Proposal for Directives of the European Parliament and of the Council Re-casting Directive 2000/12/EC of the European 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 - Annexes techniques {SEC(2004) 921}
Date: 2004-07-14
Institutions: European Commission
Subjects: credit guarantee, credit institution, financial instrument, financial solvency, management audit, provision of services, share capital

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 14.7.2004 
COM(2004) 486 final 

2004/0155 (COD) 
2004/0159 (COD) 

Annexes techniques 

Proposal for 

DIRECTIVES OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL 

Re-casting Directive 2000/12/EC of the European 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} 

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EXPLANATORY MEMORANDUM 

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Proposal for a 

COUNCIL DIRECTIVE 

on […] 

THE COUNCIL OF THE EUROPEAN UNION, 

Having regard to the Treaty establishing the European Community, 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 European 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  laws,  regulations  and  administrative  provisions 
necessary to comply with this Directive by […] at the latest. They shall forthwith inform the 
Commission thereof. 

When Member States adopt those provisions, they shall contain a reference to this Directive 
or be accompanied by such a reference on the occasion of their official publication. Member 
States shall determine how such reference is to be made. 

1 
2 
3 
4 

OJ C […], […], p. […]. 
OJ C […], […], p. […]. 
OJ C […], […], p. […]. 
OJ C […], […], p. […]. 

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This  Directive  shall  enter  into  force  on  the  […]  day  following  that  of  its  publication  in  the 
Official Journal of the European Union. 

Article […] 

Article […] 

This Directive is addressed to the Member States. 

Done at Brussels, […] 

For the Council 
The President 
[…] 

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ANNEX  

(cid:216) new 

1. 

1. 

2. 

2. 

3. 

3. 

4. 

5. 

4. 

6. 

5. 

7. 

Annex V - Technical criteria on organisation and treatment of risks 

GOVERNANCE 

Arrangements  shall  be  defined  by  the  management  body  referred  to  in  Article  11 
concerning  the  segregation  of  duties  in  the  organisation  and  the  prevention  of 
conflicts of interest. 

TREATMENT OF RISKS 

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,  including  those  posed  by  the 
macroeconomic  environment  in  which  it  operates  in  relation  to  the  status  of  the 
business cycle. 

CREDIT AND COUNTERPARTY RISK 

Credit-granting  shall  be  based  on  sound  and  well-defined  criteria.  The  process  for 
approving, amending, renewing, and re-financing credits shall be clearly established. 

The  ongoing  administration  and  monitoring  of  their  various  credit  risk-bearing 
portfolios and exposures, including for identifying and managing problem credits and 
for  making  adequate  value  adjustments  and  provisions,  shall  be  operated  through 
effective systems. 

Diversification  of  credit  portfolios  shall  be  adequate  given  the  credit  institution’s 
target markets and overall credit strategy. 

RESIDUAL RISK 

The  risk  that  recognised  credit  risk  mitigation  techniques  used  by  the  credit 
institution  prove  less  effective  than  expected  shall  be  addressed  and  controlled  by 
means of written policies and procedures. 

CONCENTRATION RISK 

The concentration risk arising from exposures 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 

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6. 

8. 

9. 

7. 

10. 

8. 

11. 

12. 

9. 

13. 

exposures  (e.g.  to  a  single  collateral  issuer),  shall  be  addressed  and  controlled  by 
means of written policies and procedures. 

SECURITISATION RISKS 

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  ensure  in  particular  that  the  economic 
substance of the transaction is fully reflected in the risk assessment and management 
decisions.  

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 early amortisation provisions. 

INTEREST RATE RISK ARISING FROM NON-TRADING ACTIVITIES 

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. 

OPERATIONAL RISK 

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. 

Contingency  and  business  continuity  plans  shall  be  in  place  to  ensure  a  credit 
institutions'  ability  to  operate  on  an  ongoing  basis  and  limit  losses  in  the  event  of 
severe business disruption. 

LIQUIDITY RISK 

Policies  and  processes  for  the  measurement  and  management  of  their  net  funding 
position  and  requirements  on  an  ongoing  and  forward-looking  basis  shall  exist. 
Alternative  scenarios  shall  be  considered  and  the  assumptions  underpinning 
decisions concerning the net funding position shall be reviewed regularly. 

14. 

Contingency plans to deal with liquidity crises shall be in place. 

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ANNEX VI 

Standardised Approach 

Part 1 - Risk weights 

1. 

EXPOSURES TO CENTRAL GOVERNMENTS OR CENTRAL BANKS 

1.1. 

Treatment 

1. 

2. 

Without prejudice to paragraphs 2 to 8, exposures to central governments and central 
banks shall receive a 100% risk weight. 

Exposures to central governments and central banks for which a credit assessment by 
a nominated ECAI is available shall be assigned a risk weight according to Table 1 in 
accordance  with  the  assignment  by  the  competent  authorities  of  the  credit 
assessments of eligible ECAIs to six steps in a credit quality assessment scale. 

Table 1 

Credit 
quality step 

Risk weight 

1 

0
%

2

2
0
%

3

5
0
%

4

1
0
0
%

5 

1
0
0
%

6

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. 

5. 

6. 

Subject  to  the  discretion  of  competent  authorities,  exposures  to  their  central 
government and central bank denominated and funded in the domestic currency may 
be assigned a risk weight which is lower than that indicated in paragraph 2. 

When the discretion in paragraph 4 is exercised 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 denominated and funded in that currency. 

When  the  competent  authorities  of  a  third  country  which  apply  supervisory  and 
regulatory  arrangements  at  least  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 central bank denominated and funded in the 
domestic currency, Member States may allow their credit institutions to risk weight 
such exposures in the same manner. 

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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) 

(b) 

the credit assessment is a consensus risk score from an Export Credit Agency 
participating  in  the  OECD  “Arrangement  on  Guidelines  for  Officially 
Supported Export Credits” 

the  Export  Credit  Agency  publishes  its  credit  assessments,  and  the  Export 
Credit  Agency  subscribes  to  the  OECD  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 assigned 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. 

9. 

10. 

11. 

12. 

EXPOSURES TO REGIONAL GOVERNMENTS OR LOCAL AUTHORITIES 

Without  prejudice  to  paragraphs  10  to  12,  exposures  to  regional  governments  and 
local authorities shall be risk weighted 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 treatment for short-
term exposures specified in paragraphs 30, 31and 36 shall not be applied. 

Subject to the discretion of competent authorities, exposures to regional governments 
and local authorities may be treated as exposures to the central government in whose 
jurisdiction  they  are  established  where  there  is  no  difference  in  risk  between  such 
exposures  because  of  the  specific  revenue-raising  powers  of  the  former,  and  the 
existence of specific institutional arrangements the effect of which is to reduce their 
risks of default.  

When the discretion of paragraph 10 is exercised 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. 

When competent authorities of a third country jurisdiction which apply supervisory 
and  regulatory  arrangements  at  least  equivalent  to  those  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 and local authorities in the same manner. 

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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 shall receive a 100% risk weight. 

3.2. 

Public Sector Entities 

14. 

15. 

16. 

17. 

Without  prejudice  to  paragraphs  15  to  17,  exposures  to  public  sector  entities  shall 
receive a 100% risk weight. 

Subject to the discretion of competent authorities, 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 treatment for short-term exposures specified 
in paragraphs 30, 31 and 36 shall not be applied. 

When  the  discretion  to  treat  exposures  to  public  sector  entities  as  exposures  to 
institutions  is  exercised  by  the  competent  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 entities in the same manner. 

When competent authorities of a third country jurisdiction, which apply supervisory 
and regulatory arrangements at least equivalent to those applied in the Community, 
treat exposures  to public sector entities as exposures to institutions, 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 communities constituted in the form of a legal 
person  under  public  law  shall,  in  so  far  as  they  raise  taxes  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 Inter-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  preferential  treatment  for  short-term 
exposures as specified in paragraph 30, 31 and 36 shall not apply. 

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21. 

Exposures  to  the  following  multilateral  development  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 Reconstruction and Development; 

(j) the European Investment Bank; 

(k) the European Investment Fund; 

(l) the Multilateral Investment Guarantee Agency 

22. 

5. 

23. 

A risk weight of 20% shall be applied to the portion of unpaid capital subscribed to 
the European Investment Fund. 

EXPOSURES TO INTERNATIONAL ORGANISATIONS 

Exposures  to  the  following  international  organisations  shall  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. 

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6.2. 

Risk-weight floor on exposures to unrated institutions 

25. 

Exposures  to  an  unrated  institution  shall  not  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  assigned  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 
central 
to  which 
government 
is 
assigned 

1 

2 

3 

4 

5 

6 

Risk  weight 
exposure 

of 

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  maturity  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  assessments  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. 

30. 

Exposures to unrated institutions shall be assigned a risk weight of 50%. 

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 assessments of eligible ECAIs to six steps in a credit quality 
assessment scale: 

Table 5 

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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 assigned a 20% risk weight. 

6.5. 

Interaction with short-term credit assessments 

32. 

33. 

34. 

35. 

If the method specified in paragraphs 28 to 31 is applied to exposures to institutions, 
then the interaction with specific short-term assessments shall be the following. 

If there is no short-term exposure assessment, the general preferential treatment for 
short-term  exposures  as  specified  in  paragraph  30  shall  apply  to  all  exposures  to 
institutions of up to three months initial maturity. 

If there is a short-term assessment and such an assessment determines the application 
of a more favourable or identical risk weight than the use of the general preferential 
treatment for short-term exposures, as specified in paragraph 30, then the short-term 
assessment shall be used for that specific exposure only. Other short-term exposures 
shall follow the general preferential treatment for short-term exposures, as specified 
in paragraph 30. 

If  there  is  a  short-term  assessment  and  such  an  assessment  determines  a  less 
favourable  risk  weight  than  the  use  of  the  general  preferential  treatment  for  short-
term exposures, as specified in paragraph 30, then the general preferential treatment 
for  short-term  exposures  shall  not  be  used  and  all  unrated  short-term  claims  shall 
receive the same risk weight as that applied by the specific short-term assessment. 

6.6. 

Short-term exposures in the national currency of the borrower 

36. 

When competent authorities have adopted for exposures to central governments and 
central banks the method described 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  national  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 maturity of 3 months or less denominated and 
funded in the national currency of the borrower shall be assigned a risk weight less 
than 20%. 

6.7 

Investments in regulatory 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. 

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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  assessments  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. 

8. 

41. 

9. 

42. 

Exposures for which such a credit assessment is not available shall receive a 100% 
risk weight or the risk weight of its central government, whichever is the higher. 

RETAIL EXPOSURES 

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%. 

EXPOSURES SECURED BY REAL ESTATE PROPERTY 

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. 

44. 

Exposures  fully  and  completely  secured,  to  the  satisfaction  of  the  competent 
authorities, by mortgages on residential property which is or shall be occupied or let 
by the owner shall be assigned a risk weight of 35%. 

Exposures  fully  and  completely  secured,  to  the  satisfaction  of  the  competent 
authorities,  by  shares  in  Finnish  residential  housing  companies,  operating  in 
accordance with the Finnish Housing Company Act of 1991 or subsequent equivalent 
legislation, in respect of residential property which is or shall be occupied or let by 
the owner shall be assigned a risk weight of 35%. 

45. 

In the exercise of their judgement, competent 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; 

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(b) 

the  risk  of  the  borrower  does  not  materially  depend  upon  the  performance  of 
the underlying property or project, but rather on the underlying capacity of the 
borrower  to  repay  the  debt  from  other  sources.  As  such,  repayment  of  the 
facility  does  not  materially  depend  on  any  cash  flow  generated  by  the 
underlying property serving 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. 

47. 

Competent authorities may dispense with the condition contained in paragraph 45(b) 
for  exposures  fully  and  completely  secured  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.  

When  the  discretion  contained  in  paragraph  46  is  exercised  by  the  competent 
authorities  of  a  Member  State,  the  competent  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. 

49. 

50. 

Subject  to  the  discretion  of  competent  authorities,  exposures  fully  and  completely 
secured, to the satisfaction of the competent authorities, by mortgages on offices or 
other  commercial  premises  situated  within  their  territory  may  be  assigned  a  risk 
weight of 50%. 

Subject  to  the  discretion  of  competent  authorities,  exposures  fully  and  completely 
secured, to the satisfaction of the competent 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%.  

Subject  to  the  discretion  of  competent  authorities,  exposures  related  to  property 
leasing transactions concerning offices or other commercial premises situated in their 
territory  and  governed  by  statutory  provisions  whereby  the  lessor  retains  full 
ownership of the rented assets until the tenant 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 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; 

(b) 

the risk of the borrower must not  materially  depend  upon  the  performance of 
the underlying property or project, but rather on the underlying capacity of the 
borrower  to  repay  the  debt  from  other  sources.  As  such,  repayment  of  the 

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facility  must  not  materially  depend  on  any  cash  flow  generated  by  the 
underlying property serving 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  property  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  mortgage  lending  value  in  statutory  or 
regulatory provisions. 

A 100% risk weigh shall apply to the part of the loan that exceeds the limits set out 
in paragraph 52. 

When the discretion contained in paragraph 48 to 50 is exercised by the competent 
authorities of one Member State, the competent 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. 

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 present 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 lending must not exceed 

0.5% of the outstanding loans in any given year. 

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.  

When  the  discretion  contained  in  paragraph  55  is  exercised  by  the  competent 
authorities  of  a  Member  State,  the  competent  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. 

PAST DUE ITEMS 

Without prejudice to the provisions contained in paragraphs 59 to 62, the unsecured 
portion  of  any  item  that  is  past  due  for  more  than  90  days  shall  be  assigned  a  risk 
weight of: 

53. 

54. 

55. 

56. 

57. 

10. 

58. 

EN 

15 

   EN 

 
(a) 

150%  if  value  adjustments  are  less  than  20%  of  the  unsecured  part  of  the 
exposure gross of value adjustments value; 

(b)  100%  if  value  adjustments  are  no  less  than  20%  of  the  unsecured  part  of  the 

exposure gross of value adjustments; 

(c) 

50%, subject to the discretion of competent authorities, if value adjustments are 
no  less  than  50%  of  the  unsecured  part  of  the  exposure  gross  of  value 
adjustments. 

For  the  purpose  of  defining  the  secured  portion  of  the  past  due  item,  eligible 
collateral and guarantees shall be those eligible for credit risk mitigation purposes. 

Nonetheless, where a past due item is fully secured by forms of collateral other then 
those  eligible  for  credit  risk  mitigation  purposes,  a  100%  risk  weight  may  apply 
subject  to  the  discretion  of  competent  authorities  based  upon  strict  operational 
criteria  to  ensure  the  good  quality  of  the  collateral  when  value  adjustments  reach 
15% of the exposure gross of value adjustments. 

Exposures indicated in paragraphs 43 to 47 shall be assigned a risk weight of 100% 
net  of  value  adjustments  if  they  are  past  due  for  more  than  90  days.  If  value 
adjustments  are  no  less  than  20%  of  the  exposures  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. 

Exposures indicated in paragraphs 48 to 57 shall be assigned a risk weight of 100% if 
they are past due for more than 90 days. 

ITEMS BELONGING TO REGULATORY HIGH-RISK CATEGORIES 

Subject  to  the  discretion  of  competent  authorities,  exposures  associated  with 
particularly high risks such as investments in venture capital firms and private equity 
investments shall be assigned a risk weight of 150%. 

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 than 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. 

EXPOSURES IN THE FORM OF COVERED BONDS 

‘Covered  bonds’,  shall  mean  bonds  as  defined  in  Article  22(4)  of  Directive 
 85/611/EEC and collateralised by any of the following eligible assets: 

59. 

60. 

61. 

62. 

11. 

63. 

64. 

12. 

65. 

EN 

16 

   EN 

 
(a) 

(b) 

(c) 

(d) 

(e) 

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; 

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; 

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  covered  bonds  of  the  issuing  credit 
institution. Exposures caused by transmission of payments from the obligors of 
loans  secured  by  real  estate  to  the  holders  of  covered  bonds  shall  not  be 
comprised by the 10% limit; 

loans secured by residential real estate or shares in Finnish residential housing 
companies  as  referred  to  in  paragraph  44  where  only  liens  that  are  combined 
with any prior liens within 80% of the value of the pledged property; 

loans  secured  by  commercial  real  estate  or  shares  in  Finnish  housing 
companies  as  referred  to  in  paragraph  49  where  only  liens  that  are  combined 
with  any  prior  liens  within  60%  of  the  value  of  the  pledged  property.  The 
competent  authorities  may  recognise  loans  secured  by  commercial  real  estate 
as eligible where the Loan to Value ratio of 60% is exceeded 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. 

67. 

68. 

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. 

Notwithstanding  paragraphs  65  and  66,  covered  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. 

Covered  bonds  shall  be  assigned  a  risk  weight  on  the  basis  of  the  risk  weight 
attributed to senior unsecured exposures to the credit institution which issues them. 
The following correspondence between risk weights shall apply: 

(a) 

(b) 

if  the  exposures  to  the  institution  receive  a  risk  weight  of  20%,  the  covered 
bond shall receive a risk weight of 10%; 

if  the  exposures  to  the  institution  receive  a  risk  weight  of  50%,  the  covered 
bond shall receive a risk weight of 20%; 

EN 

17 

   EN 

 
(c) 

(d) 

if  the  exposures  to  the  institution  receive  a  risk  weight  of  100%,  the  covered 
bond shall receive a risk weight of 50%; 

if  the  exposures  to  the  institution  receive  a  risk  weight  of  150%,  the  covered 
bond shall receive a risk weight of 100%; 

13. 

69. 

14. 

70. 

ITEMS REPRESENTING SECURITISATION POSITIONS 

Risk  weights  exposure  amounts  for  securitisation  positions  shall  be  determined  in 
accordance with the provisions of Articles 94 to 101. 

SHORT-TERM  EXPOSURES  ON  CREDIT 
CORPORATES  

INSTITUTIONS  AND 

Short-term exposures on an institution or corporate for which a credit assessment by 
a nominated ECAI is available shall be assigned 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. 

71. 

72. 

EXPOSURES 
UNDERTAKINGS (CIUS) 

IN  THE  FORM  OF  COLLECTIVE 

INVESTMENT 

Without  prejudice  to  paragraphs  72  to  78,  exposures  in  collective  investment 
undertakings (CIUs) shall be assigned a risk weight of 100%. 

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 the credit assessments of eligible ECAIs 
to six steps in a credit quality assessment scale. 

Table 7 

Credit quality step 

1 

Risk weight 

20% 

2 

50 

3 

4 

5 

6 

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 assigned a risk weight of 
150%. 

EN 

18 

   EN 

 
 
 
74. 

Credit institutions may determine the risk weight for a CIU as set out in paragraphs 
76 to 78, if the following eligibility criteria are met: 

(a) 

(i) 

the CIU is managed by a company which is subject to supervision in a Member 
State or, subject to approval of the credit institution's competent authority, if:  

they  are  managed  by  a  company  which  is  subject  to  supervision  that  is 
considered equivalent to that laid down in Community law; and  

(ii) 

co-operation between competent authorities is sufficiently ensured; 

(b) 

the CIU’s prospectus or equivalent document includes: 

– 

– 

(c) 

the categories of assets the CIU is authorised to invest in, 

if investment limits apply, the relative limits and the methodologies to calculate 
them; 

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. 

76. 

77. 

If  a  competent  authority  approves  a  third  country  CIU  as  eligible,  as  set  out  in 
paragraph  74,  point  (a),  then  a  competent  authority  in  another  Member  State  may 
make use of this recognition without conducting their own assessment. 

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. 

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  allowed  under  its  mandate,  in  the  exposure 
classes  attracting  the  highest  capital  requirement,  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. 

80. 

Tangible assets within the meaning of Article 4(10) of Directive 86/635/EEC shall be 
assigned a risk weight of 100%. 

Prepayments and accrued income for which an institution is unable to determine the 
counterparty  in  accordance  with  Directive  86/635/EEC,  shall  be  assigned  a  risk 
weight of 100%. 

EN 

19 

   EN 

 
81. 

82. 

83. 

84. 

85. 

86. 

Cash items in the process of collection shall receive a 20% risk weight. Cash in hand 
and equivalent cash items shall receive a 0% risk weight; 

Member  States  may  allow  a  risk  weight  of  10%  for  exposures  to  institutions 
specialising in the inter-bank and public-debt markets in their home Member States 
and subject to close supervision by the competent authorities where those asset items 
are fully and completely secured, to the satisfaction of the competent authorities of 
the  home  Member  States,  by  a  items  assigned  a  0%  or  a  20%  risk  weight  and 
recognised by the latter as constituting adequate collateral.  

Holdings of equity and other participations except where deducted from own funds 
shall be assigned a risk weight of at least 100%. 

Gold  bullion  held  in  own  vaults  or  on  an  allocated  basis  to  the  extent  backed  by 
bullion liabilities shall receive a 0% risk weight. 

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. 

Where a credit institution provides credit protection 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  ECAI,  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 obtain the risk weighted asset amount. The n-1 
exposures to be excluded from the aggregation shall be determined on the basis that 
they  shall  include  those  exposures  each  of  which  produces  a  lower  risk-weighted 
exposure  amount  than  the  risk-weighted  exposure  amount  of  any  of  the  exposures 
included in the aggregation. 

EN 

20 

   EN 

 
Part 2 - Recognition of ECAIs and mapping of their credit assessments 

1. 

METHODOLOGY 

1.1. 

Objectivity 

1. 

Competent  authorities  shall  verify  that  the  methodology  for  assigning  credit 
assessments  is  rigorous,  systematic,  continuous  and  subject  to  validation  based  on 
historical experience. 

1.2. 

Independence 

2. 

3. 

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. 

Independence of the ECAI’s methodology shall be assessed by competent authorities 
according to factors such as the following: 

(a) 

ownership and organisation 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. 

5. 

Competent  authorities  shall  verify  that  ECAI’s  credit  assessments  are  subject  to 
ongoing review and shall be responsive to changes in the financial conditions. Such 
review shall take place after all significant events and at least annually. 

Before  any  recognition,  competent  authorities  shall  verify  that  the  assessment 
methodology for each market segment is established according to standards such as 
the following: 

(a) 

the backtesting must be established for at least one year; 

(b) 

(c) 

the  regularity  of  the  review  process  by  the  ECAI  must  be  monitored  by  the 
competent authorities; 

the competent authorities must be able to receive from the ECAI the extent of 
its contacts with the senior management 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 

21 

   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  allow  all  potential  users  to  decide  whether 
they are derived in a reasonable way. 

2. 

INDIVIDUAL CREDIT ASSESSMENTS 

2.1. 

Credibility and market acceptance: 

8. 

9. 

Competent  authorities  shall  verify  that  ECAIs’  individual  credit  assessments  are 
recognised  in  the  market  as  credible  and  reliable  by  the  users  of  such  credit 
assessments. 

