of its 
internal capital to support cu rrent and future activities; 
(b) for credit institutions calculating the risk-weighted exposure amounts in 
accordance with Articles 78 to 83, 8 pe r cent of the risk-weighted exposure 
amounts for each of the exposure clas ses specified in Article 79;  
 
EN 147   EN (c) for credit institutions calculating risk-weighted exposure amounts in 
accordance with Articles 84 to 89, 8 pe r cent of the risk-weighted exposure 
amounts for each of the exposure classes sp ecified in Article 86. For the retail 
exposure class, this requirem ent applies to each of th e categories of exposures 
to which the different correlations in A nnex VII, Part 1, paragraphs 9 to 11 
correspond to. For the equity exposure cl ass, this requirement applies to: 
(i) each of the approaches provided in A nnex VII, Part 1, paragraphs 15 to 25; 
(ii) exchange traded exposures, private e quity exposures in sufficiently diversified 
portfolios, and other exposures; 
(iii) exposures subject to supervisory tr ansition regarding capital requirements; 
(iv) exposures subject to grandfathering provisions rega rding capital requirements; 
(d) minimum capital requirements calculated in accordance with Article 75, points 
(b) and (c); 
(e) minimum capital requirements calculate d in accordance wi th Articles 103 to 
105, and disclosed separately; 
(f) the solvency ratios calcul ated on the basis of total own funds and original own 
funds. 
5. The following information shall be disclosed regarding the credit institution’s 
exposure to credit risk and dilution risk: 
(a) the definitions for accounting purposes of past due and impaired; 
(b) a description of the approaches an d methods adopted for determining value 
adjustments and provisions; 
(c) the total amount of exposures after accounting offsets and without taking into 
account the effects of credit risk mitig ation, and the average amount of the 
exposures over the period broken down by different types of exposure classes; 
(d) the geographic distribution of the e xposures, broken down in significant areas 
by material exposure classes, and further detailed if appropriate; 
(e) the distribution of the exposures by industry or counterparty type, broken down 
by exposure classes, and furthe r detailed if appropriate; 
(f) the residual maturity breakdown of all the exposures, broken down by exposure 
classes, and further deta iled if appropriate; 
(g) by significant industry or c ounterparty type, the amount of: 
(i) impaired exposures and past due  exposures, provided separately, 
(ii) value adjustments and provisions, 
 
EN 148   EN (iii) charges for value adjustments during the period; 
(h) the amount of the impaired exposures and past due exposures, provided 
separately, broken down by the significan t geographical areas including, if 
practical, the amounts of value adjust ments and provisions related to each 
geographical area; 
(i) the reconciliation of changes in th e value adjustments and provisions for 
impaired exposures, shown separately. The information shall comprise: 
(i) a description of the type of value adjustments and provisions, 
(ii) the opening balances, 
(iii) the amounts taken against th e provisions during the period, 
(iv) the amounts set aside or reversed fo r estimated probable losses on exposures 
during the period, any other adjustme nts including those determined by 
exchange rate differences, business comb inations, acquisitions and disposals of 
subsidiaries, and transfers between provisions, 
(v) the closing balances.  
Value adjustments and recoveries recorded di rectly to the income statement shall be 
disclosed separately. 
6. For credit institutions calculating the ri sk-weighted exposure amounts in accordance 
with Articles 78 to 83, the following inform ation shall be disclosed for each of the 
exposure classes specif ied in Article 79: 
(a) the names of the nominated ECAIs and ECAs and the reasons for any changes; 
(b) the exposure classes for which each ECAI or ECA is used; 
(c) a description of the process used to transfer the issues and issue credit 
assessments onto items not included in the trading book; 
(d) the association of the external rating of each nominated ECAI or ECA with the 
credit quality steps prescribed in A nnex VI, taking into account that this 
information needs not be disclosed if th e credit institution complies with the 
standard association published by the competent authority; 
(e) the exposure values and the exposur e values after credit risk mitigation 
associated with each credit quality step  prescribed in Annex VI, as well as 
those deducted from own funds. 
7. The credit institutions calculating the risk-weighted exposure amounts in accordance 
with Annex VII, Part 1, pa ragraphs 5 or 17 to 19 sh all disclose the exposures 
assigned to each category of th e table in the paragraph 5 referred to above, or to each 
risk weight mentioned in the para graphs 17 to 19 referred to above. 
 