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 financial resources of the 
ECAI; 

(c)  whether there is any pricing on the basis of the rating. 

2.2. 

Transparency and Disclosure 

10. 

11. 

3. 

12. 

13. 

Competent authorities shall verify that individual credit assessments are accessible at 
equivalent terms at least to all parties having a legitimate interest in these individual 
credit assessments. 

In particular, competent authorities shall verify 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. 

‘MAPPING’ 

In order to differentiate between the relative degrees of risk expressed by each credit 
assessment,  competent  authorities  shall  consider  quantitative  factors  such  as  the 
long-term default rate associated with all items assigned the same credit assessment. 
For recently established ECAIs and for those 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 all items assigned the same credit assessment. 

In order to differentiate between the relative degrees of risk expressed by each credit 
assessment, competent authorities shall consider qualitative factors 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 

22 

   EN 

 
14. 

15. 

16. 

Competent  authorities  shall  compare  default  rates  experienced  for  each  credit 
assessment  of  a  particular  ECAI  and  compare  them  with  a  benchmark  built  on  the 
basis of default rates experienced by other ECAIs on a population of issuers that the 
competent authorities believes to present an equivalent level of credit risk. 

When competent authorities believe that the default rates experienced for the credit 
assessment  of  a  particular  ECAI  are  materially  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. 

When competent authorities have increased the associated risk weight for a specific 
credit  assessment  of  a  particular  ECAI,  if  the  ECAI  demonstrates  that  the  default 
longer  materially  and 
its  credit  assessment  are  no 
rates  experienced  for 
systematically  higher  than  the  benchmark,  competent  authorities  may  decide  to 
restore  the  original  step  in  the  credit  quality  assessment  scale  for  the  ECAI  credit 
assessment.  

EN 

23 

   EN 

 
Part 3 - Use of ECAIs’ credit assessments for the determination of risk weights  

1. 

1. 

2. 

3. 

4. 

5. 

6. 

7. 

8. 

2. 

9. 

10. 

TREATMENT 

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. 

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. 

An  institution  which  decides  to  use  the  credit  assessments  produced  by  an  eligible 
ECAI must use them in a continuous and consistent way over time. 

A credit institution can only use ECAIs credit assessments that take into account all 
amounts both in principal and in interest owed to it. 

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. 

If  two  credit  assessments  are  available  from  nominated  ECAIs  and  the  two 
correspond to different risk weights for a rated item, the higher risk weight shall be 
applied. 

If more than two credit assessments are available 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. 

Credit  institutions  shall  use  solicited  credit  assessments.  The  competent  authorities 
may allow credit institutions to use unsolicited credit assessments. 

ISSUER AND ISSUE CREDIT ASSESSMENT 

Where a credit assessment exists for a specific issuing program or facility to which 
the  item  constituting  the  exposure  belongs,  this  credit  assessment  shall  be  used  to 
determine the risk weight applicable to that item. 

Where no directly applicable credit assessment 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  credit  assessment  shall  be  used  if  it  produces  a  higher  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 application of paragraphs 65 to 68 of Part 
1 of this Annex. 

EN 

24 

   EN 

 
12. 

3. 

13. 

14. 

15. 

16. 

4. 

17. 

18. 

Credit  assessments  for  issuers  within  a  corporate  group  cannot  be  used  as  credit 
assessment of another issuer within the same corporate group. 

LONG-TERM AND SHORT-TERM CREDIT ASSESSMENTS 

Short-term credit assessments may only be used for short-term asset and off-balance 
sheet items constituting exposures to institutions and corporates. 

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. 

Notwithstanding  paragraph  14,  if  a  short-term  rated  facility  receives  a  150%  risk 
weight,  then  all  unrated  unsecured  exposures  on  that  obligor  whether  short-term  or 
long-term shall also receive a 150% risk weight. 

Notwithstanding  paragraph  14,  if  a  short-term  rated  facility  attracts  a  50%  risk-
weight, no unrated short-term exposure shall attract a risk weight lower than 100%. 

DOMESTIC AND FOREIGN CURRENCY ITEMS 

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. 

through  a  bank's 
Notwithstanding  paragraph  17,  when  an  exposure  arises 
participation  in  a  loan  that  has  been  extended  by  a  Multilateral  Development  Bank 
whose  preferred  creditor  status  is  recognised  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 

25 

   EN 

 
ANNEX VII 

Internal Ratings based Approach 

Part 1 - Risk weighted exposure amounts and expected loss amounts 

1. 

1. 

2. 

1.1. 

3. 

CALCULATION OF RISK WEIGHTED EXPOSURE AMOUNTS FOR CREDIT RISK 

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.  

The  risk  weighted  exposure  amount  for  each  exposure  shall  be  calculated  in 
accordance with the following formulas:  

Risk  weighted  exposure  amounts  for  exposures  to  corporates,  institutions  and 
central governments and central banks. 

Subject  to  paragraphs  4  to  8  the  risk  weighted  exposure  amounts  for  exposures  to 
corporates, institutions and central governments and central banks shall be calculated 
according to the following formulas:  

Correlation (R) = 

(
12.0
1
−×
[
(
EXP
1
1
−−

EXP
(
−

(
−
*50

*50
PD

PD
)
)

)
)
(
1/

(
1/
−

−
EXP

EXP
(
−

)
)

+

*24.0

(
−
50

50
]
)
)

Maturity factor (b) = 

(
.0

11852

−

.0

05478

ln*

(

PD

)2
)

Risk 
(
LGD
N
(
*5.11

−

*

[
(
1
)
b

1
−

−

−

)
R
(
1*
+

5.0

*

(

M

weight 
(
(
)
PDG
R
+
)
)
*5.2

−

b

06.1*5.12*

−

R

5.0

)
)

*

G

(
999.0

(RW) 
PD
*
−

]
)

LGD

)

*

= 

(
1/

N( x )  denotes  the  cumulative  distribution  function  for  a  standard  normal  random 
variable  (i.e.  the  probability  that  a  normal  random  variable  with  mean  zero  and 
)(zG   denotes  the  inverse  cumulative 
variance  of  one  is  less  than  or  equal  to  x). 
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 where the total annual sales for the consolidated group 
of which the firm is a part is less than EUR 50 million credit institutions may use the 
following  correlation  formula  for  the  calculation  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 

26 

   EN 

 
 
 
 
 
 
Correlation (R) =

(
12.0
1
−×
[
(
EXP
1
1
−
−
(
1*04.0
−
−

EXP
(
−
(
S

)
)
(
1/

*50

(
PD
−
)
)
PD
*50
)45/5
)
−

(
1/
−

−
EXP

EXP
(
−

)
)

+

*24.0

(
−
50

50
]
)
)

Credit  institutions  shall  substitute  total  assets  of  the  consolidated  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 

than  2.5 

50% 

70% 

115% 

250% 

0% 

Less 
years 

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, provided the credit institutions’ underwriting characteristics 
and other risk characteristics are substantially strong for the relevant category.  

In assigning risk weights to specialised lending exposures institutions shall take into 
account  the  following  factors:  Financial  strength,  political  and  legal  environment, 
transaction  and/or  asset  characteristics,  strength  of  the  sponsor  and  developer 
including any public private partnership income stream, security package.  

To  be  eligible  for  the  corporate  treatment  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 quantification standards for corporate exposures as set out in Part 4 for 
these receivables, the risk quantification standards for retail exposures as set out in 
Part 4 may be used. 

For  purchased  corporate  receivables,  refundable  purchase  discounts,  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. 

Where  an  institution  provides  credit  protection  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 Articles 94-101 will be 

6. 

7. 

8. 

EN 

27 

   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 basis that they shall include those exposures 
each  of  which  produces  a  lower  risk-weighted  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) = 

(
1
03.0
−×
[
(
1
1
EXP
−

EXP
(
−

−

(
−
*35

*35
PD

PD
)
)

)
)
(
1/

(
1/
−

−
EXP

EXP
(
−

)
)

+

*16.0

(
−
35

35
]
)
)

Risk weight: 
[
(
(
LGD
N
*
1
−

−

5.0

R

)

*

(
PDG

)

+

(

R

(
1/

−

R

5.0

)
)

*

G

(
999.0

]
)

−

PD

*

LGD

)

06.1*5.12*

N( x )  denotes  the  cumulative  distribution  function  for  a  standard  normal  random 
variable  (i.e.  the  probability  that  a  normal  random  variable  with  mean  zero  and 
)(zG   denotes  the  inverse  cumulative 
variance  of  one  is  less  than  or  equal  to  x). 
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. 

11. 

For  retail  exposures  secured  by  real  estate  collateral  a  correlation  (R)  of  0.15  shall 
replace the figure produced by the correlation formula in paragraph 9.  

For qualifying revolving retail exposures as defined in (a) to (e), a correlation (R) of 
0.04 shall replace the figure produced by the correlation formula in paragraph 9. 

Exposures  shall  qualify  as  qualifying  revolving  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  considered  as  unconditionally  cancellable  if  the  terms 
permit  the  credit  institution  to  cancel  them  to  the  full  extent  allowable  under 
consumer protection and related legislation. 

(c)  The  maximum  exposure  to  a  single  individual  in  the  sub-portfolio  is  EUR 

100,000 or less. 

EN 

28 

   EN 

 
 
 
(d)  The credit institution can demonstrate that the use of the correlation formula of 
this paragraph is constrained 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  subportfolios,  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  with  the  underlying  risk  characteristics  of  the  sub-
portfolio. 

12. 

To  be  eligible  for  the  retail  treatment  purchased  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  indirectly  originated  by  the  credit  institution 
itself. 

(b)  The purchased receivables shall be generated on an arm’s-length basis between 
the  seller  and  the  obligor.  As  such,  intercompany  accounts  receivables  and 
receivables subject to contra-accounts between firms that buy and sell to each 
other are ineligible. 

(c)  The  purchasing  credit  institution  has  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. 

14. 

For  purchased  receivables,  refundable  purchase  discounts,  collateral  or  partial 
guarantees  that  provide  first-loss  protection  for  default  losses,  dilution  losses,  or 
both, may be treated as first-loss positions under the IRB securitisation framework. 

For hybrid pools of purchased retail receivables where purchasing credit institutions 
cannot separate exposures secured by real estate collateral and qualifying revolving 
retail exposures from other retail exposures, the retail risk weight function producing 
the highest capital requirements for 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  different  portfolios  where  the  credit  institution  itself  uses 
different  approaches  internally.  Where  a  credit  institution  is  permitted  to  use 
different  approaches,  the  credit  institution  shall  demonstrate  to  the  competent 
authorities that the choice is made consistently and is not determined by regulatory 
arbitrage considerations.  

16. 

Notwithstanding paragraph 15 competent authorities may allow the attribution of risk 
weighted  exposure  amounts  for  equity  exposures  to  ancillary  services  undertakings 
according to the treatment of other non credit-obligation assets.  

EN 

29 

   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  equity  exposures  in  sufficiently  diversified 
portfolios. 

Risk weight (RW) = 290% for exchange 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  instruments  held  in  the  non-trading  book  are 
permitted  to  offset  long  positions  in  the  same  individual  stocks  provided  that  these 
instruments  have  been  explicitly  designated  as  hedges  of  specific  equity  exposures 
and that they provide a hedge for at least another 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 context 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. 

21. 

22. 

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.  

At the individual exposure level the sum of the expected loss amount multiplied by 
12.5  and  the  risk  weighted  exposure  amount  shall  not  exceed  the  exposure  value 
multiplied by 12.5. 

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 diversified 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  computed  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 expected loss amounts 
multiplied by 12.5. 

EN 

30 

   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  EXPOSURE  AMOUNTS  FOR  DILUTION  RISK  OF 
PURCHASED RECEIVABLES 

26. 

Risk weights for dilution risk of purchased 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 determined 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  competent  authorities  that  dilution  risk  is 
immaterial, it need not be recognised.  

3. 

27. 

28. 

CALCULATION OF EXPECTED LOSS AMOUNTS 

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.  

The  expected  loss  amounts  for  exposures  to  corporates,  institutions,  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 exposures shall be treated as EL. 

29. 

The  EL  values  for  specialised  lending  exposures  where  credit  institutions  use  the 
methods set out in paragraph 5 for assigning 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 

31 

   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  exposures  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) = 
diversified portfolios 

10%  for  private  equity  exposures 

in  sufficiently 

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  exposures  where  the  risk  weighted  exposure 
amounts are calculated according to the methods set out paragraphs 20 to 22 shall be 
calculated according to the following formulas:  

32. 

33. 

4. 

34. 

Expected loss (EL) = 

PD × LGD 

Expected loss amount = 

EL × exposure value 

The  expected  loss  amounts  for  equity  exposures  where  the  risk  weighted  exposure 
amounts are calculated according to the methods set out in paragraphs 23 to 24 shall 
be 0%.  

The  expected  loss  amounts  for  dilution  risk  of  purchased  receivables  shall  be 
calculated according to the following formula:  

Expected loss (EL) = 

PD × LGD 

Expected loss amount = 

EL × exposure value 

TREATMENT OF EXPECTED LOSS AMOUNTS 

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  value  adjustments,  premiums  on  purchased 
exposures  according  to  Part  3,  paragraph  1  shall  be  added  to  the  expected  loss 
amounts. Expected loss amounts for securitised exposures and value adjustments and 
provisions related to these exposures shall not be included in this calculation.  

EN 

32 

   EN 

 
1. 

1. 

Part 2 - PD, LGD and Maturity 

The  input  parameters  probability  of  default  (PD),  loss  given  default  (LGD)  and 
maturity  value  (M)  into  the  calculation  of  risk  weighted  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.  

EXPOSURES  TO  CORPORATES,  INSTITUTIONS  AND  CENTRAL  GOVERNMENTS  AND 
CENTRAL BANKS 

1.1. 

PD 

2. 

3. 

4. 

5. 

6. 

7. 

The PD of an exposure to a corporate or an institution shall be at least 0.03%.  

For  purchased  corporate  receivables  in  respect  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 determined according to the following methods: 
for  senior  claims  on  purchased  corporate  receivables  PD  shall  be  the  credit 
institutions estimate of EL divided by LGD for these receivables. 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 decompose its EL estimates for purchased corporate receivables 
into PDs and LGDs in a reliable manner, the PD estimate may be used.  

The PD of obligors in default shall be 100%.  

Credit institutions may recognise unfunded credit protection in the PD in accordance 
with the provisions of Articles 90 to 93 

Credit  institutions  using  own  LGD  estimates  may  recognise  unfunded  credit 
protection by adjusting PDs subject to paragraph 11.  

For  dilution  risk  of  purchased  corporate  receivables  PD  shall  be  set  equal  to  EL 
estimate  for  dilution  risk.  If  a  credit  institution  is  permitted  to  use  own  LGD 
estimates for corporate exposures and it can decompose its EL estimates for dilution 
risk of purchased corporate receivables into PDs and LGDs in a reliable manner, the 
PD estimate may be used. 

1.2. 

LGD 

8. 

Credit institutions shall use the following LGD values:  

(a)  Senior exposures without eligible collateral: 45%.  

(b)  Subordinated exposures without eligible collateral: 75%.  

(c)  Credit institutions may recognise funded 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 

33 

   EN 

 
(e)  For senior purchased corporate receivables exposures where a credit institution 
cannot demonstrate that its PD estimates  meet  the  minimum  requirements  set 
out in Part 4, 45%. 

(f) 

For  subordinated  purchased  corporate  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 purchased corporate receivables: 75% 

9. 

10. 

Notwithstanding  paragraph  8,  for  dilution  and  default  risk  if  a  credit  institution  is 
permitted to use own LGD estimates for corporate exposures and it can decompose 
its EL estimates for purchased corporate receivables into PDs and LGDs in a reliable 
manner, the LGD estimate for purchased corporate receivables may be used.  

Notwithstanding  paragraph  8,  if  a  credit  institution  is  permitted  to  use  own  LGD 
estimates  for  exposures  to  corporates,  institutions,  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  guaranteed  exposures  an 
adjusted PD or LGD such that the adjusted risk weight would be lower than that of a 
comparable, direct exposure to the guarantor.  

1.3.  Maturity 

11. 

12. 

transactions  or  securities  or  commodities 

Subject  to  paragraph  12,  credit  institutions  shall  assign  to  exposures  arising  from 
repurchase 
lending  or  borrowing 
transactions a maturity value (M) of 0.5 years and to all other exposures an M of 2.5 
years. Competent authorities may require all credit institutions in their jurisdiction to 
use M for each exposure as set out under paragraph 12.  

Credit  institutions  permitted  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  shall  be  calculated 

according to the following formula: 

M = MAX{1; MIN{

t

*

CF
t

/

∑

t

∑

t

CF
t

 ; 5}} 

where  CFt  denotes  the  cash  flows  (principal,  interest  payments  and  fees)  
contractually payable by the obligor in period t. 

(b)  For derivatives subject to a master netting agreement M shall be the weighted 
average remaining maturity of the exposure, 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  repurchase 

transactions  or  securities  or 
commodities  lending  or  borrowing  transactions  which  are  subject  to  a  master 
netting agreement M shall be the weighted average remaining maturity of the 

EN 

34 

   EN 

 
transactions  where  M  shall  be  at  least  5  days.  The  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  amounts  M  shall  equal  the  purchased 
receivables  exposure  weighted  average  maturity,  where  M  shall  be  at  least  1 
year.  This  same  value  of  M  shall  also  be  used  for  undrawn  amounts  under  a 
committed purchase facility provided the facility contains effective covenants, 
early amortisation triggers, or other features that protect the purchasing credit 
institution  against  a  significant  deterioration  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 facility, where M shall be at least 1 year.  

(e)  For  any  other  instrument  than  mentioned  in  this  paragraph  or  when  a  credit 
institution is not in a position to calculate 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.  

Notwithstanding paragraph 12 (a), (b), (d) and (e), for short-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.  

The  competent  authorities  may  allow  for  exposures  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.  

13. 

14. 

15. 

Maturity mismatches shall be treated as specified in Articles 90-93.  

2. 

RETAIL EXPOSURES 

2.1. 

PD 

16. 

17. 

18. 

The PD of an exposure shall be at least 0.03%.  

The  PD  of  obligors  or  where  an  obligation  approach  is  used  those  of  exposures  in 
default shall be 100%.  

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 

35 

   EN 

 
2.2. 

LGD 

20. 

21. 

Credit  institutions  shall  provide  own  estimates  of  LGDs  subject  to  minimum 
requirements  as  specified  in  Part 4  and  approval  of  competent  authorities.  For 
dilution risk of purchased receivables an LGD value of 75% shall be used. 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. 

Unfunded  credit  protection  may  be  recognised  by  adjusting  PD  or  LGD  estimates 
subject  to  minimum  requirements  as  specified  in  Part 4,  paragraphs  95  to  103  and 
approval  of  competent  authorities  either  in  support  of  an  individual  exposure  or  a 
pool  of  exposures.  A  credit  institution  shall  not  assign  guaranteed  exposures  an 
adjusted PD or LGD such that the adjusted risk weight would be lower than that of a 
comparable, direct exposure 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 exposures where the investment is part of a 
long-term customer relationship;  

(b)  0.09%  for  non-exchange  traded  equity  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 exposures 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 exposures shall be 5 years. 

EN 

36 

   EN 

 
1. 

1. 

2. 

3. 

4. 

5. 

6. 

7. 

8. 

Part 3 - Exposure value 

EXPOSURES  TO  CORPORATES,  INSTITUTIONS,  CENTRAL  GOVERNMENTS  AND 
CENTRAL BANKS AND RETAIL EXPOSURES.  

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, the difference between 
the  amount  owed  and  the  net  value  recorded  on  the  balance-sheet  of  credit 
institutions  is  denoted  discount  if  the  amount  owed  is  larger,  and  premium  if  it  is 
smaller.  

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 

For on-balance sheet netting of loans and deposits credit institutions shall apply for 
the calculation of the exposure value the methods set out in Articles 90 to 93. 

The exposure value for leases shall be the discounted lease payment stream.  

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.  

The  exposure  value  for  the  calculation  of  risk  weighted  exposure  amounts  of 
purchased  receivables  shall  be 
the  capital 
requirements for dilution risk prior to credit risk mitigation. 

the  outstanding  amount  minus 

Notwithstanding paragraph 5, contracts traded on recognised exchanges, and foreign-
exchange  contracts  (except  contracts  concerning  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.  

the 
Notwithstanding  paragraph  5,  competent  authorities  may  exempt  from 
application  of  the  methods  set  out  in  Annex  III  and  attribute  an  exposure  value  of 
zero to over-the-counter (OTC) contracts cleared by a clearing house where the latter 
acts as the legal counterparty and all participants fully collateralise on a daily basis 
the  exposure  they  present  to  the  clearing  house,  thereby  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 that the risk of a build-up of the clearing 
house's exposures beyond the market value of posted collateral is eliminated. 

EN 

37 

   EN 

 
9. 

10. 

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%.  

Where  an  exposure  takes  the  form  of  securities  sold,  posted  or  lent  under  a 
repurchase transaction or securities or commodities lending or borrowing transaction, 
the exposure value shall be the value of the securities or commodities determined in 
accordance with Article 74. Where the Financial Collateral Comprehensive Method 
as set out under Annex VIII, Part 3 is used, 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 the following conversion factors: 

(a)  For credit lines which are uncommitted, that are unconditionally cancellable, or 
that  effectively  provide  for  automatic  cancellation,  at  any  time  by  the 
institution  without  prior  notice,  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  deterioration  in  the  credit  quality  of  the 
obligor.  Undrawn  retail  credit  lines  may  be  considered  as  unconditionally 
cancellable if the terms permit the credit institution to cancel them to the full 
extent allowable under consumer protection and related legislation.  

(b)  For  short-term  letters  of  credit  arising  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 

issuance  facilities  (NIFs),  and  revolving 

underwriting facilities (RUFs), a conversion factor of 75% shall apply.  

(d)  Credit  institutions  which  meet  the  minimum  requirements  for  the  use  of  own 
estimates  of  conversion  factors  as  specified  in  Part  4  may  use  their  own 
estimates  of  conversion  factors  across  different  product  types,  subject  to 
approval of the competent authorities. 

Where a commitment refers to the extension of another commitment, the lower of the 
two conversion factors associated with the individual commitment shall be used. 

For  all  other  off-balance  sheet  items  than  mentioned  in  paragraphs  1  to  11,  the 
exposure value shall be determined according to Annex II.  

EQUITY EXPOSURES 

The  exposure  value  shall  be  the  value  presented  in  the  financial  statements. 
Admissible equity exposure measures are the following:  

12. 

13. 

2. 

14. 

EN 

38 

   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  separate  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 value presented in the balance sheet. 

3. 

15. 

OTHER NON CREDIT-OBLIGATION ASSETS 

The exposure value of other non credit-obligation assets shall be the value presented 
in the financial statements.  

EN 

39 

   EN 

 
Part 4 - Minimum Requirements for IRB Approach 

1. 

1. 

2. 

3. 

RATING SYSTEMS 

A  ‘rating  system’  shall  comprise  all  of  the  methods,  processes,  controls,  data 
collection and IT systems that 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.  

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 reflects the level of risk.  

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 estimates 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. 

6. 

7. 

8. 

9. 

A rating system shall take into account obligor and transaction risk characteristics.  

A  rating  system  shall  have  an  obligor  rating  scale  which  reflects  exclusively 
quantification  of  the  risk  of  obligor  default.  The  obligor  rating  scale  shall  have  a 
minimum of 7 grades for non-defaulted obligors and one for defaulted obligors.  

An ‘obligor grade’ shall mean a risk category 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.  

Credit  institutions  with  portfolios  concentrated  in  a  particular  market  segment  and 
range  of  default  risk  shall  have  enough  obligor  grades  within  that  range  to  avoid 
undue  concentrations  of  obligors  in  a  particular  grade.  Significant  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.  

To  qualify  for  recognition  by  the  competent  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  competent  authorities  of  the  use  for  capital 
requirement calculation of own estimates of conversion factors a rating system shall 
incorporate  a  distinct  facility  rating  scale  which  exclusively  reflects  conversion 
factor related transaction characteristics.  

EN 

40 

   EN 

 
11. 

12. 

13. 

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  distinct  set  of  rating 
criteria from which own estimates of either LGDs or conversion factors are derived. 
The grade definition shall include both a description of how exposures are assigned 
to the grade and of the criteria used to distinguish the level of risk across grades.  

Significant  concentrations  within  a  single  facility  grade  shall  be  supported  by 
convincing  empirical  evidence  that  the  facility  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.  

Credit institutions using the methods set out in Part 1, paragraph 5 for assigning risk 
weights for specialised lending exposures are exempt from the requirement to have 
an obligor rating scale which reflects exclusively quantification of the risk of obligor 
default  for  these  exposures.  Notwithstanding  paragraph  6,  these  institutions  shall 
have for these exposures at least 4 grades for non-defaulted obligors and at least one 
grade for defaulted obligors.  

1.1.2.  Retail exposures 

14. 

15. 

16. 

Rating  systems  shall  reflect  both  obligor  and  transaction  risk,  and  shall  capture  all 
relevant obligor and transaction characteristics. 

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.  

Credit institutions shall demonstrate that the process of assigning exposures to grades 
or pools provides for a meaningful differentiation 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 purchased receivables the 
grouping  shall  reflect  the  seller’s  underwriting  practices  and  the  heterogeneity  of 
their customers.  

17. 

Credit institutions shall consider the following risk drivers when assigning exposures 
to grades or pools:  

Obligor risk characteristics 

(a)  Transaction  risk  characteristics,  including  product  or  collateral  types  or  both. 
Credit  institutions  shall  explicitly  address  cases  where  several  exposures 
benefit from the same collateral 

(b)  Delinquency,  unless  the  credit  institution  demonstrates  to  its  competent 
authority that delinquency is not a material 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 

41 

   EN 

 
(a)  The grade or pool definitions and criteria shall be sufficiently detailed to allow 
those charged with assigning ratings to consistently assign obligors or facilities 
posing  similar  risk  to  the  same  grade  or  pool.  This  consistency  shall  exist 
across lines of business, departments 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 appropriateness of the assignments to a grade 
or a pool. 

(c)  The criteria shall also be consistent with the credit institution’s internal lending 

standards and its policies for handling troubled obligors and facilities. 

19. 

A  credit  institution  shall  take  all  relevant  information  into  account  in  assigning 
obligors  and  facilities  to  grades  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 facility 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. 

21. 

22. 

23. 

24. 

Each  obligor  shall  be  assigned  to  an  obligor  grade  as  part  of  the  credit  approval 
process.  

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. 

Credit institutions using the methods set out in Part 1, paragraph 5 for assigning risk 
weights  for  specialised  lending  exposures  shall  assign  each  of  these  exposures  to  a 
grade in accordance with paragraph 13.  

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  regarding  the  treatment  of  individual  obligor  clients  and 
groups of connected clients.  

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 guarantees to an exposure may be reflected 

in an adjusted assignment to an obligor grade  

EN 

42 

   EN 

 
1.2.2.  Retail exposures 

25. 

Each  exposure  shall  be  assigned  to  a  grade  or  a  pool  as  part  of  the  credit  approval 
process.  

1.2.3.  Overrides 

26. 

For  grade  and  pool  assignments  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 responsible for approving these overrides. Credit 
institutions  shall  document  these  overrides  and  the  personnel  responsible.  Credit 
institutions shall analyse the performance of the exposures whose assignments have 
been  overridden.  This  analysis  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. 

28. 

29. 

Assignments and periodic reviews of assignments shall be completed or approved by 
an  independent  party  that  does  not  directly  benefit  from  decisions  to  extend  the 
credit.  

Credit institutions shall update assignments at least annually. High risk obligors and 
problem exposures shall be subject to more frequent review. Credit institutions shall 
undertake  a  new  assignment  if  material  information  on  the  obligor  or  exposure 
becomes available.  

A  credit  institution  shall  have  an  effective  process  to  obtain  and  update  relevant 
information  on  obligor  characteristics 
transaction 
characteristics that affect LGDs and conversion factors.  

that  affect  PDs,  and  on 

1.3.2.  Retail exposures 

30. 

A credit institution shall at least annually update obligor and facility assignments or 
review  the  loss  characteristics  and  delinquency  status  of  each  identified  risk  pool 
whichever  applicable.  A  credit  institution  shall  also  at  least  annually  review  in  a 
representative sample the status of individual 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 facilities grades or pools, then:  

(a)  The  credit  institution  shall  demonstrate  to  its  competent  authority  that  the 
model  has  good  predictive  power  and  that  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 

43 

   EN 

 
(b)  The credit institution shall have in place 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  the  credit  institution’s  actual  obligors  or 
exposures. 

(d)  The  credit  institution  shall  have  a  regular  cycle  of  model  validation  that 
includes  monitoring  of  model  performance  and  stability;  review  of  model 
specification; and testing of model outputs against outcomes. 

(e)  The  credit  institution  shall  complement  the  statistical  model  by  human 
judgement  and  human  oversight  to  review  model-based  assignments  and  to 
ensure that the models are used appropriately. 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. 

33. 

34. 

35. 

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 differentiation, rating 
criteria,  responsibilities  of  parties  that  rate  obligors  and  exposures,  frequency  of 
assignment reviews, and management oversight of the rating process.  

The  credit  institution  shall  document  the  rationale  for  and  analysis  supporting  its 
choice of rating criteria. A credit institution shall document all major changes in the 
risk  rating  process,  and  such  documentation  shall  support  identification  of  changes 
made  to  the  risk  rating  process  subsequent  to  the  last  review  by  the  competent 
authorities.  The  organisation  of  rating  assignment  including  the  rating  assignment 
process and the internal control structure shall also be documented.  

The credit institutions shall document the specific definitions of default and loss used 
internally and demonstrate consistency with the definitions set out in this Directive.  

If  the  credit  institution  employs  statistical  models  in  the  rating  process,  the  credit 
institution shall document their methodologies. This material shall:  

(a) 

provide a detailed outline of the theory, assumptions and/or mathematical and 
empirical  basis  of  the  assignment  of  estimates  to  grades,  individual  obligors, 
exposures, or pools, and the data source(s) used to estimate the model; 

(b) 

establish a rigorous statistical process (including out-of-time and out-of-sample 
performance tests) for validating the model; and 

(c) 

indicate any circumstances under which the model does not work effectively 

36. 

Use of a model obtained from a third-party vendor that claims proprietary technology 
is  not  a  justification  for  exemption  from  documentation  or  any  other  of  the 

EN 

44 

   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 obligors and recognised guarantors,  

(b)  The dates the ratings were assigned,  

(c)  The key data and methodology used 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 estimates 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 realised 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 assigned and the estimates were done, 

(c)  The key data and methodology used to derive 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 credit institutions that reflect the credit 
risk mitigating effects of guarantees or credit derivatives through LGD. 

EN 

45 

   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 allocating exposures to grades or pools, 

(b)  Data  on  the  estimated  PDs,  LGDs  and  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 grades or pools to which the exposure was 
assigned over the year prior 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. 

42. 

2. 

43. 

A  credit  institution  shall  have  in  place  sound  stress  testing  processes  for  use  in  the 
assessment  of  its  capital  adequacy.  Stress  testing  shall  involve  identifying  possible 
events or future changes in economic conditions that could have unfavourable effects 
on  a  credit  institution’s  credit  exposures  and  assessment  of  the  credit  institution’s 
ability to withstand such changes.  

A credit institution shall regularly perform a credit risk stress test to assess the effect 
of certain specific conditions on its total capital 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  reasonably  conservative, 
considering  at  least  the  effect  of  mild  recession  scenarios. A  credit  institution  shall 
assess migration in its ratings under the stress test scenarios. Stressed portfolios shall 
contain the vast majority of a credit institution's total exposure.  

RISK QUANTIFICATION 

In determining the risk parameters to be associated with rating grades or pools, credit 
institutions shall apply the following requirements:  

2.1. 

Definition of default 

44. 

A ‘default’ shall be considered to have occurred with regard to a particular obligor 
when either or both of the two following events has taken place:  

(a)  The  credit  institution  considers  that  the  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 

46 

   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  has  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 has been brought to the knowledge of the 
obligor. 

In  the  case  of  retail  exposures  and  exposures  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 institutions 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 credit obligation on non-accrued status. 

(b)  The  credit  institution  makes  a  value  adjustment  resulting  from  a  significant 
perceived decline in credit quality subsequent 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  result  in  a  diminished  financial  obligation 
caused  by  the  material  forgiveness,  or  postponement,  of  principal,  interest  or 
(where  relevant)  fees.  This  includes  in  the  case  of  equity  exposures  assessed 
under a PD/LGD Approach, distressed restructuring 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  obligation  to  the  credit  institution,  the  parent 
undertaking or any of its subsidiaries. 

(f)  The obligor has sought or has been placed in bankruptcy or similar protection 
where this would avoid or delay repayment of a credit obligation to the credit 
institution, the parent undertaking 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 institution considers that a previously defaulted exposure is such that no 
trigger  of  default  continues  to  apply,  the  credit  institution  shall  rate  the  obligor  or 

EN 

47 

   EN 

 
facility as they would for a non-defaulted exposure. Should the definition of default 
subsequently be triggered, another default 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 Member State. The specific number shall fall 
within  90-180  days  and  may  differ  across  product  lines.  For  exposures  to  such 
counterparts  situated  in  the  territories  of  other  Member  States,  the  competent 
authorities shall set a number of days past 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. 

50. 

51. 

52. 

53. 

A  credit  institution’s  own  estimates  of  the  risk  parameters  PD,  LGD,  conversion 
factor  and  EL  shall  incorporate  all  relevant  data,  information  and  methods.  The 
estimates  shall  be  derived  using  both  historical  experience  and  empirical  evidence, 
and not based purely on judgemental considerations. The estimates shall be plausible 
and  intuitive  and  shall  be  based  on  the  material  drivers  of  the  respective  risk 
parameters. The less data a credit institution has, the more conservative it shall be in 
its estimation. 

The credit institution shall be able to provide a breakdown of its loss experience in 
terms of default frequency, LGD, conversion 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.  

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 implications of technical 
advances  and  new  data  and  other  information,  as  it  becomes  available.  Credit 
institutions shall review their estimates when new information comes to light but at 
least on an annual basis.  

The population of exposures represented in the data used for estimation, the lending 
standards used when the data was generated and other relevant  characteristics shall 
be  comparable  with  those  of  the  credit  institution’s  exposures  and  standards.  The 
credit institution shall also demonstrate that 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 confidence in the accuracy and robustness of its 
estimates. 

For  purchased  receivables  the  estimates  shall  reflect  all  relevant  information 
available to the purchasing credit institution regarding the quality of the underlying 
receivables, including 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 

48 

   EN 

 
54. 

55. 

56. 

A credit institution shall add to its estimates a margin of conservatism that is related 
to  the  expected  range  of  estimation  errors.  Where  methods  and  data  are  less 
satisfactory  and  the  expected  range  of  errors  is  larger,  the  margin  of  conservatism 
shall be larger.  

If  credit  institutions  use  different  estimates  for  the  calculation  of  risk  weights  and 
internal  purposes  it  shall  be  documented  and  their  reasonableness  shall  be 
demonstrated to the competent authority.  

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  broad  equivalence  with  the  definitions  of 
default  or  loss,  competent  authorities  may  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  across  credit  institutions  it  shall 
demonstrate that:  

(a)  The  rating  systems  and  criteria  of  other  credit  institutions  in  the  pool  are 

similar with its own; 

(b)  The pool shall be representative 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 pooled across credit institutions, it shall remain 
responsible  for  the  integrity  of  its  rating  systems.  The  credit  institution  shall 
demonstrate to the competent authority that it has sufficient 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. 

60. 

61. 

Credit  institutions  shall  estimate  PDs  by  obligor  grade  from  long  run  averages  of 
one-year default rates.  

For purchased corporate receivables credit institutions may estimate ELs by obligor 
grade from long run averages of one-year realised default rates.  

If  a  credit  institution  derives  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 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.  

62. 

Credit institutions shall use PD estimation techniques only with supporting analysis. 
Credit  institutions  shall  recognise  the  importance  of  judgmental  considerations  in 

EN 

49 

   EN 

 
63. 

64. 

65. 

66. 

67. 

68. 

69. 

combining  results  of  techniques  and  in  making  adjustments  for  limitations  of 
techniques and information.  

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 differences 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  

To  the  extent  that  a  credit  institution  associates  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  grades  to  the  credit  institution’s  grades, 
mappings  shall  be  based  on  a  comparison  of  internal  rating  criteria  to  the  criteria 
used  by  the  external  organisation  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 oriented to default risk only and not reflect 
transaction  characteristics.  The  credit 
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.  

institution’s  analysis  shall 

To  the  extent  that  a  credit  institution  uses  statistical  default  prediction  models  it  is 
allowed  to  estimate  PDs  as  the  simple  average  of  default-probability  estimates  for 
individual obligors in a given grade. The credit institution’s use of default probability 
models for this purpose shall meet the standards specified in paragraph 31.  

Irrespective of whether a credit institution is using external, internal, or pooled data 
sources,  or  a  combination  of  the  three,  for  its  PD  estimation,  the  length  of  the 
underlying historical observation period used shall 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 

Credit  institutions  shall  estimate  PDs  by  obligor  grade  or  pool  from  long  run 
averages of one-year default rates.  

Notwithstanding  paragraph  67,  PD  estimates  may  also  be  derived  from  realised 
losses and appropriate estimates of LGDs.  

Credit  institutions  shall  regard  internal  data  for  assigning  exposures  to  grades  or 
pools as the primary source of information for estimating loss characteristics. Credit 
institutions  are  permitted  to  use  external  data  (including  pooled  data)  or  statistical 
models for quantification provided a strong 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 

50 

   EN 

 
70. 

71. 

(b) 

the credit institution’s internal risk profile and the composition of the external 
data.  

For  purchased  retail  receivables  credit  institutions  may  use  external  and  internal 
reference  data.  Credit  institutions  shall  use  all  relevant  data  sources  as  points  of 
comparison.  

If  a  credit  institution  derives  long  run  average  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.  

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 historical observation period used shall be at least five years 
for  at  least  one  source.  If  the  available  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  analyse  expected  changes  of  risk  parameters 
over the life of credit exposures (seasoning effects). 

2.2.2.  Requirements specific to own-LGD estimates 

73. 

74. 

75. 

76. 

77. 

78. 

Credit institutions shall estimate LGDs by facility 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).  

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  constant  realised  LGDs  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 impact of an economic downturn.  

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.  

Currency  mismatches  between  the  underlying  obligation  and  the  collateral  shall  be 
treated conservatively in the credit institution’s assessment of LGD.  

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 expeditiously gain control of their collateral and liquidate it.  

To the extent, that a credit institution does 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 

51 

   EN 

 
79. 

80. 

81. 

82. 

83. 

84. 

85. 

For the specific case of exposures already in default, the credit institution shall use its 
best  estimate  of  expected  loss  for  each  exposure  given  current  economic 
circumstances and exposure status.  

To  the  extent  that  unpaid  late  fees  have  been  capitalised  in  the  credit  institution’s 
income statement, they shall be added to the credit institution’s measure of exposure 
and loss.  

Exposures to corporates, institutions and central governments and central banks 

Estimates of LGD shall be based on data over a minimum of seven years for at least 
one  data  source.  If  the  available  observation  period  spans  a  longer  period  for  any 
source, and the data is relevant, this longer period shall be used.  

Retail exposures 

Notwithstanding paragraph 73, LGD estimates may be derived from realised losses 
and appropriate estimates of PDs.  

Notwithstanding paragraph 88, credit institutions may reflect future drawings either 
in its conversion factor or in its LGD estimates.  

For  purchased  retail  receivables  credit  institutions  may  use  external  and  internal 
reference data to estimate LGDs. 

Estimates  of  LGD  shall  be  based  on  data  over  a  minimum  of  five  years. 
Notwithstanding paragraph 73, a credit institution needs not give equal importance to 
historic data if it can demonstrate to its competent authority that more recent data is a 
better predictor of loss rates.  

2.2.3.  Requirements specific to own-conversion factor estimates 

86. 

87. 

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).  

Credit  institutions  shall  use  conversion  factor  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 constant 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  impact  of  an  economic 
downturn.  

88. 

Credit  institutions  estimates  of  conversion  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  incorporate  a  larger  margin  of  conservatism 
where a stronger positive correlation can reasonably be expected between the default 
frequency and the magnitude of conversion factor.  

EN 

52 

   EN 

 
89. 

90. 

91. 

92. 

93. 

94. 

In  arriving  at  estimates  of  conversion  factors  credit  institutions  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 short of payment default, such as covenant 
violations or other technical default events.  

Credit  institutions  shall  have  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 credit institution shall be able to monitor 
outstanding balances on a daily basis.  

If credit institutions use different estimates of conversion factors for the calculation 
of risk weighted exposure amounts and internal purposes it shall be documented and 
their reasonableness shall be demonstrated to the competent authority.  

Exposures to corporates, institutions and central governments and central banks 

Estimates of conversion factor shall be based on data over a minimum of seven years 
for at least one data source. If the available observation period spans a longer period 
for any source, and the data is relevant, this longer period shall be used. 

Retail exposures 

Notwithstanding paragraph 88, credit institutions may reflect future drawings either 
in their conversion factors or in their LGD estimates.  

Estimates of conversion factors shall be based on data over a minimum of five years. 
Notwithstanding paragraph 86, a credit institution need not give equal importance to 
historic data if it can demonstrate to its competent authority that more recent data is a 
better predictor of draw downs.  

2.2.4.  Minimum requirements for assessing the effect of guarantees and credit derivatives 

Exposures  to  corporates,  institutions  and  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  governments  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 requirements of Articles 90 to 93 shall apply.  

96. 

For retail guarantees, these requirements also apply to the assignment of exposures to 
grades or pools, and the estimation of PD.  

Eligible guarantors and guarantees 

97. 

98. 

Credit institutions shall have clearly specified criteria for the types of guarantors they 
recognise for the calculation of risk weighted exposures.  

For recognised guarantors the same rules as for obligors as set out in paragraphs 18 
to 30 shall apply. 

EN 

53 

   EN 

 
99. 

100. 

101. 

102. 

The  guarantee  shall  be  evidenced  in  writing,  non-cancellable  on  the  part  of  the 
guarantor, in force until the obligation 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  guarantor  has  assets  to  attach  and  enforce  a  judgement. 
Guarantees prescribing conditions under which the guarantor 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 

A credit institution shall have clearly specified criteria for 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  assets.  These  criteria  shall  comply  with  the 
minimum requirements set out in paragraphs 18 to 30.  

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 the guarantor’s ability to perform under the 
guarantee  is  correlated  with  the  obligor’s  ability  to  repay,  and  the  extent  to  which 
residual risk to the obligor remains.  

Credit derivatives 

The  minimum  requirements  for  guarantees  in  this  Part  shall  apply  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  apply.  For  retail  exposures  and  eligible 
purchased receivables, this paragraph applies to the process of allocating exposures 
to grades or pools.  

103. 

The  criteria  shall  address  the  payout  structure  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 that under all foreseeable circumstances the 
credit institution has effective ownership and 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 are forwarded completely and 
within the contractually agreed terms. Servicer shall mean an entity that manages a 
pool  of  purchased  receivables  or  the  underlying  credit  exposures  on  a  day-to-day 
basis.  Credit  institutions  shall  have  procedures  to  ensure  that  ownership  over  the 
receivables  and  cash  receipts  is  protected  against  bankruptcy  stays  or  legal 

EN 

54 

   EN 

 
challenges  that  could  materially  delay  the  lender’s  ability  to  liquidate  or  assign  the 
receivables or retain control 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 seller and servicer. In particular:  

(a)  The  credit  institution  shall  assess  the  correlation  among  the  quality  of  the 
purchased  receivables  and  the  financial  condition  of  both  the  seller  and 
servicer,  and  have  in  place  internal  policies  and  procedures  that  provide 
adequate  safeguards  to  protect  against  such  contingencies,  including  the 
assignment of an internal risk rating 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  reviews  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 quality of the seller’s credit 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-obligor 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  receivables  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 

The credit institution shall have systems and procedures for detecting deteriorations 
in the seller’s financial condition and purchased receivables quality at an early stage, 
and for addressing emerging problems pro-actively. In particular the credit institution 
shall  have  clear  and  effective  policies,  procedures,  and  information  systems  to 
monitor  covenant  violations,  and  clear  and  effective  policies  and  procedures  for 
initiating legal actions and dealing with problem purchased receivables.  

Effectiveness of systems for controlling collateral, credit availability, and cash 

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  material  elements  of  the  receivables  purchase 
programme, 
rates,  eligible  collateral,  necessary 
documentation,  concentration  limits,  and  the  way  cash  receipts  are  to  be  handled. 

the  advancing 

including 

106. 

107. 

EN 

55 

   EN 

 
These  elements  shall  take  appropriate  account  of  all  relevant  and  material  factors, 
including  the  seller’s  and  servicer’s  financial  condition,  risk  concentrations,  and 
trends in the quality of the purchased receivables and the seller’s customer base, and 
internal  systems  shall  ensure  that  funds  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  and  procedures.  The  process  shall  include 
regular  audits  of  all  critical  phases  of  the  credit  institution’s  receivables  purchase 
programme, verification of the separation of duties between firstly the assessment of 
the  seller  and  servicer  and  the  assessment  of  the  obligor  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. 