EN 149   EN 8. The credit institutions calculating their capital requirements in accordance with 
Article 75, points (b) and (c) shall disclose  those requirements separately for each 
risk referred to in those provisions. 
9. The following information shall be disclosed by each credit institution which 
calculates its capital requirements in acco rdance with [Annex VIII of Directive 
93/6/EEC]: 
(a) for each sub-portfolio covered: 
(i) the characteristics of the models used, 
(ii) a description of stress tes ting applied to the sub-portfolio, 
(iii) a description of the approach used for backtesting and validating the accuracy 
and consistency of the internal models and modelling processes; 
(b) the scope of acceptance by the competent authority; 
(c) for the sub-portfolios under the model: 
(i) the high, mean and low value-at-risk measures over the reporting period and at 
period-end, 
(ii) a comparison of the value-at-risk measures with actual gains and losses 
experienced by the credit institution, with analysis of important outliers in 
backtesting results . 
10. The following information shall be disclosed by the credit institutions on operational 
risk: 
(a) the approaches for the assessment of  own funds requirements for operational 
risk that the credit institution qualifies for; 
(b) a description of the methodology set out in Article 105, if used by the credit 
institution, including a disc ussion of relevant intern al and external factors 
considered in the credit institution’s measurement approach. In the case of 
partial use, the scope and coverage of the different methodologies used. 
11. The following information shall be disclosed regarding the exposures in equities not 
included in the trading book: 
(a) the differentiation between exposures based on their objectives, including for 
capital gains relationship and strategi c reasons, and an overview of the 
accounting techniques and valuation methodologies used, including key 
assumptions and practices affecting va luation and any significant changes in 
these practices; 
(b) the balance sheet value, the fair va lue and, for those exchange-traded, a 
comparison to the market price where it is materially different from the fair 
value; 
 
EN 150   EN (c) the types, nature and amounts of ex change-traded exposures, private equity 
exposures in sufficiently diversifie d portfolios, and other exposures; 
(d) the cumulative realised gains or losses arising from sales and liquidations in the 
period; 
(e) the total unrealised gains or losses, the total latent revaluation gains or losses, 
and any of these amounts included in the original or additional own funds. 
12. The following information shall be disclosed by credit institutions on their exposure 
to interest rate risk on positions  not included in the trading book: 
(a) the nature of the interest rate risk and the key as sumptions (including 
assumptions regarding loan prepayme nts and behaviour of non-maturity 
deposits), and frequency measuremen t of the interest rate risk; 
(b) the variation in earnings, economic valu e or other relevant measure used by the 
management for upward and downward rate shocks according to 
management’s method for measuring the interest rate risk, broken down by 
currency. 
13. The credit institutions calculating risk weighted exposure amounts in accordance 
with Articles 94 to 101 shall disclose the following information: 
(a) a discussion of the credit institution' s objectives in relation to securitisation 
activity; 
(b) the roles played by the credit institution in the securitisation process; 
(c) an indication of the exte nt of the credit instituti on’s involvement in each of 
them; 
(d) the approaches to calculating risk weighted exposure amounts that the credit 
institution follows for its securitisation activities; 
(e) a summary of the credit institution’s accounting policies for securitisation 
activities, including: 
(i) whether the transactions are treated as sales or financings, 
(ii) the recognition of gains on sales, 
(iii) the key assumptions for valuing retained interests, 
(iv) the treatment of synthetic securitisa tions if this is no t covered by other 
accounting policies; 
(f) the names of the ECAIs used for secu ritisations and the types of exposure for 
which each agency is used; 
 
EN 151   EN (g) the total outstanding amount of exposu res securitised by the credit institution 
and subject to the securitisation framew ork (broken down into traditional and 
synthetic), by exposure type; 
(h) for exposures securitised by the cr edit institution and subject to the 
securitisation framework, a breakdown  by exposure type of the amount of 
impaired and past due expos ures securitised, and the losses recogn ised by the 
credit institution during the period; 
(i) the aggregate amount of securitisati on positions retained or purchased, broken 
down by exposure type; 
(j) the aggregate amount of securitisati on positions retained or purchased, broken 
down into a meaningful number of risk weight bands. Positions that have been 
risk weighted at 1250% or deducte d shall be disclo sed separately; 
(k) the aggregate outstanding amount  of securitised revolving exposures 
segregated by the originator’s interest and the investors’ interest; 
(l) a summary of the securitisation activity in the period, includ ing the amount of 
exposures securitised (by e xposure type), and recognised gain or loss on sale 
by exposure type. 
3. Part 3 - Qualifying requirements for th e use of particular instruments or 
methodologies  
14. The credit institutions calculating the risk-weighted exposure amounts in accordance 
with Articles 84 to 89 shall disclose the following information: 
(a) the competent authority’s acceptance of approach or approved transition; 
(b) an explanation and review of:  
(i) the structure of internal rating sy stems and relation be tween internal and 
external ratings, 
(ii) the use of internal estimates other than for calculating ri sk-weighted exposure 
amounts in accordance with Articles 84 to 89, 
(iii) the process for managing and recognising credit risk mitigation, 
(iv) the control mechanisms for rati ng systems including a description of 
independence, accountability, and rating systems review; 
(c) a description of the internal rating s process, provided separately for the 
following exposure classes: 
(i) central governments and central banks, 
(ii) institutions, 
 