110. 

111. 

112. 

113. 

Credit  institutions  shall  have  robust  systems  in  place  to  validate  the  accuracy  and 
consistency  of  rating  systems,  processes,  and  the  estimation  of  all  relevant  risk 
parameters. A credit institution shall demonstrate to its competent authority that the 
internal validation process enables it to assess the performance of internal rating and 
risk estimation systems consistently and meaningfully.  

Credit institutions shall regularly compare realised default rates with estimated PDs 
for each grade and where realised default rates 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 estimates. 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.  

Credit institutions shall also use other quantitative 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  assessments  of  the  performance  of  their  rating 
systems shall be based on as long a period as possible.  

The  methods  and  data  used  for  quantitative  validation  shall  be  consistent  through 
time. Changes in estimation and validation methods and data (both data sources and 
periods covered) shall be documented.  

Credit institutions shall have sound internal standards for situations where deviations 
in  realised  PDs,  LGDs,  conversion  factors  and  total  losses  where  EL  is  used  from 
expectations  become  significant  enough  to  call  the  validity  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 

56 

   EN 

 
higher  than  expected  values,  credit  institutions  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 purpose 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  available  and  meaningful  in  representing  the 
risk profile of the credit institution’s specific equity exposures. The data used 
shall be sufficient to provide conservative, statistically reliable 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  outputs  that  achieve  appropriate  realism  and 
conservatism. In constructing Value at Risk (VaR) models estimating potential 
quarterly  losses,  credit  institutions  may  use  quarterly  data  or  convert  shorter 
horizon period data to a quarterly equivalent using an analytically appropriate 
method  supported  by  empirical  evidence  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 both the general market risk and specific 
risk  exposure  of  the  credit  institution’s  equity  portfolio.  The  internal  models 
shall adequately explain historical price variation, capture both the magnitude 
and  changes  in  the  composition  of  potential  concentrations,  and  be  robust  to 
adverse market environments. The population of risk exposures represented in 
the data used for estimation shall be closely 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.  Where  a  credit  institution  has  material 
holdings  with  values  that  are  highly  non-linear  in  nature  the  internal  models 
shall  be  designed  to  capture  appropriately  the  risks  associated  with  such 
instruments.  

(d)  Mapping  of  individual  positions  to  proxies,  market  indices,  and  risk  factors 

shall be plausible, intuitive, and conceptually sound.  

EN 

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(e)  Credit 

institutions  shall  demonstrate 

the 
appropriateness of risk factors, including their ability to cover both general and 
specific risk.  

through  empirical  analyses 

(f)  The  estimates  of  the  return  volatility  of  equity  exposures  shall  incorporate 
relevant and available data, information, and methods. Independently reviewed 
internal  data  or  data  from  external  sources  (including  pooled  data)  shall  be 
used.  

(g)  A rigorous and comprehensive stress-testing 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  shall  be  fully  integrated  into  the  credit 
institution’s  risk  management  infrastructure  if  they  are  particularly  used  in: 
measuring  and  assessing  equity  portfolio  performance  (including  the  risk-
adjusted  performance);  allocating  economic  capital  to  equity  exposures  and 
evaluating overall capital adequacy and the investment management process. 

(b)  Established  management  systems,  procedures,  and  control  functions  for 
ensuring  the  periodic  and  independent  review  of  all  elements  of  the  internal 
modelling  process,  including  approval  of  model  revisions,  vetting  of  model 
inputs,  and  review  of  model  results,  such  as  direct  verification  of  risk 
computations.  These  reviews  shall  assess  the  accuracy,  completeness,  and 
appropriateness  of  model  inputs  and  results  and  focus  on  both  finding  and 
limiting  potential  errors  associated  with  known  weaknesses  and  identifying 
unknown  model  weaknesses.  Such  reviews  may  be  conducted  by  an  internal 
independent unit, or by an independent external third party.  

(c)  Adequate systems and procedures for monitoring 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 shall 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  system  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 process and validation shall be documented.  

EN 

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117. 

118. 

119. 

120. 

121. 

Credit institutions shall use the internal validation process to assess the performance 
of its internal models and processes in a consistent and meaningful way.  

The  methods  and  data  used  for  quantitative  validation  shall  be  consistent  through 
time. Changes in estimation and validation methods and data (both data sources and 
periods covered) shall be documented.  

Credit  institutions  shall  regularly  compare  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.  

Credit  institutions  shall  make  use  of  other  quantitative  validation  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  assessments  of  the  performance  of  their  models 
shall be based on as long a period as possible.  

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  model  reviews  shall  be 
documented and consistent with the credit institution’s model review standards.  

122. 

The  internal  model  and  the  modelling  process  shall  be  documented,  including  the 
responsibilities  of  parties  involved  in  the  modelling,  and  the  model  approval  and 
model review processes.  

5. 

CORPORATE GOVERNANCE AND OVERSIGHT 

5.1. 

Corporate Governance 

123. 

124. 

125. 

All material aspects of the rating and estimation 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 comprehension of its associated management 
reports. 

Senior  management  shall  provide  notice  to  the  board  of  directors  or  a  designated 
committee  thereof  of  material  changes  or  exceptions  from  established  policies  that 
will materially impact the operations of the credit institution’s rating systems.  

Senior  management  shall  have  a  good  understanding  of  the  rating  systems  designs 
and operations. Senior management shall ensure, on an ongoing basis that the rating 
systems  are  operating  properly.  Senior  management  shall  be  regularly  informed  by 
the  credit  risk  control  units  about  the  performance  of  the  rating  process,  areas 
needing  improvement,  and  the  status  of  efforts  to  improve  previously  identified 
deficiencies.  

EN 

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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  across  grades,  estimation  of  the  relevant 
parameters per grade, and comparison of realised default rates and own estimates of 
LGDs  and  conversion  factors against  expectations  and  stress-test  results.  Reporting 
frequencies shall depend on the significance and type of information and the level of 
the recipient.  

5.2. 

Credit risk control 

127. 

The credit risk control unit shall be independent from the personal and management 
functions responsible for originating or renewing exposures and that 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 output of the rating systems.  

128. 

The areas of responsibility for the credit risk control unit(s) shall include:  

(a)  Testing and monitoring grades and pools; 

(b)  Production and analysis of summary reports from the credit institution’s rating 

systems;  

(c) 

Implementing  procedures  to  verify  that  grade  and  pool  definitions  are 
consistently applied across departments and geographic areas;  

(d)  Reviewing  and  documenting  any  changes  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 parameters 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 models used in the rating process;  

(h)  Ongoing review and alterations to models used in the rating process.  

129. 

Notwithstanding  paragraph  128,  credit  institutions  using  pooled  data  according  to 
paragraphs 57 and 58 may outsource the following tasks:  

(a)  Production of information relevant to testing and monitoring grades and pools; 

(b)  Production of summary reports from the credit institution’s rating systems; 

(c)  Production of information relevant to review of the rating criteria to evaluate if 

they remain predictive of risk; 

(d)  Documentation  of  changes  to  the  rating  process,  criteria  or  individual  rating 

parameters; 

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(e)  Production of information relevant to ongoing review and alterations to models 

used in the rating process. 

Credit  institutions  making  use  of  this  paragraph  shall  ensure  that  the  competent 
authorities  have  access  to  all  relevant  information  from  the  third  party  that  is 
necessary  for  examining  compliance  with  the  minimum  requirements  and  that  the 
competent authorities may perform on-site examinations 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 

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ANNEX VIII – Credit risk mitigation 

Part 1- Eligibility 

1. 

2. 

This Part sets out eligible forms of credit risk mitigation for the purposes of Article 
92. 

For the purposes of this Annex: 

‘Secured lending transaction’ shall mean any 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  mean  any  transaction  giving  rise  to  an 
exposure secured by collateral which includes a provision conferring upon the credit 
institution the right to receive margin frequently.  

1. 

FUNDED CREDIT PROTECTION 

1.1. 

On-balance sheet netting 

3. 

4. 

The on-balance sheet netting of mutual claims between the credit institution and its 
counterparty may be recognised.  

Without  prejudice  to  paragraph  5,  eligibility  is  limited  to  reciprocal  cash  balances 
between  the  credit  institution  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  amounts  as  a  result  of  an  on-balance  sheet 
netting agreement.  

1.2.  Master  netting  agreements  covering  repurchase  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  netting  contracts  covering 
repurchase transactions, securities or commodities lending or borrowing transactions, 
and/or  other  capital  market-driven  transactions  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 commodities 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  assets,  eligibility  depends  upon  whether  risk-
weighted exposure amounts, and, as relevant, expected loss amounts, 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 

62 

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Comprehensive  Method  under  Part  3.  In  relation  to  repurchase  transactions  and 
securities or commodities lending or borrowing transactions, eligibility also depends 
upon whether the transaction is booked in the non-trading book or the trading book. 

1.3.1.  Eligibility under all approaches and methods 

7. 

The  following  financial  items  may  be  recognised  as  eligible  collateral  under  all 
approaches and methods: 

(a)  Cash  on  deposit  with,  or  cash  assimilated  instruments  held  by,  the  lending 

credit institution. 

(b)  Debt securities issued by central governments 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 with credit quality step 4 or above under 
the rules for the risk weighting of exposures 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 institutions under Articles 78 to 83. 

(d)  Debt  securities  issued  by  other  entities  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 corporates under Articles 78 to 83; 

(e)  Debt securities with a short-term 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  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), ‘debt securities issued by central governments 
or central banks shall be deemed to include – 

(i) 

debt securities issued by regional governments or local authorities exposures to 
which are treated as exposures to the central 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 under Articles 78 to 83; 

(iii)  debt  securities  issued  by  international  organisations  which  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 

63 

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(i) 

ebt  securities  issued  by  regional  governments  or  local  authorities  other  than 
those exposures to which are treated as exposures to the central government in 
whose jurisdiction they are established under Articles 78 to 83; 

(ii)  debt securities issued by public sector entities, 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 which 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) 

(d) 

(e) 

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  for  the  risk  weighting  of 
exposures to institutions or short term exposures under Articles 78 to 83. 

the lending credit institution has no information to suggest that the issue would 
justify a credit assessment below that indicated in (c);  

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 recognised as eligible collateral 
if the following conditions 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 recognition under paragraphs 7 and 8. 

The  use  (or  potential  use)  by  a  collective  investment  undertaking  of  derivative 
instruments  to  hedge  permitted  investments  shall  not  prevent  units  in  that 
undertaking from being eligible. 

10. 

In  relation  to  points  (b)  to  (e)  of  Paragraph  7,  where  a  security  has  two  credit 
assessments  by  eligible  ECAIs,  the  less  favourable  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 different, the less favourable of the two shall 
be deemed to apply.  

EN 

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1.3.2.  Additional eligibility under the Financial Collateral Comprehensive Method  

11. 

In addition to the collateral set out in paragraphs 7 to 10, where a credit institution 
uses  the  Financial  Collateral  Comprehensive  Method  under  Part  3,  the  following 
financial items may be recognised as eligible collateral: 

(a)  Equities  or  convertible  bonds  not  included  in  a  main  index  but  traded  on  a 

recognised exchange. 

(b)  Units in collective investment undertakings if the following conditions are met: 

(i) 

they have a daily public price quote; and 

(ii) 

the collective investment undertaking is limited to investing in instruments that 
are eligible for recognition under paragraph 7 and 8 and the items mentioned in 
the point (a) of this paragraph. 

The  use  (or  potential  use)  by  a  collective  investment  undertaking  of  derivative 
instruments  to  hedge  permitted  investments  shall  not  prevent  units  in  that 
undertaking from being eligible. 

1.3.3.  Additional eligibility for calculations underArticles 84 to 89 

12. 

13. 

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 set out in Articles 84 to 89: 

(a)  Real estate collateral 

Residential real estate property 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 the following conditions are met: 

(a)  The value of the property does not materially depend upon the credit quality of 
the  obligor.  This  requirement  is  not  intended  to  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 does not materially depend upon the performance of 
the underlying property or project, but rather on the underlying capacity of the 
borrower  to  repay  the  debt  from  other  sources.  As  such,  repayment  of  the 
facility  does  not  materially  depend  on  any  cash  flow  generated  by  the 
underlying property serving 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  subsequent  equivalent  legislation  in  respect  of  residential 
property which is or will be occupied or let by the owner, as residential real estate 
collateral, provided that these conditions are met. 

15. 

The competent authorities may also authorise their credit institutions to recognise as 
eligible collateral shares in Finnish housing companies operating in accordance with 

EN 

65 

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16. 

17. 

18. 

19. 

20. 

the  Finnish  Housing  Company  Act  of  1991  or  subsequent  equivalent  legislation  as 
commercial real estate collateral, provided that these conditions are met. 

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  relevant  market  is  well-developed  and  long-
established with loss-rates which are sufficiently low to justify such action. This shall 
not  prevent  the  competent  authorities  of  a  Member  State,  which  do  not  use  this 
waiver  from  recognising  as  eligible  residential  real  estate  property  recognised  as 
eligible  in  another  Member  State  by  virtue  of  the  waiver.  Member  States  shall 
disclose publicly the use they make of this waiver. 

The competent authorities of the Member States may waive the requirement for their 
institutions to comply with condition (b) in paragraph 13 for commercial real estate 
property  situated  within  the  territory  of  that  Member  State,  if  the  competent 
authorities  have  evidence  that  the  relevant  market  is  well-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 where applicable and if lower 60 % of the 
mortgage-lending-value)  does  not  exceed  0.3  %  of  the  outstanding  loans 
secured by commercial real estate property in any given year. 

(b)  overall losses stemming from lending secured by commercial real estate does 

not exceed 0.5 % of the outstanding loans in any given year.  

If either of these conditions is not satisfied in a given year, the eligibility to use this 
treatment will cease until the conditions are satisfied in a subsequent year.  

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 

The  competent  authorities  may  recognise  as  eligible  collateral  amounts  receivable 
linked  to  a  commercial  transaction  or  transactions  with  an  original  maturity  of  less 
than or equal to one year. Eligible receivables 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  paragraphs  13  to  19  if  satisfied  as  to  the 
following: 

(a) 

the existence of liquid markets for disposal of the collateral in an expeditious 
and economically efficient manner; and 

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(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 collateral 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  assimilated  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  arrangement  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 lending 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  will  be  repurchased  by  that 
institution on request may be recognised 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  providers  of  unfunded 
protection: 

(a)  Central governments and central banks;  

(b) 

regional governments or local authorities;  

(c)  multi-lateral development banks; 

(d) 

(e) 

international organisations exposures to which receive a 0% risk weight under 
Articles 78 to 83; 

public sector entities, claims on which are treated by the competent authorities 
as claims on institutions under Articles 78 to 83; 

(f) 

institutions; 

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(g)  Other  corporate  entities,  including  parent,  subsidiary  and  affiliate  corporate 

entites of the credit institution, that  

(i) 

(ii) 

have a credit assessment by a recognised ECAI which has been 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;  

in  the  case  of  credit  institutions  calculating  risk-weighted  exposure  amounts 
and  expected  loss  amounts  under  Articles  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 for the risk weighting of exposures to 
corporates under Articles 78 to 83. 

Where  risk-weighted  exposure  amounts  and  expected  loss  amounts  are  calculated 
under Articles 84o 89, to be eligible a guarantor must be internally rated by the credit 
institution in accordance with the provisions of Annex VII, Part 4. 

By way of derogation from paragraph 26, the 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 subject to prudential requirements equivalent to 
those applied to credit institutions. 

TYPES OF CREDIT DERIVATIVES 

The following types of credit derivatives, and instruments that may be composed of 
such  credit  derivatives  or  that  are  economically  effectively  similar,  may  be 
recognised as eligible. 

(a) 

credit default swaps 

(b) 

total return swaps 

(c) 

credit linked notes to the extent of their cash funding 

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  the  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.  

27. 

28. 

3. 

29. 

30. 

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  the  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  parties.  In  such  circumstances,  subject  to  the 

EN 

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compliance of such transfer with the requirements for the recognition of credit risk 
mitigation  set  out  in  this  Annex,  the  rules  for  the  calculation  of  risk-weighted 
exposure  amounts  and  expected  loss  amounts  where  unfunded  credit  protection  is 
acquired set out in Parts 3 to 6 shall be applied. 

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Part 2 - Minimum Requirements 

1. 

2. 

The credit institution must satisfy the competent authorities that it has adequate risk 
management  processes  to  control  those  risks  to  which  the  credit  institution  may  be 
exposed as a result of carrying out credit risk mitigation practices.  

Notwithstanding  the  presence  of  credit  risk  mitigation  taken  into  account  for  the 
purposes  of  calculating  risk-weighted  exposure  amounts  and  as  relevant  expected 
loss  amounts,  credit  institutions  shall  continue  to  undertake  full  credit  risk 
assessment  of  the  underlying  exposure  and  be  in  a  position  to  demonstrate  the 
fulfilment of this requirement to the competent 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. 

3. 

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) 

For  on-balance  sheet  netting  agreements  -  other  than  master  netting  agreements 
covering  repurchase  transactions,  securities  or  commodities  lending  or  borrowing 
transactions and/or other capital market-driven transactions - to be recognised for the 
purposes of Articles 90 to 93 the following conditions shall be satisfied:  

(a) 

(b) 

(c) 

(d) 

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; 

the  credit  institution  must  be  able  to  determine  at  any  time  those  assets  and 
liabilities that are subject to the netting agreement; 

the  credit  institution  must  monitor  and  control  the  risks  associated  with  the 
termination of the credit protection;  

the credit institution must monitor and control the relevant exposures on a net 
basis. 

1.2.  Master  netting  agreements  covering  repurchase  transactions  and/or  securities 
or commodities lending or borrowing transactions and/or other capital market 
driven transactions 

4. 

For master netting agreements covering repurchase transactions and/or securities or 
commodi.ties  lending  or  borrowing  transactions  and/or  other  capital  market  driven 
transactions to be recognised 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 insolvency of the counterparty  

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(b)  give  the  non-defaulting  party  the  right  to  terminate  and  close-out  in  a  timely 
manner  all  transactions  under  the  agreement  upon  the  event  of  default, 
including in the event of the bankruptcy or insolvency 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 amount 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 out in paragraph 6 shall be 
fulfilled. 

1.3. 

Financial collateral 

1.3.1.  Minimum  requirements  for  the  recognition  of  financial  collateral  under  all 

Approaches and Methods 

6. 

For the recognition of financial collateral and gold, the following conditions shall be 
met: 

(a)  Low correlation 

The  credit  quality  of  the  obligor  and  the  value  of  the  collateral  must  not  have  a 
material positive correlation.  

Securities issued by the obligor, or any related group entity are not eligible. 

(b)  Legal certainty 

Credit  institutions  shall  fulfil  any  contractual  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  sufficient  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  properly  documented,  with  a  clear  and  robust 
procedure for the timely liquidation of collateral. 

Credit  institutions  shall  employ  robust  procedures  and  processes  to  control  risks 
arising  from  the  use  of  collateral  –  including  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 

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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 segregates the collateral from its own assets. 

1.3.2.  Additional  minimum  requirements  for  the  recognition  of  financial  collateral  under 

the Financial Collateral 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  least  as  long  as  the  residual  maturity  of  the 
exposure. 

1.4.  Minimum requirements for the recognition 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 enforceable 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  legal  requirements  for  establishing  the  pledge 
shall been fulfilled). The protection agreement and the legal process underpinning it 
shall  enable  the  credit  institution  to  realise  the  value  of  the  protection  within  a 
reasonable timeframe. 

(b)  Monitoring of property values 

The value of the property shall be monitored on a frequent basis and at a minimum 
once every year. More frequent monitoring shall 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 identify 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  funds  of  the  credit 
institution,  the  property  shall  be  evaluated  by  an  independent  valuer  at  least  every 
three years.  

‘Independent valuer’ shall mean a person who possesses the necessary qualifications, 
ability and experience to execute a valuation 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. 

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1.5.  Minimum requirements for the recognition of receivables as collateral 

9. 

For the recognition of receivables the 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 steps necessary to fulfil local requirements in 
respect  of  the  enforceability  of  security  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  claims  to  be  subject  to  the  claims  of 
preferential creditors provided for in legislative or implementing provisions. 

(iii)  Credit institutions shall have conducted sufficient legal review confirming the 
enforceability of the collateral arrangements in all relevant jurisdictions. 

(iv)  The  collateral  arrangements  must  be  properly  documented,  with  a  clear  and 
robust  procedure  for  the  timely  collection  of  collateral.  Credit  institutions 
procedures  shall  ensure  that  any  legal  conditions  required  for  declaring  the 
default of the customer and timely collection of collateral are 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  business  and  industry  and  the  types  of 
customers with whom the borrower does business. Where the credit institution 
relies  on  the  borrower  to  ascertain  the  credit  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 factors, 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  institution’s  general  methodology.  The 
credit institution must maintain a continuous 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 legal requirements shall be reviewed on a 
regular basis. 

(iii)  The receivables pledged by a borrower shall be diversified and not be unduly 
correlated with the borrower. Where there is material positive correlation, the 
attendant  risks  shall  be  taken  into  account  in  the  setting  of  margins  for  the 
collateral pool as a whole.  

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(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 documented process for collecting receivable 
payments in distressed situations. The requisite 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 recognition of other physical collateral  

10. 

For the recognition of other physical collateral the following 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 over, 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 significant changes in conditions.  

(d)  The  loan  agreement  shall  include  detailed  descriptions  of  the  collateral  plus 

detailed specifications of the manner and frequency of revaluation.  

(e)  The types of physical collateral accepted by the credit institution and policies 
and  practices  in  respect  of  the  appropriate  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  with  regard  to  the  transaction  structure 
shall  address  appropriate  collateral  requirements  relative  to  the  exposure 
amount,  the  ability  to  liquidate  the  collateral  readily,  the  ability  to  establish 
objectively  a  price  or  market  value,  the  frequency  with  which  the  value  can 
readily  be  obtained  (including  a  professional  appraisal  or  valuation),  and  the 
volatility of the value of the collateral. 

(g)  Both  initial  valuation  and  revaluation  shall  take  fully  into  account  any 
deterioration or obsolescence of the collateral. Particular attention must be paid 
in valuation and revaluation to the effects 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  addressing  its  exercise  of  the  right  to 
physical inspection. 

(i)  The credit institution must have procedures to monitor that the property taken 

as protection is adequately insured against damage. 

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1.7.  Minimum requirements for treating lease exposures as collateralised 

11. 

For the exposures arising from leasing transactions 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 establishing the lessor’s legal 
ownership of the asset and its ability to exercise its rights as owner in a timely 
fashion; and 

(d)  The  difference  between  the  rate  of  depreciation  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 attributed to the leased assets. 

1.8.  Minimum requirements for the recognition of other funded credit protection 

1.8.1.  Cash  on  deposit  with,  or  cash  assimilated  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 notified 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  institution  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) 

(b) 

the  company  providing  the  life  insurance  may  be  recognised  as  an  eligible 
unfunded protection provider under Part 1, paragraph 26; 

the  life  insurance  policy  is  openly  pledged  or  assigned  to  the  lending  credit 
institution; 

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(c) 

(d) 

(e) 

the  company  providing  the  life  insurance  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 consent of the lending credit institution; 

the  policy  must  have  a  declared  surrender  value  which  is  a  non-reducible 
amount; 

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 informed 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 protection deriving from a guarantee or credit 
derivative to be recognised the following conditions shall be met: 

(a)  The credit protection shall be direct.  

(b)  The extent of the credit protection shall be clearly defined and incontrovertible. 

(c)  The  credit  protection  contract  shall  not  contain  any  clause,  the  fulfilment  of 

which is outside the direct control of the lender, that: 

(i)  would allow the protection provider unilaterally to cancel the protection;  

(ii)  would increase the effective cost of protection as a result of deteriorating credit 

quality of the protected exposure; 

(iii)  could prevent the protection provider from being obliged to pay out in a timely 
manner in the event that the original obligor fails to make any payments due; or 

(iv)  could allow the maturity of the credit protection to be reduced 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  supervisor  that  it  has  systems  in  place  to 
manage  potential  concentration  of  risk  arising  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.  

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2.2. 

Sovereign and other public sector counter-guarantees 

16. 

Where  an  exposure  is  protected  by  a  guarantee  which  is  counter-guaranteed  by  a 
central government or central bank, a regional government or local authority claims 
on  which  are  treated  as  claims  on  the  sovereign  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 credit institutions under Articles 78 to 83, 
the  exposure  may  be  treated  as  protected  by  a  guarantee  provided  by  the  entity  in 
question provided the following conditions are satisfied: 

(a) 

the counter-guarantee covers all credit 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 that the cover is robust and that nothing in 
the  historical  evidence  suggests  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 following conditions shall also be met: 

(a)  On the qualifying default/non-payment of the counterparty, the lending credit 
institution shall have the right to pursue, 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 subject to the lending credit institution 
first having to pursue the oligor. 

(b)  The  guarantee  shall  be  an  explicitly  documented  obligation  assumed  by  the 

guarantor.  

(c)  Subject  to  the  following  sentence,  the  guarantee  shall  cover  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  competent  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 lending 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  amount  of  the  economic  loss, 
including losses resulting 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 proportional to the coverage of the guarantee;  

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(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 which 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 specified under the credit derivative shall at a 

minimum include: 

(i) 

(ii) 

the failure to pay the amounts due under the terms of the underlying obligation 
that are in effect at the time of such failure (with a grace period that is closely 
in line with or shorter than the grace period in the underlying obligation); and 

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  underlying  obligation  involving  forgiveness  or 
postponement of principal, interest or fees that results in a credit loss event (i.e. 
value adjustment or other similar debit 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 third indent of (a), 
the  credit  protection  may  nonetheless  be  recognised  subject  to  a  reduction  in 
the recognised value as specified in Part 3, paragraph 84.  

(c) 

(d) 

In the case of credit derivatives allowing 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.  

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  any  required  consent  to  such  transfer 
may not be unreasonably withheld.  

(e)  The  identity  of  the  parties  responsible  for  determining  whether  a  credit  event 
has occurred shall be clearly defined. This determination shall not be the sole 
responsibility  of  the  protection  seller.  The  protection  buyer  shall  have  the 
right/ability  to  inform  the  protection  provider  of  the  occurrence  of  a  credit 
event; 

20. 

A mismatch between the underlying obligation and the reference obligation under the 
credit  derivative  (i.e.  the  obligation  used  for  the  purposes  of  determining  cash 
settlement value or the deliverable obligation) 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: 

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(a) 

(b) 

the  reference  obligation  or  the  obligation  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; 

the  underlying  obligation  and  the  reference  obligation  or  the  obligation  used 
for  purposes  of  determining  whether  a  credit  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-default or cross-acceleration clauses.  

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Part 3 - Calculating the effects of credit risk mitigation 

1. 

2. 

Subject  to  Parts  4  to  6,  where  the  provisions  in  Parts  1  and  2  are  satisfied,  the 
calculation of risk-weighted exposure amounts 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. 

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  credit  institution  subject  to  on-balance  sheet 
netting are to be treated as cash collateral. 

1.3.  Master  netting  agreements  covering  repurchase  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) 

5. 

6. 

7. 

Using  the  ‘Supervisory’  volatility  adjustments  or  the  ‘Own  Estimates’  volatility 
adjustments approaches 

Subject  to  paragraphs  12  to  22,  in  calculating  the  ‘fully  adjusted  exposure  value’ 
(E*)  for  the  exposures  subject  to  an  eligible  master  netting  agreement  covering 
repurchase  transactions  and/or  securities  or  commodities  lending  or  borrowing 
transactions  and/or  other  capital  market-driven 
the  volatility 
adjustments to be applied shall be calculated in the manner set out below either using 
the  Supervisory  volatility  adjustments  approach  or  the  Own  estimates  volatility 
adjustments  approach  as  set  out  in  paragraphs  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  Financial  Collateral 
Comprehensive Method. 

transactions, 

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  securities  of  that  type  borrowed,  purchased  or 
received under the agreement. 

For the purposes of paragraph 6, type of security means securities which are issued 
by the same entity, have the same issue date, the same maturity and are subject to the 

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8. 

9. 

10. 

same  terms  and  conditions  and  are  subject  to  the  same  liquidation  periods  as 
indicated in paragraphs 35 to 60. 

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 lent or transferred under the 
agreement,  the  total  value  of  securities  denominated  in  that  currency  borrowed, 
purchased  or  received  under  the  agreement  added  to  the  amount  of  cash  in  that 
currency borrowed or received under the agreement. 

The volatility adjustment appropriate to a given type of security or cash position shall 
be applied to the positive or negative net position in the securities of that type. 

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 Hsec) + + (∑|Efx| x 
Hfx)]}  

Where risk-weighted exposure amounts are calculated under 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  and  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 agreement 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. 

Using the Internal Models approach 

As  an  alternative  to  using  the  Supervisory  volatility  adjustments  approach  or  the 
Own  Estimates  volatility  adjustments  approach  in  calculating  the  fully  adjusted 
exposure  value  (E*)  resulting  from  the  application  of  an  eligible  master  netting 

(b) 

12. 

EN 

81 

   EN 

 
13. 

14. 

15. 

16. 

agreement  covering  repurchase  transactions,  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  correlation  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). 

A credit institution may choose to use an internal models approach independently of 
the choice it has made between the Standardised Approach and the IRB Foundation 
Approach  to  credit  risk.  However,  if  a  credit  institution  seeks  to  use  an  internal 
models  approach,  it  must  do  so  for  all  counterparties  and  securities,  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. 

The  internal  models  approach  is  available  to  credit  institutions  that  have  received 
recognition  for  an  internal  risk-management  model  under  Annex  V  of  Directive 
[93/6/EEC]. 

Credit institutions which have not received supervisory recognition for use of such a 
model  under  Directive  93/6/EEC,  may  apply  to  the  competent  authorities  for 
recognition  of  an  internal  risk-measurement  model  for  the  purposes  of  these 
paragraphs. 

Recognition shall only be given if the competent authority is satisfied that the credit 
institution's  risk-management  system  for  managing  the  risks  arising  on  the 
transactions  covered  by  the  master  netting  agreement  is  conceptually  sound  and 
implemented with integrity and that, in particular, the following qualitative standards 
are met: 

(a) 

(b) 

the  internal  risk-measurement  model  used  for  calculation  of  potential  price 
volatility  for  the  transactions  is  closely  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; 

the  credit  institution  has  a  risk  control  unit  that  is  independent  from  business 
trading  units  and  reports  directly  to  senior  management.  The  unit  must  be 
responsible  for  designing  and  implementing  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  appropriate  measures  to  be  taken  in 
terms of position limits; 

(c) 

the  daily  reports  produced  by  the  risk-control  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 

82 

   EN 

 
(e) 

(f) 

(g) 

(h) 

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; 

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; 

the credit institution frequently conducts a rigorous programme of stress testing 
and the results of these tests are reviewed by senior management and reflected 
in the policies and limits it sets; 

the  credit  institution  must  conduct,  as  part  of  its  regular  internal  auditing 
process,  an  independent  review  of  its  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,  the  credit  institution  must  conduct  a  review  of  its  risk 
management system.  

17. 

The  calculation  of  potential  change  in  value  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) 

(d) 

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 equivalent liquidation period shall be used; 

an  effective  historical  observation  period  of  at  least  one  year  except  where  a 
shorter  observation  period  is  justified  by  a  significant  upsurge  in  price 
volatility; 

(e) 

three-monthly data set updates. 

18. 

19. 

20. 

The  competent  authorities  shall  require  that  the  internal  risk-measurement  model 
captures a sufficient number of risk factors in order to capture all material price risks. 

The competent authorities may allow credit institutions to use empirical correlations 
within  risk  categories  and  across  risk  categories  if  they  are  satisfied  that  the 
institution's  system  for  measuring  correlations  is  sound  and  implemented  with 
integrity`. 

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  shall  include  the  10  largest  as  determined  by  the  credit 
institution  according  to  its  own  exposure  measurement  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  change  in  the  exposure  value  using  the 

EN 

83 

   EN 

 
internal  models  approach  calculated  as  of  the  previous  close  of  business.  An 
exception  occurs  for  each  observation  in  which  the  actual  change  in  exposure 
exceeds the internal model estimate. Depending 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 internal model shall be 
increased using the multiplier set out in Table 1 .  

Table 1 

Zone 

Green Zone 

Yellow Zone 

Number 
exceptions 

of 

Multiplier 

0-99 

100-119 

120-139 

140-159 

160-179 

180-199 

1 

1.13 

1.17 

1.22 

1.25 

1.28 

1.33 

Red Zone 

200 or more 

As part of its backtesting, the credit institution shall confirm that exceptions are not 
concentrated in its exposures to one or more counterparties.  

21. 

The  fully  adjusted  exposure  value  (E*)  for  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  calculated  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  and  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 

84 

   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  exposure  amounts  and  expected  loss  amounts  for 
repurchase  transactions  and/or  securities  or  commodities  lending  or  borrowing 
transactions  and/or  other  capital  market-driven  transactions  covered  by  master 
netting agreements 

Standardised Approach 

23. 

24. 

E* as calculated under paragraphs 5 to 22 shall be taken as the exposure value of the 
exposure  to  the  counterparty  arising  from  the  transactions  subject  to  the  master 
netting agreement for the purposes of Article 80.  

IRB Foundation Approach 

E* as calculated under paragraphs 5 to 22 shall be taken as the exposure value of the 
exposure  to  the  counterparty  arising  from  the  transactions  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 shall 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  collateral  is  assigned  a  value  equal  to  its 
market value as determined in accordance with Part 2, paragraph 6. 

Calculating risk-weighted exposure amounts 

27. 

28. 

The risk weight that would apply under Articles 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  collateral.  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 shall receive the risk weight that would be 
applied to an unsecured exposure to the counterparty under Articles 78 to 83.  

Repurchase transactions and securities lending or borrowing transactions 

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 subject to daily mark-to-market 

EN 

85 

   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 instruments 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  the  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 paragraph ‘debt securities issued by central governments or 
central banks shall be deemed to include –  

(a) 

debt securities issued by regional governments or local authorities exposures to 
which are treated as exposures to the central government in whose jurisdiction 
they are established under Articles 78 to 83; 

(b)  debt  securities  issued  by  multilateral  development  banks  to  which  a  0%  risk 

weight is applied under or by virtue of Articles 78 to 83; 

(c) 

debt  securities  issued  by  international  organisations  which  are  assigned  a  0% 
risk weight under Articles 78 to 83. 

Other transactions 

30. 

A  0%  risk  weight  may  be  applied  where  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 paragraph ‘debt securities issued by central governments or 
central banks shall be deemed to include those indicated under the previous heading. 

1.4.2.  Financial Collateral Comprehensive Method  

31. 

32. 

33. 

In  valuing  financial  collateral  for  the  purposes  of  the  Financial  Collateral 
Comprehensive Method, ‘volatility adjustments’ 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. 

Subject  to  the  treatment  for  currency  mismatches  in  the  case  of  OTC  derivatives 
transactions  set  out  in  paragraph  33,  where  collateral  is  denominated  in  a  currency 
that  differs  from  that  in  which  the  underlying  exposure  is  denominated,  an 
adjustment  reflecting  currency  volatility  shall  be  added  to  the  volatility  adjustment 
appropriate to the collateral as set out in paragraphs 35 to 60.  

In  the  case  of  OTC  derivatives  transactions  covered  by  netting  agreements 
recognised  by  the  competent  authorities  under  Annex  III,  a  volatility  adjustment 
reflecting currency volatility shall be applied when there is a mismatch between the 
collateral  currency  and  the  settlement  currency.  Even  in  the  case  where  multiple 

EN 

86 

   EN 

 
(a) 

34. 

currencies are involved in the transactions covered by the netting agreement, only a 
single volatility adjustment shall be applied. 

Calculating adjusted values 

The volatility-adjusted value of the collateral to be taken into account is calculated as 
follows in the case of all transactions except those transactions subject to recognised 
master netting agreements to which the provisions set out in paragraphs 5 to 24 are 
be applied: 

CVA = C x (1-HC-HFX) 

The volatility-adjusted value of the exposure to be taken into account is calculated as 
follows: 

EVA = E x (1+HE), and in the case of OTC derivative transactions EVA = 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, [EVA - CVAM]} 

Where 

E is the exposure value as would be determined under Articles 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  CVA  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  appropriate  for  currency  mismatch,  as  calculated 
under paragraphs 35 to 60. 

E*  is  the  fully  adjusted  exposure  value  taking  into  account  volatility  and  the  risk-
mitigating effects of the collateral. 

Calculation of volatility adjustments to be applied 

Volatility  adjustments  may  be  calculated  in  two  ways:  the  Supervisory  volatility 
adjustments approach and the Own estimates of volatility adjustments approach (the 
‘Own estimates’ approach). 

(b) 

35. 

EN 

87 

   EN 

 
36. 

(i) 

37. 

A  credit  institution  may  choose  to  use  the  Supervisory  volatility  adjustments 
approach  or  the  Own  estimates  approach  independently  of  the  choice  it  has  made 
between  the  Articles  78  to  83  and  Articles  84  to  89  for  the  calculation  of  risk-
weighted  exposure  amounts.  However,  if  credit  institutions  seek  to  use  the  Own 
estimates approach, they must do so for the full range of instrument types, excluding 
immaterial  portfolios  where  they  may  use  the  Supervisory  volatility  adjustments 
approach. 

Where  the  collateral  consists  of  a  number  of  recognised  items,  the  volatility 

H

∑=

i Ha

i

adjustment  shall  be 
collateral as a whole and Hi is the volatility adjustment applicable to that item. 

,  where  ai  is  the  proportion  of  an  item  to  the 

i

Supervisory volatility adjustments 

The volatility adjustments to be applied under the Supervisory volatility adjustments 
approach (assuming daily revaluation) shall be those set out in tables 2 to 5.  

VOLATILITY ADJUSTMENTS 

Table 2 

Residual 
Maturity 

Volatility adjustments for debt 
securities  issued  by  entities 
described in Part 1, paragraph 
7 (b)  

Volatility 
for  debt 
adjustments 
securities issued by entities described 
in Part 1, paragraph 7 (c) and (d) 

Credit 
step 
quality 
with  which 
the 
credit 
assessment 
of 
security 
associated 

the  debt 
is 

20  day 
liquid- 
ation 
period 
(%) 

10  day 
liquid- 
ation 
period 
(%) 

day 

5 
liquid- 
ation 
period 
(%) 

day 

20 
liquid- 
ation 
period (%) 

day 

10 
liquid- 
ation 
period 
(%) 

day 

5 
liquid- 
ation 
period (%) 

1 

≤ 1 year 

0.707 

0.5 

0.354 

1.414 

>1  ≤  5 
years 

2.828 

2 

1.414 

5.657 

5 

5.657 

4 

2.828 

11.314 

> 
years 

2-3 

≤ 1 year 

1.414 

>1  ≤  5 
years 

4.243 

1 

3 

0.707 

2.828 

2.121 

8.485 

1 

4 

8 

2 

6 

0.707 

2.828 

5.657 

1.414 

4.243 

> 

5  8.485 

6 

4.243 

16.971 

12 

8.485 

EN 

88 

   EN 

 
 
 
 
 
 
 
years 

4 

≤ 1 year 

21.213 

15 

10.607 

N/A 

>1  ≤  5 
years 

21.213 

15 

10.607 

N/A 

N/A 

N/A 

N/A 

N/A 

5 

21.213 

15 

10.607 

N/A 

N/A 

N/A 

> 
years 

Table 3 

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 

Credit 
quality 
step  with 
which  the 
credit 
assessment 
of  a  short 
term  debt 
security  is 
associated 

day 
20 
liquidation 
period (%) 

day 
10 
liquidation 
period (%) 

day 

5 
liquidation 
period (%) 

day 

20 
liquidation 
period (%) 

day 

10 
liquidation 
period (%) 

day 

5 
liquidation 
period (%) 

1 

2-3 

0.707 

1.414 

0.5 

1 

0.354 

0.707 

1.414 

2.828 

1 

2 

0.707 

1.414 

Table 4 

Other collateral or exposure types

day 
20 
liquidation period 
(%) 

day 
10 
liquidation period 
(%) 

5  day  liquidation 
period (%) 

Main Index Equities, Main Index 
Convertible Bonds 

21.213 

Other  Equities  or  Convertible 
Bonds  listed  on  a  recognised 
exchange  

35.355 

Cash 

Gold 

Table 5 

0 

21.213 

15 

25 

0 

15 

10.607 

17.678 

0 

10.607 

EN 

89 

   EN 

 
 
 
 
 
 
Volatility adjustment for currency mismatch 

20  day  liquidation  period 
(%) 

20  day  liquidation  period 
(%) 

5 day liquidation period (%) 

11.314 

38. 

39. 

40. 

41. 

42. 

(ii) 

43. 

44. 

45. 

8 

5.657 

For secured lending transactions the liquidation period shall be 20 business days. For 
repurchase  transactions  (except  insofar  as  such  transactions  involve  the  transfer  of 
commodities  or  guaranteed  rights  relating  to  title  to  commodities)  and  securities 
lending or borrowing transactions the liquidation period shall be 5 business days. For 
other  capital  market  driven  transactions, the liquidation period shall be 10 business 
days. 

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  determined  by  the  competent  authorities  to  be 
associated  under  Articles  78  to  83.  For  these  purposes  Part  1,  paragraph  10  also 
applies. 

For  non-eligible  securities  lent  or  sold  under  repurchase  transactions  or  securities 
lending  or  borrowing  transactions,  the  volatility  adjustment  is  the  same  as  for  non-
main index equities listed on a recognised exchange. 

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 paragraph 38, to any of the assets in which 
the fund has the right to invest. 

For unrated debt securities issued by institutions 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. 

Own estimates of volatility adjustments 

The competent authorities may permit institutions 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 applied to collateral and exposures.  

When debt securities have a credit assessment from a recognised ECAI equivalent to 
investment grade or better, the competent authorities may allow credit institutions to 
calculate a volatility estimate for each category of security.  

In determining relevant categories, credit institutions 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 

90 

   EN 

 
46. 

47. 

48. 

49. 

50. 

51. 

52. 

53. 

For debt securities having a credit assessment from a recognised ECAI equivalent to 
below  investment  grade  and  for  other  eligible  collateral  the  volatility  adjustments 
must be calculated for each individual item. 

Credit institutions using the Own estimates approach must estimate volatility of the 
collateral or foreign exchange mismatch without taking into account any correlations 
between the unsecured exposure, collateral and/or exchange rates.  

Quantitative Criteria 

In  calculating  the  volatility  adjustments,  a  99th  percentile  one-tailed  confidence 
interval$ shall be used. 

The liquidation period shall be 20 business days for secured lending transactions; 5 
business days for repurchase transactions except insofar as such transactions involve 
the transfer of commodities or guaranteed rights relating to title to commodities and 
securities  lending  or  borrowing  transactions;  and  10  business  days  for  other  capital 
market driven transactions.  

Credit  institutions  may  use  volatility  adjustment  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 transaction in question, using the square root of 
time formula: 

H

M

=

TTH
/
NM

N

where TM 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 TN; 

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 volatility, e.g. a pegged currency. Such cases shall be dealt with 
by means of a stress scenario. 

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  observation  period,  the 
effective observation period shall be at least one year (that is, the weighted average 
time  lag  of  the  individual  observations  shall  not  be  less  than  6  months).  The 
competent  authorities  may  also  require  a  credit  institution  to  calculate  its  volatility 
adjustments  using  a  shorter  observation  period  if,  in  the  competent  authorities’ 
judgement, this is justified by a significant upsurge in price volatility. 

Credit institutions shall update their data sets no less frequently than once every three 
months and shall also reassess them whenever market prices are subject to material 
changes.  This  implies  that  volatility  adjustments  shall  be  computed  at  least  every 
three months.  

EN 

91 

   EN 

 
 
54. 

55. 

56. 

57. 

Qualitative Criteria 

The volatility estimates shall be used in the day-to-day risk management process of 
the credit institution including in relation to its internal exposure limits. 

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  volatility  adjustments  shall  be  scaled  up  in 
accordance with the square root of time formula set out in paragraph 50. 

The credit institution shall have established procedures for monitoring and ensuring 
compliance  with  a  documented  set  of  policies  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.  

An  independent  review  of  the  credit  institution’s  system  for  the  estimation  of 
volatility  adjustments  shall  be  carried  out  regularly  in  the  credit  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 shall 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) 

(c) 

the  validation  of  any  significant  change  in  the  process  for  the  estimation  of 
volatility adjustments; 

the  verification  of  the  consistency,  timeliness  and  reliability  of  data  sources 
used  to  run  the  system  for  the  estimation  of  volatility  adjustments,  including 
the independence of such data sources; 

(d) 

the accuracy and appropriateness 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 daily revaluation. Similarly where an credit 
institution  uses  its  own  estimates  of  the  volatility  adjustments  in  accordance  with 
paragraphs  43  to  57,  these  must  be  calculated  in  the  first  instance  on  the  basis  of 
daily revaluation. If the frequency of revaluation is less than daily, larger volatility 
adjustments  shall  be  applied.  These  shall  be  calculated  by  scaling  up  the  daily 
revaluation volatility adjustments, using the following ‘square root of time’ formula : 

 HH
=
M

−

)1

N

R

+

(
T
M
T
M

where 

H is the volatility adjustment to be applied 

HM 

is the volatility adjustment where there is daily revaluation 

EN 

92 

   EN 

 
 
NR is the actual number of business days between revaluation 

TM is the liquidation period for the type of transaction in question. 