EN 152   EN (iii) corporate, including SMEs, specia lised lending and purchased corporate 
receivables, 
(iv) retail, for each of the categories of e xposures to which the different correlations 
in Annex VII, Part 1, para graphs 9 to 11 correspond to, 
(v) equities; 
(d) the exposure values for each of the exposure classes specified in Article 86. 
Exposures to central governments and central banks, credit institutions and 
corporates where credit institutions us e own estimates of LGDs or conversion 
factors for the calculation of risk-wei ghted exposure amounts shall be disclosed 
separately from exposures for which th e credit institutions do not use such 
estimates;  
(e) for each of the exposure classes cen tral governments and central banks, 
institutions, corporate and equity, and across a sufficient number of obligor 
grades (including default) to allow for a meaningful differentiation of credit 
risk, credit institutions shall disclose:  
(i) the total exposures (for  the exposure classes cent ral governments and central 
banks, institutions and corporate, the sum of outstanding loans and exposure 
values for undrawn commitments; fo r equities, the outstanding amount), 
(ii) for the credit institutions using own LGD estimates for the calculation of risk-
weighted exposure amounts, the e xposure-weighted average LGD in 
percentage, 
(iii) the exposure-weighted  average risk weight, 
(iv) for the credit institutions using ow n estimates of conversion factors for the 
calculation of risk-weighted exposur e amounts, the amount of undrawn 
commitments and exposure-weighted average exposure values for each 
exposure class;  
(f) for the retail exposure class and for each of the categories as defined under (c) 
above, either the disclosures outline d under (e) above (if applicable, on a 
pooled basis), or an analysis of ex posures (outstanding loans and exposure 
values for undrawn commitments) agains t a sufficient number of EL grades to 
allow for a meaningful differentiation of  credit risk (if a pplicable, on a pooled 
basis); 
(g) the actual value adjustments in the preceding period for each exposure class 
(for retail, for each of the categories as defined under (c) above) and how this 
differs from past experience;  
(h) a description of the factors that impacted on the loss experience in the 
preceding period (for example, has the credit institution experienced higher 
than average default rates, or higher than average LGDs and conversion 
factors); 
 
EN 153   EN (i) the credit institution’s estimates against actual outcomes over a longer period. 
At a minimum, this shall include info rmation on estimates of losses against 
actual losses in each exposur e class (for retail, for each of the categories as 
defined under (c) above) over a period sufficient to allow for a meaningful 
assessment of the performance of th e internal rating processes for each 
exposure class (for retail for each of the categories as  defined under (c) above). 
Where appropriate, the credit institutions shall further decompose this to 
provide analysis of PD and, for the cred it institutions using own estimates of 
LGDs and/or conversion factors, LGD and conversion factor outcomes against 
estimates provided in the quantitative risk assessment disclosures above. 
For the purposes of (c) above, the descrip tion shall include th e types of exposure 
included in the exposure class, the defin itions, methods and data for estimation and 
validation of PD and, if  applicable, LGD and conversion factors, including 
assumptions employed in the derivation of th ese variables, and th e descriptions of 
material deviations from the definition of default as set out in Annex VII, Part 4, 
paragraphs 44 to 48, including the broad segments affected by such deviations. 
15. The credit institutions applying credit risk mitigation techniques shall disclose the 
following information: 
(a) the policies and processes for, and an indication of the extent to which the 
entity makes use of, on- and off-balance sheet netting; 
(b) the policies and processes for co llateral valuation and management; 
(c) a description of the main types of collateral taken by the credit institution; 
(d) the main types of guarantor and cr edit derivative counterparty and their 
creditworthiness; 
(e) information about market or credit risk concentrations within the credit 
mitigation taken; 
(f) for credit institutions calculating risk-weighted exposure amounts in 
accordance with Articles 78 to 83 or 84 to  89, but not providing own estimates 
of LGDs or conversion factors in respect  of the exposure class, separately for 
each exposure class, the total exposure value (after, where applicable, on- or 
off-balance sheet netting) that is covered – after the application of volatility 
adjustments – by eligible financial collateral, and other eligible collateral; 
(g) for credit institutions calculating risk-weighted exposure amounts in 
accordance with Articles 78 to 83 or 84 to 89, separately for each exposure 
class, the total exposure (after, where applicable, on- or off-balance sheet 
netting) that is covered by guarantees or  credit derivatives. For the equity 
exposure class, this requir ement applies to each of the approaches provided in 
Annex VII, Part 1, paragraphs 15 to 24. 
16. The credit institutions using the approach set out in Article 105 for the calculation of 
their own funds requirements fo r operational risk shall disc lose a description of the 
use of insurance for the pur pose of mitigating the risk.