(iv) 

Conditions for applying a 0% volatility adjustment 

59. 

to  repurchase 

transactions  and  securities 

In  relation 
lending  or  borrowing 
transactions,  where  a  credit  institution  uses  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 authorities may allow credit institutions not to 
apply the volatility adjustments calculated under paragraphs 35 to 58 and to instead 
apply  a  0%  volatility  adjustment.  This  option  is  not  available  in  respect  of  credit 
institutions using the internal models approach 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  transaction  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  settlement  system  proven  for  that  type  of 

transaction; 

(f)  The documentation covering the agreement is standard market documentation 
for  repurchase  transactions  or  securities  lending  or  borrowing  transactions  in 
the securities concerned; 

(g)  The  transaction  is  governed  by  documentation  specifying  that  if  the 
counterparty  fails  to  satisfy  an  obligation  to  deliver  cash  or  securities  or  to 
deliver  margin  or  otherwise  defaults,  then  the  transaction  is  immediately 
terminable;  

(h)  The  counterparty  is  considered  a  ‘core  market  participant’  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 insurance companies) exposures to which 
receive  a  20  %  risk  weight  under  Articles  78  to  83  or  which,  in  the  case  of 
credit  institutions  calculating  risk-weighted  exposure  amounts  and  expected 
loss  amounts  under  Articles  83  to  89,  do  not  have  a  credit  assessment  by  a 
recognised  ECAI  and  are  internally  rated  as  having  a  probability  of  default 

EN 

93 

   EN 

 
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 for the risk weighting of exposures to corporates under Articles 
78 to 83. 

regulated  collective  investment  undertakings  that  are  subject  to  capital  or 
leverage requirements; 

regulated pension funds; and 

recognised clearing organisations. 

– 

– 

– 

60. 

Where  a  competent  authority  permits  the  treatment  set  out  in  paragraph  59  to  be 
applied  in  the  case  of  repurchase  transactions  or  securities  lending  or  borrowing 
transactions  in  securities  issued  by  its  domestic  government,  then  other  competent 
authorities may choose to allow credit institutions incorporated in their jurisdiction to 
adopt the same approach to the same transactions. 

(c) 

Calculating risk-weighted exposure amounts and expected loss amounts 

Standardised Approach 

61. 

E*  as  calculated  under  paragraph  34  shall  be  taken  as  the  exposure  value  for  the 
purposes of Article 80. 

IRB Foundation Approach 

62. 

LGD* (the effective Loss Given Default) calculated 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) 

63. 

Real estate collateral 

The  property  shall  be  valued  by  an  independent  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  regulatory  provisions  the 
property may instead be valued by an independent valuer at or less than the mortgage 
lending value. 

EN 

94 

   EN 

 
64. 

65. 

66. 

(b) 

67. 

(c) 

68. 

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  marketing  wherein  the  parties  had  each  acted 
knowledgeably,  prudently  and  without  compulsion.  The  market  value  shall  be 
documented in a transparent and clear manner. 

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,  the  normal  and  local  market  conditions,  the 
current  use  and  alternative  appropriate  uses  of  the  property.  Speculative  elements 
shall not be taken into account in the assessment of the mortgage lending value. The 
mortgage lending value shall be documented in a transparent and clear manner.  

The  value  of  the  collateral  shall  be  the  market  value  or  mortgage  lending  value 
reduced as appropriate to reflect the results of the monitoring required under Part 2, 
paragraph 8 and to take account of the any prior claims on the property. 

Receivables 

The value of receivables shall be the amount receivable. 

Other physical collateral 

The  property  shall  be  valued  at  its  market  value  –  that  is  the  estimated  amount  for 
which the property would exchange on the date of valuation between a willing buyer 
and a willing seller in an arm’s-length transaction. 

1.5.2.  Calculating risk-weighted exposure amounts and expected loss amounts 

(a) 

69. 

70. 

71. 

72. 

General treatment 

LGD* (the effective Loss Given Default) calculated as set out in paragraphs 70 to 73 
shall be taken as the LGD for the purposes of Annex VII. 

Where the ratio of the value of the collateral (C) to the exposure value (E) is below a 
threshold level of C* (the required minimum 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. 

Where the ratio of the value of the collateral 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.  

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 the required level of collateralisation 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 

95 

   EN 

 
Table 6 

Minimum LGD for secured portion of exposures 

LGD* 
for 
senior  claims  or 
contingent 
claims 

for 

or 

LGD* 
subordinated 
claims 
contingent 
claims 

Required 
minimum 
collateralisation 
level 
the 
exposure (C*) 

of 

Required 
minimum 
collateralisation 
level 
the 
exposure (C**) 

of 

Receivables 

real 
Residential 
estate/commercial 
real estate 

35% 

35% 

65% 

65% 

0% 

30% 

125% 

140% 

Other collateral 

40%  

70% 

30% 

140% 

(b) 

74. 

By  way  of  derogation,  until  31  December  2012  the  competent  authorities  may, 
subject to the indicated levels of collateralisation 

(a) 

(b) 

allow credit institutions to assign a 30% LGD for senior exposures in the form 
of Commercial Real Estate leasing; and  

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.  

Alternative treatment for real estate collateral 

Subject to the requirements of this paragraphs and paragraph 75 and as an alternative 
to the treatment in paragraphs 69 to 73, the 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  real  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  residential  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 where 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 property respectively must not exceed 0.5 % 
of  the  outstanding  loans  collateralised  by  that  form  of  real  estate  property  in 
any given year.  

EN 

96 

   EN 

 
 
 
75. 

76. 

1.6. 

77. 

78. 

If  either  of  the  conditions  in  paragraph  74  is  not  satisfied  in  a  given  year,  the 
eligibility  to  use  this  treatment  shall  cease  until  the  conditions  are  satisfied  in  a 
subsequent year.  

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 collateralised by residential real estate property of 
commercial real estate property respectively located in the territory of those Member 
States the competent authorities of which authorise this treatment subject to the same 
conditions as apply in that Member State. 

Calculating  risk-weighted  exposure  amounts  and  expected  loss  amounts  in  the 
case of mixed pools of collateral 

Where  risk-weighted  exposure  amounts  and  expected  loss  amounts  are  calculated 
under Articles 84 to 89, and an exposure is collateralised by both financial collateral 
and other eligible collateral, LGD* (the effective Loss Given Default) to be taken as 
the LGD for the purposes of Annex VII shall be calculated as follows. 

The  credit  institution  shall  be  required  to  subdivide  the  volatility-adjusted  value  of 
the exposure (i.e. the value after the application 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  exposure  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 covered by other eligible collateral, 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 satisfied, credit protection 
falling within the terms of Part 1, paragraph 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 satisfied, credit protection 
falling within the terms of Part 1, paragraph 24 may be treated as a guarantee by the 
company providing the life insurance. The value 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 Part 1, paragraph 25 may be treated as a guarantee by the 
issuing institution.  

EN 

97 

   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. 

85. 

The value of unfunded credit protection (G) shall be the amount that the protection 
provider  has  undertaken  to  pay  in  the  event  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  credit  event  restructuring  of  the  underlying 
obligation  involving  forgiveness  or  postponement  of  principal,  interest  or  fees  that 
result in a credit loss event (e.g. value adjustment, the making of a value adjustment 
or other similar debit to the profit and loss account), the value of the credit protection 
calculated under the first sentence of this paragraph shall be reduced by 40%. 

Where unfunded credit protection is denominated in a currency different from that in 
which  the  exposure  is  denominated  (a  currency  mismatch)  the  value  of  the  credit 
protection  shall  be  reduced  by  the  application  of  a  volatility  adjustment  HFX  as 
follows: 

G* = G x (1-HFX) 

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  applied  for  any  currency  mismatch  may  be 
calculated  based  on  the  Supervisory  volatility  adjustments  approach  or  the  Own 
estimates approach as set out in paragraphs 35 to 58. 

EN 

98 

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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 positions and to give rise to a tranched transfer 
of risk. 

2.2.2. 

Standardised Approach 

(a) 

88. 

(b) 

89. 

(c) 

90. 

Full protection 

For  the  purposes  of  Article  80,  g  shall  be  the  risk  weight  to  be  assigned  to  an 
exposure which is fully protected by unfunded protection (GA),  

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  under  paragraph  85  further  adjusted  for  any 
maturity mismatch as laid down in Part 4.  

Partial protection – equal seniority 

Where  the  protected  amount  is  less  than  the  exposure  value  and  the  protected  and 
unprotected  portions  are  of  equal  seniority  –  ie  the  credit  institution  and  the 
protection  provider  share  losses  on  a  pro-rata  basis,  proportional  regulatory  capital 
relief  shall  be  afforded.  For  the  purposes  of  Article  80  risk-weighted  exposure 
amounts shall be calculated in accordance with the following formula: 

(E-GA) x r + GA x g 

where  

E is the exposure value; 

GA  is  the  value  of  G*  as  calculated  under  paragraph  85  further  adjusted  for  any 
maturity mismatch as laid down in Part 4; 

r is the risk weight of exposures to the obligor as specified under Articles 78 to 83; 

g  is  the  risk  weight  of  exposures  to  the  protection  provider  as  specified  under 
Articles 78 to 83.  

Sovereign guarantees  

The  competent  authorities  may  extend  the  treatment  provided  for  in  Annex  VI, 
paragraphs  4  to  6  to  exposures  or  portions  of  exposures  guaranteed  by  the  central 

EN 

99 

   EN 

 
government  or  central  bank,  where  the  guarantee  is  denominated  in  the  domestic 
currency of the borrower and the exposure is funded in that currency. 

2.2.3. 

IRB Foundation Approach 

Full protection / Partial protection – equal seniority 

91. 

92. 

93. 

For  the  covered  portion  of  the  exposure  (based  on  the  adjusted  value  of  the  credit 
protection GA), 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 protection, the LGD to be applied for the 
purposes of Annex VII, Part 2 may be that associated with senior claims.  

For any uncovered portion of the exposure the PD shall be that of the borrower and 
the LGD shall be that of the underlying exposure. 

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 

100 

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1. 

2. 

1. 

3. 

4. 

5. 

Part 4 - Maturity Mismatches  

For  the  purposes  of  calculating  risk-weighted  exposure  amounts,  a  maturity 
mismatch occurs when the residual maturity of the credit protection is less than that 
of the protected exposure. Protection of less than three months residual maturity, the 
maturity of which is less than the maturity of the underlying exposure, shall not be 
recognised.  

Where  there  is  a  maturity  mismatch  the  credit  protection  shall  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 floor rather than a one-year floor in respect of the 
maturity value (M) under Annex VII, Part 2, paragraph 13. 

DEFINITION OF MATURITY 

Subject  to  a  maximum  of  5  years,  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 maturity of the credit protection shall be the 
time to the earliest date at which the protection may terminate or be terminated.  

Where there is an option to terminate the protection 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  transaction  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  such  an  option  may  be  considered  not  to 
affect the maturity of the protection. 

Where a credit derivative is not prevented from terminating prior to expiration of any 
grace period required for a default on the underlying obligation to occur as a result of 
a failure to pay the maturity of the protection shall be reduced by the amount of the 
grace period. 

2. 

VALUATION OF PROTECTION  

2.1. 

6. 

Transactions  subject  to  funded  credit  protection  –  Financial  Collateral  Simple 
Method 

Where there is a mismatch between the maturity of the exposure and the maturity of 
the protection, the collateral shall not be recognised. 

EN 

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2.2. 

7. 

Transactions  subject  to  funded  credit  protection  -  Financial  Collateral 
Comprehensive Method 

The maturity of the credit protection and that of the exposure must be reflected in the 
adjusted value of the collateral according to the following formula: 

CVAM = CVA x (t-t*)/(T-t*) 

where  

CVA  is  the  volatility  adjusted  value  of  the  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 remaining 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 CVA further adusted for maturity mismatch to be included in 
the formula for the calculation of the fully adjusted 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 protection and that of the exposure must be reflected in the 
adjusted value of the credit protection according to the following formula  

GA = G* x (t-t*)/(T-t*) 

where  

G* is the amount of the protection adjusted 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 remaining 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 

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Part 5 - Combinations of credit risk mitigation in the Standardised Approach 

9. 

In  the  case  where  a  credit  institution  calculating  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 collateral 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  portion  covered  by  guarantee)  and  the  risk-
weighted  exposure  amount  for  each  portion  must  be  calculated  separately  in 
accordance with the provisions of Articles 78 to 83 and this Annex.  

10. 

When  credit  protection  provided  by  a  single  protection  provider  has  differing 
maturities, a similar approach to that described in paragraph 1 shall be applied. 

EN 

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Part 6 - Basket CRM techniques  

1. 

1. 

2. 

2. 

FIRST-TO-DEFAULT CREDIT DERIVATIVES 

Where a credit institution obtains credit protection for a number of exposures under 
terms  that  the  first  default  among  the  exposures  shall  trigger  payment  and  that  this 
credit  event  shall  terminate  the  contract,  the  credit  institution  may  modify  the 
calculation of the risk-weighted exposure amount and, as relevant, the expected loss 
amount of the exposure which would in the absence of the credit protection produce 
the lowest risk-weighted exposure 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. 

nTH-TO-DEFAULT CREDIT DERIVATIVES 

In  the  case  where  the  nth  default  among  the  exposures  triggers  payment  under  the 
credit protection, the credit institution purchasing the protection may only recognise 
the protection for the calculation of risk-weighted 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-default derivatives appropriately modified for 
nth-to-default products. 

EN 

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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 securitised exposures net of costs and expenses. 

‘Clean-up  call  option’  means  a  contractual  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  respect  of  the  securitised  exposures  had 
they  not  been  securitised  plus  the  amount  of  expected  losses  associated  with 
those exposures calculated under those Articles. 

‘Ratings  based  method’  means  the  method  of  calculating  risk-weighted 
exposure  amounts  for  securitisation  positions  in  accordance  with  Part  4, 
paragraphs 45 to 49. 

‘Supervisory formula method’ means the method of calculating risk-weighted 
exposure  amounts  for  securitisation  positions  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  programme’  (‘ABCP’  programme)  means  a 
programme of securitisations the securities issued by which predominantly take 
the form of commercial paper with an original maturity of one year or less. 

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Part 2 - Minimum requirements for recognition of significant credit risk transfer and 
calculation of risk-weighted exposure amounts and expected loss amounts for securitised 
exposures 

1. 

1. 

MINIMUM  REQUIREMENTS  FOR  RECOGNITION  OF  SIGNIFICANT  CREDIT  RISK 
TRANSFER IN A TRADITIONAL SECURITISATION 

The originator credit institution of a traditional securitisation may exclude securitised 
exposures from the calculation of risk-weighted exposure 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  beyond  the  reach  of  the  originator  credit 
institution  and  its  creditors,  including  in  bankruptcy  and  receivership.  This 
shall be supported by the opinion of qualified legal counsel 

(c)  The  securities  issued  do  not  represent  payment  obligations  of  the  originator 

credit institution.  

(d)  The transferee is a securitisation special-purpose entity (SSPE). 

(e)  The originator credit institution does not maintain effective or indirect control 
over  the  transferred  exposures.  An  originator  shall  be  considered  to  have 
maintained effective control over the transferred exposures if it has the right to 
repurchase from the transferee the previously transferred exposures in order to 
realise  their  benefits  or  if  it  is  obligated  to  re-assume  transferred  risk.  The 
originator  credit  institution’s  retention  of  servicing  rights  or  obligations  in 
respect  of  the  exposures  shall  not  of  itself  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  structured  to  avoid  allocating  losses  to  credit 
enhancement positions or other positions held by investors and is not otherwise 
structured to provide credit enhancement. 

(g)  The securitisation documentation does not contain clauses that 

(i) 

other than in the case of early amortisation provisions, require positions in the 
securitisation  to  be  improved  by  the  originator  credit  institution  institution 
including  but  not  limited  to  altering  the  underlying  credit  exposures  or 

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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  holders  of  positions  in  the  securitisation  in 
response to a deterioration in the credit quality of the underlying pool. 

MINIMUM  REQUIREMENTS  FOR  RECOGNITION  OF  SIGNIFICANT  CREDIT  RISK 
TRANSFER IN A SYNTHETIC SECURITISATION 

An  originator  credit  institution  of  a  synthetic  securitisation  may  calculate  risk-
weighted  exposure  amounts,  and,  as  relevant,  expected  loss  amounts,  for  the 
securitised  exposures  in  accordance  with  paragraphs  3  and  4  below,  if  significant 
credit  risk  has  been  transferred  to  third  parties  either  through  funded  or  unfunded 
credit protection and the transfer complies with the following conditions.  

(a)  The  securitisation  documentation  reflects  the  economic  substance  of  the 

transaction. 

(b)  The credit protection by which the credit risk is transferred complies with the 
eligibility and other 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 unfunded protection providers.  

(c)  The instruments used to transfer credit 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 amortisation provisions, require 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 protection in all relevant jurisdictions. 

ORIGINATOR CREDIT INSTITUTIONS’ CALCULATION OF RISK-WEIGHTED EXPOSURE 
AMOUNTS FOR EXPOSURES SECURITISED IN A SYNTHETIC SECURITISATION 

In  calculating  risk-weighted  exposure  amounts  for  the  securitised  exposures,  where 
the conditions in paragraph 2 are met, the originator credit institution of a synthetic 
securitisation  shall,  subject  to  paragraphs  5  to  8,  use  the  relevant  calculation 
methodologies set out in Part 4 and not those set out in Articles 78 to 89. For credit 
institutions  calculating  risk-weighted  exposure  amounts  and  expected  loss  amounts 

2. 

2. 

3. 

3. 

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under Articles 84 to 89, the expected loss amount in respect of such exposures shall 
be zero. 

4. 

For  clarity,  paragraph  3  refers  to  the  entire  pool  of  exposures  included  in  the 
securitisation.  Subject  to  paragraphs  5  to  8,  the  originator  credit  institution  is 
required to calculate risk-weighted exposure amounts in respect of all tranches in the 
securitisation in accordance with the provisions of Part IV including those relating to 
the recognition of credit risk mitigation. For example, where a tranche is transferred 
by means of unfunded credit protection to a third party, the risk weight of that third 
party  shall  be  applied  to  the  tranche  in  the  calculation  of  the  originator  credit 
institution’s risk-weighted exposure amounts. 

3.1. 

Treatment of maturity mismatches in synthetic securitisations  

5. 

6. 

7. 

For the purposes of calculating risk-weighted exposure amounts in accordance with 
paragraph  3,  any  maturity  mismatch  between  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 any of those exposures subject to a maximum 
of five years.  

The maturity of the securitied exposures shall be taken to be the longest maturity of 
any  of  those  exposures  subject  to  a  maximum  of  five  years.  The  maturity  of  the 
credit protection shall be determined in accordance with Annex VIII .  

Where  an  originator  credit  institution  uses  Part  4,  paragraphs  6  to  35  for  the 
calculation of risk-weighted exposure amounts, it shall ignore any maturity mismatch 
in calculating risk-weighted exposure amounts for tranches 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  uses  Part  4,  paragraphs  36  to  74  for  the 
calculation of risk-weighted exposure amounts, it shall ignore any maturity mismatch 
in  calculating  risk-weighted  exposure  amounts  for  tranches  or  parts  of  tranches 

EN 

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which  are  associated  with  a  risk  weight  of  1250%  under  those  paragraphs.  For  all 
other tranches or parts of tranches the maturity mismatch treatment set out in Annex 
VIII shall be applied in accordance with the formula in paragraph 7. 

EN 

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1. 

1. 

2. 

2. 

3. 

4. 

5. 

6. 

7. 

Part 3 - External credit assessments 

REQUIREMENTS TO BE MET BY THE CREDIT ASSESSMENTS OF ECAIS 

To  be  used  for  the  purposes  of  calculating  risk-weighted  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  the  types  of  payments  reflected  in  the 
credit  assessment  and  the  types  of  payment  to  which  the  credit  institution  is 
entitled under the contract giving rise to the securitisation position in question. 

(b) 

It shall be available publicly to the 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. 

USE OF CREDIT ASSESSMENTS 

A credit institution may nominate one or more eligible ECAIs the credit assessments 
of which shall be used in the calculation of its risk-weighted exposure amounts under 
Articles 94 to 101 (a ‘nominated ECAI’). 

Subject to paragraphs 5 to 7 below, a credit institution must use credit assessments 
from nominated ECAIs consistently in respect of its securitisation positions.  

Subject  to  paragraphs  5  and  6,  a  credit  institution  may  not  use  an  ECAI’s  credit 
assessments for its positions in some tranches 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.  

In cases where a position has two credit assessments by nominated ECAIs, the credit 
institution shall use the less favourable credit assessment. 

In cases where a position has more than two credit assessments by nominated ECAIs, 
the two most favourable credit assessments shall be used. If the two most favourable 
assessments are different, the least favourable of the two shall be used. 

Where  credit  protection  eligible  under  Articles  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 eligible under Articles 90 to 93, the credit assessment shall not 
be  recognised.  In  the  situation  where  the  credit  protection  is  not  provided  to  the 
SSPE but rather directly to a securitisation position, the credit assessment shall not 
be recognised. 

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3. 

8. 

9. 

MAPPING 

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  shall  be  associated.  In 
doing so the competent authorities shall differentiate between the relative degrees of 
risk expressed by each assessment. They shall consider quantitative 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. 

The competent authorities shall seek to ensure that securitisation positions to which 
the  same  risk  weight  is  applied  on  the  basis  of  the  credit  assessments  of  eligible 
ECAIs are subject to equivalent degrees of credit risk. This shall include modifying 
their  determination  as  to  the  credit  quality  step  with  which  a  particular  credit 
assessment shall be associated as appropriate. 

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Part 4 - Calculation 

1. 

1. 

CALCULATION OF RISK-WEIGHTED EXPOSURE AMOUNTS 

For the purposes of Article 96, the risk-weighted 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  calculates  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  calculates  risk-weighted  exposure  amounts  under 
paragraphs  36  to  74,  the  exposure  value  of  an  on-balance  sheet  securitisation 
position shall be measured gross of value adjustments; and  

(c) 

the  exposure  value  of  an  off-balance  sheet  securitisation  position  shall  be  its 
nominal  value  multiplied  by  a  conversion  figure  as  prescribed  in  this  Annex. 
This conversion figure shall be 100% unless otherwise specified. 

The exposure value of a securitisation position arising from a derivative instrument 
listed in Annex IV, shall be determined in accordance with Annex III.  

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 further specified in this Annex. 

Where a credit institution has two or more overlapping positions in a securitisation, it 
will be required to the extent that they overlap to include in its calculation of risk-
weighted exposure amounts only the position or portion of a position producing the 
higher risk-weighted exposure amounts. For these purposes ‘overlapping’ means that 
the positions, wholly or partially, represent an exposure to the same risk such that to 
the extent of the overlap there is a single exposure. 

CALCULATION  OF  RISK-WEIGHTED  EXPOSURE  AMOUNTS  UNDER  THE 
STANDARDISED APPROACH 

Subject  to  paragraph  8  and  9,  the  risk-weighted  exposure  amount  of  a  rated 
securitisation position shall be calculated by applying to the exposure value the risk 
weight  associated  with  the  credit  quality  step  with  which  the  credit  assessment  has 
been  determined  to  be  associated  by  the  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 

3. 

4. 

5. 

2. 

6. 

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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 
assessments 

other 

credit 

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 calculated by applying a risk weight of 1250%. 

2.1. 

Originator and sponsor credit institutions 

8. 

9. 

Originator credit institutions and sponsor credit institutions shall apply a risk weight 
of 1250% to all retained and repurchased securitisation positions which have a credit 
assessment  by  a  nominated  ECAI  which  has  been  determined  by  the  competent 
authorities to be associated with a credit quality 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. 

For  an  originator  credit  institution  or  sponsor  credit  credit  institution,  the  risk-
weighted  exposure  amounts  calculated  in  respect  of  its  positions  in  a  securitisation 
may be limited to the risk-weighted exposure amounts which would be calculated for 
the  securitised  exposures  had  they  not  been  securitised  subject  to  the  presumed 
application  of  a  150%  risk  weight  to  all  past  due  items  and  items  belonging  to 
‘regulatory high risk categories’ amongst the securitised exposures.  

2.2. 

Treatment of unrated positions 

10. 

11. 

Competent authorities may permit a credit institution having an unrated 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.  

A  credit  institution  may  apply  the  weighted-average  risk  weight  that  would  be 
applied to the securitised exposures 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 tranches 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  applicable  to  a  rated  more  senior  tranche. 
Where  the  credit  institution  is  unable  to  determine  the  risk  weights  that  would  be 

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applied  to  the  securitised  exposures  under  Articles  78  to  83,  it  shall  apply  a  risk 
weight of 1250% to the position. 

2.3. 

12. 

Treatment  of  securitisation  positions  in  a  second  loss  tranche  or  better  in  an 
ABCP programme 

Subject to the availability of a more favourable treatment by virtue of the provisions 
concerning liquidity facilities in paragraphs 14 to 16, a credit 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  securitised  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  tranche  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 year or less and a conversion figure of 50% may be applied 
to the nominal amount of a liquidity facility with an original maturity 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 shall 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..  

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(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 the pool falls below investment grade. 

The risk weight to be applied shall be the highest risk weight that would be applied 
to  any  of  the  securitised  exposures  under  Articles  78  to  83  by  a  credit  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  conversion  figure  of  0%  may  be  applied  to  the 
nominal  amount  of  a  liquidity  facility  that  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 paper and that inability is not the result 
of an impairment of the SPE’s credit quality of the credit quality of the securitised 
exposures), provided that the conditions set out in paragraph 14 are satisfied. 

2.4.3.  Cash advance facilities 

16. 

2.5. 

17. 

18. 

19. 

20. 

To  determine  its  exposure  value,  a  conversion  figure  of  0%  may  be  applied  to  the 
nominal  amount  of  a  liquidity  facility  that  is  unconditionally  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. 

Additional capital requirements for securitisations of revolving exposures with 
early amortisation provisions 

In  addition  to  the  risk-weighted  exposure  amounts  calculated  in  respect  of  its 
securitisation positions, an originator credit institution shall calculate 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  contains  an  early  amortisation 
provision. 

The  credit  institution  shall  calculate  a  risk-weighted  exposure  amount  in  respect  of 
the sum of the originator’s interest and the investors’ interest.  

For securitisation structures where the securitised exposures comprise revolving and 
non-revolving exposures, an originator credit institution shall apply the treatment set 
out below to that portion of the underlying pool containing revolving exposures.  

For these purposes, ‘originator’s interest’ means 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  determines  the 
proportion of the cashflows generated by principal and interest collections and other 

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associated  amounts  which  are  not  available  to  make  payments  to  those  having 
securitisation positions in the securitisation.  

To qualify as such the originator’s interest may not be subordinate 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  securitisation  position  but  as  a 
pro rata exposure to the securitised exposures as if they had not been securitised. 

2.5.1.  Exemptions from early amortisation treatment 

22. 

Originators  of  the  following  types  of  securitisaton  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  that  the  risk  on  the  underlying  facilities 
does  not  return  to  the  originator  credit  institution  even  after  an  early 
amortisation  event  has  occurred  are  exempt  from  the  early  amortisation 
treatment, and 

(b) 

securitisations  where  any  early  amortisation  provision  is  solely  triggered  by 
events not related to the performance 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  subject  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-weighted  exposure  amounts  calculated  under 
paragraph 17 shall be no greater than the greater of  

(a) 

(b) 

the risk-weighted exposure amounts calculated in respect of its positions in the 
investors’ interest,  

the risk-weighted exposure amounts that would be calculated in respect of the 
securitised  exposures  by  a  credit  institution  holding  the  exposures  as  if  they 
had not been securitised in an amount equal to the investors’ 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-weighted 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 conversion figure as indicated in paragraphs 27 to 32 and 

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the weighted average risk weight that would 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 capital and liquidity available in the event 
of an early amortisation. 

(b)  Throughout the duration of the transaction there is a pro rata sharing between 
the originator’s interest and the investors’ interest of payments of interest and 
principal, expenses, losses and recoveries 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)  outstanding  at  the  beginning  of  the  early 
amortisation period to have been repaid or recognised as in default; 

(d)  The speed of repayment is no more rapid than would be achieved by straight-

line amortisation over the period set out in condition (c). 

27. 

28. 

29. 

In  the  case  of  securitisations  subject  to  an  early  amortisation  provision  of  retail 
exposures  which  are  uncommitted  and  unconditionally  cancellable  without  prior 
notice, where the early amortisation is triggered by the excess spread level falling to 
a  specified  level,  credit  institutions  shall  compare  the  three-month  average  excess 
spread  level  with  the  excess  spread  levels  at  which  excess  spread  is  required  to  be 
trapped. 

In  cases  where  the  securitisation  does  not  require  excess  spread  to  be  trapped,  the 
trapping point is deemed to be 4.5 percentage points greater than the excess spread 
level at which an early amortisation is triggered.  

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 

3  months  average 
excess spread 

Above level A 

Level A 

Level B 

EN 

Securitisations  subject  to 
a 
early 
controlled 
amortisation provision 

Securitisations  subject  to  a 
non-controlled 
early 
amortisation provision 

Conversion factor 

Conversion factor 

0% 

1% 

2% 

0% 

5% 

15% 

117 

   EN 

 
 
Level C 

Level D 

Level E 

30. 

20% 

20% 

40% 

50% 

100% 

100% 

In  Table  3,  ‘Level  A’  means  levels  of  excess  spread  less  than  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  levels  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 trapping level of excess 
spread. 

31. 

32. 

All  other  securitisations  subject  to  a  controlled  early  amortisation  provision  of 
revolving exposures shall be subject to a credit conversion figure of 90%. 

All  other  securitisations  subject  to  a  non-controlled  early  amortisation  provision  of 
revolving exposures shall be subject to a credit conversion figure of 100%. 

2.6. 

Recognition of credit risk mitigation on securitisation positions 

33. 

Where  credit  protection  is  obtained  on  a  securitisation  position,  the  calculation  of 
risk-weighted exposure amounts may be modified in accordance with Annex VIII. 

2.7. 

Reduction in risk-weighted exposure amounts 

34. 

35. 

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 their calculation of risk-weighted exposure amounts, deduct 
from  own  funds  the  exposure  value  of  the  position.  For  these  purposes,  the 
calculation of the exposure value may reflect eligible funded protection in a manner 
consistent with paragraph 33. 

Where  a  credit  institution  makes  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 from the amount specified in that paragraph 
as  the  maximum  risk-weighted  exposure  amount  to  be  calculated  by  the  credit 
institutions there indicated. 

EN 

118 

   EN 

 
 
3. 

CALCULATION  OF  RISK-WEIGHTED  EXPOSURE  AMOUNTS  UNDER  THE  INTERNAL 
RATINGS BASED APPROACH 

3.1. 

Hierarchy of methods 

36. 

37. 

38. 

39. 

40. 

For the purposes of Article 96, the risk-weighted exposure amount of a securitisation 
positions shall be calculated in accordance with paragraphs 36 to 74. 

For a rated position or a position in respect of which an inferred rating may be used, 
the Ratings Based Method set out in paragraphs 45 to 49 shall be used to calculate 
the risk-weighted exposure amount.  

For an unrated position the Supervisory Formula Method as set out in paragraphs 50 
to 52 shall be used except wherethe Internal Assessment Approach is permitted to be 
used as set out in paragraphs 42 and 43. 

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.  

In the case of an originator or sponsor credit institution unable to calculate Kirb 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  all  respects  subordinate  to  the  unrated 
securitisation position in question.  

(a)  The  reference  positions  must  be  subordinate  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 the 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 derived rating as laid down in paragraph 43. 

EN 

119 

   EN 

 
(a)  Positions  in  the  commercial  paper  issued  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 exposures of the type securitised.. 

(c)  The  ECAIs,  the  methodology  of  which  shall  be  reflected  as  required  by  the 
point (b), shall include those ECAIs which have provided an external rating for 
the  commercial  paper  issued  from  the  programme.  Quantitative  elements  – 
such  as  stress  factors  –  used  in  assessing  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  assessment  methodology  the  credit  institution  shall 
take  into  consideration  all  published  ratings  methodologies  of  eligible  ECAIs 
for the the rating of securities backed by the exposures of the type securitised. 
This consideration shall be documented by the credit institution and updated at 
least once a year. 

(e)  The  credit  institution’s  internal  assessment  methodology  shall  include  rating 
grades.  There  shall  be  a  correspondence  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 
its  decision  making, 

internal 
management information and capital allocation processes. 

risk  management  processes, 

including 

(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  credit  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 shall be independent of the 
ABCP programme business line, as well 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 incorporate 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  exposures  arising  from  the  provision  of 
liquidity facilities and credit enhancements, the loss distribution, and the legal 
and  economic  isolation  of  the  transferred  assets  from  the  entity  selling  the 
assets. A credit analysis of the asset seller’s risk profile shall be performed and 

EN 

120 

   EN 

 
shall  include  analysis  of  past  and  expected  future  financial  performance, 
current market position, expected future competitiveness, leverage, cash flow, 
and  interest  coverage,  and  debt  rating.  In  addition,  a  review  of  the  seller’s 
underwriting standards, servicing capabilities, and collection processes shall be 
performed. 

(j)  The ABCP programme’s underwriting standards shall establish minimum asset 

eligibility criteria that, in particular, 

(i) 

excludes the purchase of assets that are significantly past due or defaulted; 

(ii) 

limits excess concentration to individual 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  credit  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  the  seller-provided  credit  enhancement  is 
sized  based  on  only  credit-related  losses,  then  a  separate  reserve  shall  be 
established  for  dilution  risk,  if  dilution  risk  is  material  for  the  particular 
exposure  pool.  In  addition,  in  sizing  the  required  enhancement  level,  the 
program shall review several years of historical information, including losses, 
delinquencies, dilutions, and the turnover rate of the receivables.  

(m)  The ABCP programme shall incorporate structural features – for example wind 
down  triggers  -  into  the  purchase  of  exposures  in  order  to  mitigate  potential 
credit deterioration of the underlying portfolio.  

The  requirement  for  the  assessment  methodology  of  the  ECAI  to  be  publicly 
available  may  be  waived  by  the  competent  authorities  where  they  are  satisfied  that 
due to the specific features of the securitisation – for example its unique structure - 
there is as yet no publicly available ECAI assessment methodology. 

43. 

The  unrated  position  shall  be  assigned  by  the  credit  institution  to  one  of  the  rating 
grades described in paragraph 42. The position 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 calculating risk-weighted 
exposure amounts. 

3.2.  Maximum risk-weighted exposure amounts 

44. 

For  an  originator  credit  institution,  a  sponsor  credit  institution,  or  for  other  credit 
institutions which can calculate KIRB, the risk-weighted exposure amounts calculated 
in  respect  of  its  positions  in  a  securitisation  may  be  limited  to  that  which  would 

EN 

121 

   EN 

 
produce a capital requirement under Article 75(a) equal to the sum of 8% of the risk-
weighted  exposure  amounts  which  would  be  produced  if  the  securitised  assets  had 
not been securitised and were on the balance 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 exposure value the risk 
weight  associated  with  the  credit  quality  step  with  which  the  credit  assessment  has 
been  determined  to  be  associated  by  the  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 
(CQS) 

Step 

Risk weight 

CQS 1 

CQS 2 

CQS 3 

CQS 4 

CQS 5 

CQS 6 

CQS 7 

CQS 8 

CQS 9 

CQS 10 

CQS 11 

A 

7% 

8% 

10% 

12% 

20% 

35% 

60% 

100% 

250% 

425% 

650% 

B 

12% 

15% 

18% 

20% 

35% 

50% 

75% 

100% 

250% 

425% 

650% 

C 

20% 

25% 

35%3 

35% 

35% 

50% 

75% 

100% 

250% 

425% 

650% 

Below CQS 11 

1250% 

1250% 

1250% 

Table 5 

Positions with short term credit assessments 

EN 

122 

   EN 

 
 
Credit  Quality 
(CQS) 

Step 

Risk weight 

A 

7% 

12% 

60% 

B 

12% 

20% 

75% 

C 

20% 

35% 

75% 

credit 

1250% 

1250% 

1250% 

CQS 1 

CQS 2 

CQS 3 

All 
assessments 

other 

46. 

47. 

48. 

49. 

Subject to paragraph 47, the risk weights in column A of each table shall be applied 
where the position is in the most senior tranche of a securitisation. When determining 
whether  a  tranche  is  the  most  senior  for  these  purposes,  it  is  not  required  take  into 
consideration  amounts  due  under  interest  rate  or  currency  derivative  contracts,  fees 
due, or other similar payments. 

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:  

(

N

=

EAD

2)

i

EAD

2
i

i

∑
∑

i

where  EADi  represents  the  sum  of  the  exposure  values  of  all  exposures  to  the 
ith obligor. In the case of resecuritisation (securitisation of securitisation exposures), 
the credit institution must look at the number of securitisation exposures in the pool 
and  not  the  number  of  underlying  exposures  in  the  original  pools  from  which  the 
underlying  securitisation  exposures  stem.  If  the  portfolio  share  associated  with  the 
largest exposure, C1, is available, the credit institution may compute N as 1/C1. 

The risk weights in Column B shall be applied to all other positions. 

Credit  risk  mitigation  on  securitisation  positions  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 the greater of 7% or the risk weight to be 
applied in accordance with paragraph 51. 

EN 

123 

   EN 

 
 
 
 
51. 

Subject  to  paragraphs  56  and  57,  the  risk  weight  to  be  applied  to  the  exposure 
amount shall be  

12.5 x (S[L+T] – S[L]) / T 

where 

][
xS

=

⎧
⎨
⎩

where 

x

when

x

≤

Kirbr

+

K[x]

−

K[Kirbr]

Kirbr
(
d

+

⋅

Kirbr/ω

)(
1

−

e

ω(Kirbr

−

x)/Kirbr

)

when

Kirbr

<

x

⎫
⎬
⎭

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.  For  these  purposes  the  exposure  value  of  a 
derivative instrument listed in Annex IV shall, where the current replacement cost is 
not a positive value, be the potential future credit exposure calculated 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 the tranche in which the position is held to the sum of the 
exposure  values  of  the  exposures  that  have  been  securitised.  Capitalised  future 
income  shall  not  be  included  in  the  measured L.  Amounts  due  by  counterparties  to 
derivative instruments listed in Annex IV that represent tranches more junior than the 
tranche in question may be measured at their current replacement cost (without the 
potential future credit exposures) in calculating the enhancement level.  

N is the effective number of exposures calculated in accordance with paragraph 47. 

ELGD, the exposure-weighted average loss-given-default, is calculated as follows:  

ELGD

=

LGD
i

⋅

EAD
i

∑

i

EAD
i

∑

i

where  LGDi  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 purchased receivables are treated in an aggregate 

EN 

124 

   EN 

 
 
 
manner  within  a  securitisation  (e.g.  a  single  reserve  or  over-collateralisation  is 
available to cover losses from either source), 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  charges  for  credit  risk  and  dilution  risk 
respectively. 

Simplified inputs 

If the exposure value of the largest securitised exposure, C1, 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 

N

=

⎛
⎜⎜
⎝

CC
1

m

+

C

m
m

−
−

C
1
1

⎛
⎜
⎝

⎞
⎟
⎠

1max{

−

Cm
1

}0,

⎞
⎟⎟
⎠

−

1

 . 

or 

N=1/ C1. 

Cm is the ratio of the sum of the exposure values 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 involving retail exposures, the competent authorities may permit 
the Supervisory Formula Method to be implemented using the simplifications: h = 0 
and v = 0.  

52. 

Credit  risk  mitigation  on  securitisation  positions  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  applied  to  the  nominal  amount  of  a  liquidity 
facility that may only be drawn in the event of a general market disruption and that 
meets the conditions to be an ‘eligible liquidity facility’ set out in paragraph 14.  

3.5.2.  Cash advance facilities 

55. 

A  conversion  figure  of  0%  may  be  applied  to  the  nominal  amount  of  a  liquidity 
facility that meets the conditions set out in paragraph 16. 

Exceptional treatment where Kirb cannot be calculated. 

EN 

125 

   EN 

 
56. 

57. 

When  it  is  not  practical  for  the  credit  institution  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 allowed to apply the following method for the 
calculation of risk-weighted exposure amounts for an unrated securitisation position 
in the form of a liquidity facility.  

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  the  liquidity  facility.  To  determine  the 
exposure  value  of  the  position  a  conversion  figure  of  50%  may  be  applied  to  the 
nominal amount of the liquidity facility if the facility has an original maturity of one 
year or less. If the liquidity facility complies 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  eligible  for  the  calculation  of 
risk-weighted exposure amounts under Articles 78 to 83 as laid down under Articles 
90  to  93  and  recognition  is  subject  to  compliance  with  the  relevant  minimum 
requirements as laid down under those Articles. 

3.6.2.  Unfunded protection 

59. 

Eligible unfunded protection and unfunded protection providers are limited to those 
which are eligible under Articles 90 to 93 and recognition is subject to compliance 
with the relevant minimum requirements laid down under those Articles.  

3.6.3.  Calculation  of  capital  requirements  for  securitisation  positions  with  credit  risk 

mitigation 

Ratings Based Method 

60. 

61. 

62. 

Where  risk-weighted  exposure  amounts  are  calculated  using  the  Ratings  Based 
Method,  the  exposure  value  and/or  the  risk-weighted  exposure  amount  for  a 
securitisation position in respect of which credit protection has been obtained may be 
modified  in  accordance  with  the  provisions  of  Annex  VIII  as  they  apply  for  the 
calculation of risk-weighted exposure amounts under Articles 78 to 83. 

Supervisory Formula Method – full protection 

Where  risk-weighted  exposure  amounts  are  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 position and multiplying the result by 100.  

In  the  case  of  funded  credit  protection,  the  risk-weighted  exposure  amount  of  the 
securitisation  position  shall  be  calculated  by  multiplying  the  funded  protection-
adjusted exposure amount of the position (E*, as calculated under Articles 90 to 93 

EN 

126 

   EN 

 
63. 

64. 

65. 

3.7. 

66. 

for the calculation of risk-weighted exposure amounts under Articles 78 to 83 taking 
the amount of the securitisation position to be E) by the effective risk weight. 

In the case of unfunded credit protection, the risk-weighted exposure amount of the 
securitisation  position  shall  be  calculated  by  multiplying  GA  (the  amount  of  the 
protection adjusted for any currency mismatch and maturity mismatch in accordance 
with the provisions of Annex VIII) by the risk weight of the protection provider; and 
adding this to the amount arrived at by multiplying the amount of the securitisation 
position minus GA by the effective risk weight. 

Supervisory formula method - partial protection 

If the credit risk mitigation covers the ‘first loss’ or losses on a proportional basis on 
the  securitisation  position,  the  credit  institution  may  apply  the  provisions  in 
paragraphs 61 to 63. 

In  other  cases  the  credit  institution  shall  treat  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 provisions 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*  denotes  the  ratio  of  E*  to  the 
total  notional  amount  of  the  underlying  pool,  where  E*  is  the  adjusted  exposure 
amount of the securitisation position calculated in accordance with the provisions of 
Annex  VIII  as  they  apply  for  the  calculation  of  risk-weighted  exposure  amounts 
under Articles 78 to 83 taking the amount of the securitisation position to be E; and g 
is the ratio of the nominal amount of credit 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  exposures.  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’. 

Additional capital requirements for securitisations of revolving exposures with 
early amortisation provisions 

In  addition  to  the  risk-weighted  exposure  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, paragraphs 68 and 69 shall replace paragraphs 20 
and 21. 

68. 

For the purposes of these provisions, “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  determines  the  proportion  of  the  cashflows 
generated  by  principal  and  interest  collections  and  other  associated  amounts 

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which  are  not  available  to  make  payments  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  been  sold  into  the  securitisation,  the 
proportion of which to the total amount of such undrawn amounts 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 subordinate to the investors’ 
interest.  

“Investors’  interest”  means  the  nominal  amount  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 paragraph 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 securitised 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. 

71. 

72. 

The  risk-weighted  exposure  amount  of  a  securitisation  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. 

The  risk-weighted  exposure  amount  of  a  securitisation  position  may  be  reduced  by 
12.5  times  the  amount  of  any  value  adjustments  made  by  the  credit  institution  in 
respect of the position. 

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 their calculation of risk-weighted 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  may  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 may reflect eligible funded protection in a 
manner consistent with the methodology prescribed in paragraphs 58 to 65; 

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(c)  where  the  Supervisory  Formula  Method  is  used  to  calculate  risk-weighted 
exposure amounts and L < KIRBR and [L+T] > KIRBR the position may be treated 
as two positions with L equal to KIRBR for the more senior of the positions. 

74. 

Where  a  credit  institution  makes  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 from the amount specified in that paragraph 
as  the  maximum  risk-weighted  exposure  amount  to  be  calculated  by  the  credit 
institutions there indicated. 

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Annex X 

Operational Risk 

Part 1 - Basic Indicator Approach 

1. 

1. 

2. 

2. 

3. 

4. 

CAPITAL REQUIREMENT  

Under  the  Basic  Indicator  Approach,  the  capital  requirement  for  operational  risk  is 
equal to 15% of the relevant indicator defined below.  

RELEVANT INDICATOR 

The  relevant  indicator  is  the  average  over  three  years  of  the  sum  of  net  interest 
income, and net non-interest income. 

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.  

If  for  any  given  observation,  the  sum  of  net  interest  income  and  net  non-interest 
income is negative or equal to zero, this figure shall not be taken into account in the 
calculation of the three-year average. The relevant 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. 

6. 

Based  on  the  accounting  categories  for  the  profit  and  loss  account  of  credit 
institutions under Article 27 of Directive 86/635/EEC, the relevant indicator shall be 
expressed  as  the  sum  of  the  elements  listed  in  Table  1.  Each  element  shall  be 
included in the sum with its positive or negative sign.  

These elements may need to be adjusted to reflect the qualifications in paragraphs 7 
and 8. 

Table 1: 

1 

2 

3 

Interest receivable and similar income 

Interest payable and similar charges 

Income from securities: 

a)  from  shares  and  other  variable-yield 
securities 

b) from participating interests 

c) from shares in affiliated undertakings 

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4 

5 

Commissions/fees receivable 

Commissions/fees payable 

Net  profit  or  net  loss  on  financial 

6 
operations 

7 

Other operating income 

2.1.1.  Qualifications: 

7. 

8. 

The  indicator  shall  be  calculated  before  the  deduction  of  any  provisions  and 
operating expenses. 

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 statement, 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. 

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Part 2 - Standardised Approach 

1. 

1. 

2. 

3. 

4. 

5. 

6. 

CAPITAL REQUIREMENT 

Under the Standardised Approach, the capital requirement for operational risk is the 
simple  sum  of  the  capital  requirements  calculated  for  each  of  the  business  lines  in 
table 2 . 

The capital requirement for a given business line is equal to a certain percentage of a 
relevant indicator. 

The indicator is calculated for each business line individually. 

For  each  business  line,  the  relevant  indicator  is  the  average  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. 

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. 

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 

18% 

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 

and 

research 

Investment 
financial 
analysis  and  other  forms  of  general 
recommendation relating to transactions 
in financial instruments 

Trading and sales 

Dealing on own account 

18% 

EN 

Money broking 

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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 
entities 
meeting  the  criteria  set  out  in 
Article 55 for the retail exposure 
class) 

sized 

Commercial banking 

Reception and transmission of orders in 
relation 
to  one  or  more  financial 
instruments 

12% 

Execution of orders on behalf of clients 

Placing of financial instruments without 
a firm commitment basis 

Acceptance  of  deposits  and  other 
repayable funds 

15% 

Lending 

Financial leasing 

Guarantees and commitments 

Retail banking 

(Activities  with  a 
individual 
physical  persons  or  with  small 
entities 
and  medium 
meeting  the  criteria  set  out  in 
Article 55 for the retail exposure 
class) 

sized 

Acceptance  of  deposits  and  other 
repayable funds 

12% 

Lending 

Financial leasing 

Guarantees and commitments 

Payment and settlement 

Money transmission services, 

18% 

Agency services 

Issuing  and  administering  means  of 
payment 

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% 

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Managing of UCITS 

Other forms of asset management  

7. 

2. 

8. 

Competent  authorities  may  authorise  a  credit  institution  to  calculate  its  capital 
requirement for operational risk using an alternative standardised approach, as set out 
in paragraphs 9 to 16. 

PRINCIPLES FOR BUSINESS LINE MAPPING 

Credit  institutions  must  develop  and  document  specific  policies  and  criteria  for 
mapping  the  indicator  for  current  business  lines  and  activities  into  the  standardised 
framework.  The  criteria  must  be  reviewed  and  adjusted  as  appropriate  for  new  or 
changing business activities and risks. The principles for business line mapping are : 

(a)  All  activities  must  be  mapped  into  the  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 business line it supports. If more than one 
business line is supported through the ancillary 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 associated ancillary activity. 

(d)  Credit  institutions  may  use  internal  pricing  methods  to  allocate  the  indicator 
between  business  lines.  Costs  generated  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  business  lines  for  operational  risk  capital 
purposes  must  be  consistent  with  the  categories  used  for  credit  and  market 
risks. 

(f) 

Senior management is responsible for 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. 

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3. 

ALTERNATIVE INDICATORS FOR CERTAIN BUSINESS LINES 

3.1.  Modalities 

9. 

10. 

11. 

12. 

The  competent  authorities  may  authorise  the  credit  institution  to  use  an  alternative 
indicator for the business lines: retail banking and commercial banking. 

For these business lines, the relevant indicator shall be a normalised income indicator 
equal  to  the  three-year  average  of  the  total  nominal  amount  of  loans  and  advances 
multiplied by 0.035. 

For the retail banking business line, the loans and advances shall consist of the total 
drawn amounts in the following credit portfolios: retail, SMEs treated as retail, and 
purchased retail receivables. 

For the commercial banking business line, the loans and advances shall consist of the 
drawn amounts in the following credit portfolios: 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  indicators  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 retail banking and commercial banking 

15. 

16. 

4. 

17. 

The  credit  institution  is  overwhelmingly  active  in  retail  and  commercial  banking 
activities, which shall account for at least 90% of its income. 

The  credit  institution  is  able  to  demonstrate  to  the  competent  authorities  that  a 
significant  proportion  of  its  retail  and/or  commercial  banking  activities  comprise 
loans  associated  with  a  high  probability  of  default,  and  that  the  alternative 
standardised approach provides an improved basis for assessing the operational risk. 

QUALIFYING CRITERIA 

Credit  institutions  must  meet  the  following  qualifying  criteria  listed  below,  in 
addition to the general risk management standards set out in Article 22 and Annex V. 

(a)  Credit institutions shall have a well-documented assessment and management 
system for operational risk with clear responsibilities assigned for this system. 
They  shall  identify  their  exposures  to  operational  risk  and  track  relevant 
operational risk data, including material loss data. This system shall be subject 
to regular independent review. 

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(b)  The operational risk assessment system must be closely integrated into the risk 
management  processes  of  the  credit  institution.  Its  output  must  be  an  integral 
part  of  the  process  of  monitoring  and  controlling  the  credit  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  for  taking  appropriate 
action according to the information within the management reports.  

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Part 3 - Advanced Measurement Approaches 

1. 

1. 

QUALIFYING CRITERIA 

To  be  eligible  for  an  Advanced  Measurement  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. 

3. 

4. 

5. 

6. 

7. 

The credit institution’s internal operational risk measurement system shall be closely 
integrated into its day-to-day risk management processes. 

The  credit  institution  must  have  an  independent  risk  management  function  for 
operational risk. 

There  must  be  regular  reporting  of  operational  risk  exposures  and  loss  experience. 
The credit institution shall have procedures for taking appropriate corrective action. 

The  credit  institution’s  risk  management  system  must  be  well  documented.  The 
credit institution shall have routines in place for ensuring compliance and policies for 
the treatment of non-compliance.  

The  operational  risk  management  processes  and  measurement  systems  shall  be 
subject to regular reviews performed by internal and/or external auditors. 

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. 

9. 

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 business practices. The operational risk measure 
must  capture  potentially  severe  tail  events,  achieving  a  soundness  standard 
comparable to a 99.9% confidence interval over a one year period.  

The  operational  risk  measurement  system  of  a  credit  institution  must  have  certain 
key  elements  to  meet  the  soundness  standard  set  out  above.  These  elements  must 
include the use of internal data, external data, 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 

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10. 

11. 

weighting the use of these four elements in its overall operational risk measurement 
system. 

The  risk  measurement  system  shall  capture  the  major  drivers  of  risk  affecting  the 
shape of the tail of the loss estimates. 

Correlations  in  operational  risk  losses  across  individual  operational  risk  estimates 
may be recognised only if credit institutions can demonstrate to the satisfaction of the 
competent  authorities  that  their  systems  for  measuring  correlations  are  sound, 
implemented  with  integrity,  and  take  into  account  the  uncertainty  surrounding  any 
such  correlation  estimates,  particularly  in  periods  of  stress.  The  credit  institution 
must  validate  its  correlation  assumptions  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. 

14. 

15. 

16. 

17. 

Internally  generated  operational  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  observation  period  is 
acceptable. 

Credit  institutions  must  be  able  to  map  their  historical  internal  loss  data  into  the 
business  lines  defined  in  Part  2  and  into  the  event  types  defined  in  Part  5,  and  to 
provide these data to competent authorities 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 databases 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  continue  to  be  treated  as  credit  risk  for  the 
purposes  of  calculating  minimum  capital  requirements.  Operational  risk  losses  that 
are related to market risks shall be included in the scope of the capital requirement 
for operational risk. 

The credit institution's internal loss data must be comprehensive in that it captures all 
material  activities  and  exposures  from  all  appropriate  sub-systems  and  geographic 
locations.  Credit  institutions  must  be  able  to  justify  that  any  excluded  activities  or 
exposures, both individually and in combination, would not have a material impact 
on the overall risk estimates. An appropriate minimum loss threshold for internal loss 
data collection must be defined. 

Aside  from  information  on  gross  loss  amounts,  credit  institutions  shall  collect 
information about the date of the event, any recoveries of gross loss amounts, as well 
as some descriptive information about the drivers or causes of the loss event. 

There  shall  be  specific  criteria  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. 

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18. 

Credit  institutions  must  have  documented  procedures  for  assessing  the  on-going 
relevance  of  historical  loss  data,  including  those  situations  in  which  judgement 
overrides,  scaling,  or  other  adjustments  may  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 reason to believe that the credit institution is 
exposed to infrequent, yet potentially severe, losses. A credit institution must have a 
systematic  process  for  determining  the  situations  for  which  external  data  must  be 
used and the methodologies used to incorporate the data in its measurement system. 
The  conditions  and  practices  for  external  data  use  must  be  regularly  reviewed, 
documented and subject to periodic independent review. 

1.2.4. 

Scenario analysis  

20. 

The  credit  institution  shall  use  scenario  analysis  of  expert  opinion  in  conjunction 
with external data to evaluate its exposure to high severity events. Over time, such 
assessments need to be validated and re-assessed through comparison to actual loss 
experience to ensure their reasonableness. 

1.2.5.  Business environment and internal control factors 

21. 

22. 

23. 

24. 

2. 

25. 

26. 

27. 

The  credit  institution's  firm-wide  risk  assessment  methodology  must  capture  key 
business environment and internal control factors that can change its operational risk 
profile. 

The choice of each factor needs to be justified as a meaningful driver of risk, based 
on experience and involving the expert judgment of the affected business areas.  

The sensitivity of risk estimates to changes 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. 

This  framework  must  be  documented  and  subject  to  independent  review  within  the 
credit  institution  and  by  competent  authorities.  Over  time,  the  process  and  the 
outcomes need to be validated and re-assessed through comparison to actual internal 
loss experience, relevant external data. 

IMPACT OF INSURANCE 

Credit  institutions  shall  be  able  to  recognise  the  impact  of  insurance  subject  to  the 
conditions set out in paragraphs 26 to 29. 

The provider is authorised to provide insurance or re-insurance. 

The provider has a minimum claims paying ability rating of A (or equivalent); 

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(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 term 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  institution,  except  in  respect  of  events 
occurring  after  the  initiation  of  receivership  or  liquidation  proceedings  in 
respect of the credit institution; provided 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 the overall determination of operational 
risk capital; 

(e)  The  insurance  is  provided  by  a  third  party  entity.  In  the  case  of  insurance 
through  captives  and  affiliates,  the  exposure  has  to  be  laid  off  to  an 
independent third party entity, for example through re-insurance, that meets the 
eligibility criteria; 

(f)  The framework for recognising insurance 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, where 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.  

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. 

APPLICATION  TO  USE  AN  ADVANCED  MEASUREMENT  APPROACH  ON  A  GROUP-
WIDE BASIS 

When an Advanced Measurement Approach is intended to be used by the EU parent 
credit institution and its subsidiaries, or by the subsidiaries of an EU parent financial 
holding  company,  the  application  shall  include  a  description  of  the  methodology 
used for allocating operational risk capital between the different entities of the group. 

29. 

3. 

30. 

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31. 

The application shall indicate whether and how diversification effects are intended to 
be factored in the risk measurement system. 

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Part 4 – Combined use of different methodologies 

1. 

1. 

USE  OF  AN ADVANCED MEASUREMENT APPROACH  IN  COMBINATION  WITH  OTHER 
APPROACHES 

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  the  methodology  used  to  cover  different 
activities,  geographical  locations,  legal  structures  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  competent  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  commitment  to  roll  out  the  Advanced 
Measurement  Approach  across  a  material  part  of  its  operations  within  a  time 
schedule agreed with its competent authorities. 

2. 

3. 

4. 

COMBINED USE OF THE BASIC INDICATOR APPROACH AND OF THE STANDARDISED 
APPROACH 

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. 

The combined use of the Basic Indicator Approach and the Standardised Approach 
shall  be  conditional  upon  a  commitment  by  the  credit  institution  to  roll  out  the 
Standardised Approach within a time schedule agreed with the competent authorities. 

EN 

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Part 5 - Loss event type classification 

Table 3 

Event-Type Category 

Definition 

Internal fraud 

Losses  due  to  acts  of  a  type  intended  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  intended  to  defraud,  misappropriate 
property or circumvent the 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  (including  fiduciary  and 
suitability requirements), or from the nature or design of a product. 

Damage 
Assets 

to  Physical 

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  processing  or  process  management, 
from relations with trade counterparties and vendors 

EN 

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Annex XI 

Technical criteria on the review and evaluation by the competent authorities 

1. 

In  addition  to  credit,  market  and  operational  risk,  the  review  and  evaluation 
performed  by  competent  authorities  pursuant  to  Article  124  shall  include  the 
following: 

(a) 

(b) 

(c) 

the  results  of  the  stress  test  carried  out  by  the  credit  institutions  applying  an 
IRB approach; 

the exposure to and management of liquidity risk and concentration risk by the 
credit institutions, including their compliance with the requirements laid down 
in Articles 108 to 118; 

the  robustness,  suitability  and  manner  of  application  of  the  policies  and 
procedures  implemented  by  credit  institutions  for  the  management  of  the 
residual  risk  associated  with  the  use  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  adequate  having  regard  to  the  economic 
substance of the transaction, including the degree of risk transfer achieved. 

2. 

Competent authorities shall monitor whether a credit institution has provided implicit 
support  to  a  securitisation.  If  a  credit  institution  is  found  to  have  provided  implicit 
support  on  more  than  one  occasion  the  competent  authority  shall  take  appropriate 
measures reflective of the increased expectation that it will provide future support to 
its securitisations thus failing to achieve a significant transfer of risk. 

EN 

144 

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Annex XII 

Technical criteria on disclosure 

PART 1 - GENERAL CRITERIA 

1. 

2. 

3. 

4. 

5. 

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 purpose of making economic decisions. 

Information  shall  be  regarded  as  proprietary  to  a  credit  institution  if  sharing  that 
information with the public would undermine 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. 

Information shall be regarded as confidential if there are obligations to customers or 
other counterparty relationships binding a credit institution to confidentiality.  

Competent  authorities  shall  require  credit  institution  to  assess  the  need  to  publish 
some  or  all  disclosures  more  frequently  than  annually  in  the  light  of  the  relevant 
characteristics  of  their  business  such  as  scale  of  operations,  range  of  activities, 
presence  in  different  countries,  involvement  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.  

The  disclosure  requirement  in  Part  2,  paragraph  4,  letter  (f)  shall  be  provided 
pursuant to Article 72 (1) and (2). 

Part 2 - General requirements 

The  risk  management  objectives  and  policies  of  the  credit  institution  shall  be 
disclosed  for  each  separate  category  of  risk,  including  the  risks  referred  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  disclosed  regarding  the  scope  of  application  of 
the requirements of this Directive: 

EN 

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(a) 

(b) 

the  name  of  the  credit  institution  to  which  the  requirements  of  this  Directive 
apply; 

an  outline  of  the  differences  in  the  basis  of  consolidation  for  accounting  and 
prudential purposes, with a brief description of the entities that are: 

(i) 

fully consolidated, 

(ii)  proportionally consolidated, 

(iii)  deducted from own funds,  

(iv)  neither consolidated nor deducted; 

(c) 

(d) 

any current or foreseen material or legal impediments to the prompt transfer of 
own  funds  or  repayment  of  liabilities  among  the  parent  undertaking  and  its 
subsidiaries; 

the aggregate amount by which the actual 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  making  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) 

(b) 

(c) 

summary  information  on  the  terms  and  conditions  of  the  main  features  of  all 
own funds items and components thereof; 

the  amount  of  the  original  own  funds, with separate disclosure of all positive 
items and deductions; 

the total amount of additional own funds, and own funds 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 items 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 disclosed regarding the compliance by the credit 
institution with the requirements laid down in Articles 75 and 123: 

(a) 

(b) 

a summary of the credit institution’s approach to assessing the adequacy of its 
internal capital to support current and future activities; 

for  credit  institutions  calculating  the  risk-weighted  exposure  amounts  in 
accordance  with  Articles  78  to  83,  8  per  cent  of  the  risk-weighted  exposure 
amounts for each of the exposure classes specified in Article 79;  

EN 

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(c) 

institutions  calculating  risk-weighted  exposure  amounts 

for  credit 
in 
accordance  with  Articles  84  to  89,  8  per  cent  of  the  risk-weighted  exposure 
amounts for each of the exposure classes specified in Article 86. For the retail 
exposure class, this requirement applies to each of the categories of exposures 
to  which  the  different  correlations  in  Annex  VII,  Part  1,  paragraphs  9  to  11 
correspond to. For the equity exposure class, this requirement applies to: 

(i) 

each of the approaches provided in Annex VII, Part 1, paragraphs 15 to 25; 

(ii) 

exchange traded exposures, private equity exposures in sufficiently diversified 
portfolios, and other exposures; 

(iii)  exposures subject to supervisory transition regarding capital requirements; 

(iv)  exposures subject to grandfathering provisions regarding capital requirements; 

(d)  minimum capital requirements calculated in accordance with Article 75, points 

(b) and (c); 

(e)  minimum  capital  requirements  calculated  in  accordance  with  Articles  103  to 

105, and disclosed separately; 

(f) 

the solvency ratios calculated 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) 

(c) 

(d) 

(e) 

(f) 

a  description  of  the  approaches  and  methods  adopted  for  determining  value 
adjustments and provisions; 

the total amount of exposures after accounting offsets and without taking into 
account  the  effects  of  credit  risk  mitigation,  and  the  average  amount  of  the 
exposures over the period broken down by different types of exposure classes; 

the geographic distribution of the exposures, broken down in significant areas 
by material exposure classes, and further detailed if appropriate; 

the distribution of the exposures by industry or counterparty type, broken down 
by exposure classes, and further detailed if appropriate; 

the residual maturity breakdown of all the exposures, broken down by exposure 
classes, and further detailed if appropriate; 

(g)  by significant industry or counterparty type, the amount of: 

(i) 

impaired exposures and past due exposures, provided separately, 

(ii)  value adjustments and provisions, 

EN 

147 

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(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  significant  geographical  areas  including,  if 
practical,  the  amounts  of  value  adjustments  and  provisions  related  to  each 
geographical area; 

(i) 

the  reconciliation  of  changes  in  the  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 the provisions during the period, 

(iv) 

the  amounts  set  aside  or  reversed  for  estimated  probable  losses  on  exposures 
during  the  period,  any  other  adjustments  including  those  determined  by 
exchange rate differences, business combinations, acquisitions and disposals of 
subsidiaries, and transfers between provisions, 

(v) 

the closing balances.  

Value adjustments and recoveries recorded directly to the income statement shall be 
disclosed separately. 

6. 

For credit institutions calculating the risk-weighted exposure amounts in accordance 
with Articles 78 to 83, the following information shall be disclosed for each of the 
exposure classes specified 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) 

(d) 

a  description  of  the  process  used  to  transfer  the  issues  and  issue  credit 
assessments onto items not included in the trading book; 

the association of the external rating of each nominated ECAI or ECA with the 
credit  quality  steps  prescribed  in  Annex  VI,  taking  into  account  that  this 
information  needs  not  be  disclosed  if  the  credit  institution  complies  with  the 
standard association published by the competent authority; 

(e) 

the  exposure  values  and  the  exposure  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,  paragraphs  5  or  17  to  19  shall  disclose  the  exposures 
assigned to each category of the table in the paragraph 5 referred to above, or to each 
risk weight mentioned in the paragraphs 17 to 19 referred to above. 

EN 

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8. 

9. 

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. 

The  following  information  shall  be  disclosed  by  each  credit  institution  which 
calculates  its  capital  requirements  in  accordance  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 testing 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) 

(ii) 

the high, mean and low value-at-risk measures over the reporting period and at 
period-end, 

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) 

(b) 

the  approaches  for  the  assessment  of  own  funds  requirements  for  operational 
risk that the credit institution qualifies for; 

a  description  of  the  methodology  set  out  in  Article  105,  if  used  by  the  credit 
institution,  including  a  discussion  of  relevant  internal  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  strategic  reasons,  and  an  overview  of  the 
accounting  techniques  and  valuation  methodologies  used,  including  key 
assumptions  and  practices  affecting  valuation  and  any  significant  changes  in 
these practices; 

(b) 

the  balance  sheet  value,  the  fair  value  and,  for  those  exchange-traded,  a 
comparison  to  the  market  price  where  it  is  materially  different  from  the  fair 
value; 

EN 

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(c) 

(d) 

(e) 

the  types,  nature  and  amounts  of  exchange-traded  exposures,  private  equity 
exposures in sufficiently diversified portfolios, and other exposures; 

the cumulative realised gains or losses arising from sales and liquidations in the 
period; 

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) 

(b) 

the  nature  of  the  interest  rate  risk  and  the  key  assumptions  (including 
assumptions  regarding  loan  prepayments  and  behaviour  of  non-maturity 
deposits), and frequency measurement of the interest rate risk; 

the variation in earnings, economic value or other relevant measure used by the 
management 
to 
management’s  method  for  measuring  the  interest  rate  risk,  broken  down  by 
currency. 

for  upward  and  downward 

rate  shocks  according 

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) 

(d) 

(e) 

an  indication  of  the  extent  of  the  credit  institution’s  involvement  in  each  of 
them; 

the  approaches  to  calculating  risk  weighted  exposure  amounts  that  the  credit 
institution follows for its securitisation activities; 

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  securitisations  if  this  is  not  covered  by  other 
accounting policies; 

(f) 

the names of the ECAIs used for securitisations and the types of exposure for 
which each agency is used; 

EN 

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(g) 

(h) 

(i) 

(j) 

(k) 

(l) 

the  total  outstanding  amount  of  exposures  securitised  by  the  credit  institution 
and subject to the securitisation framework (broken down into traditional and 
synthetic), by exposure type; 

for  exposures  securitised  by  the  credit  institution  and  subject  to  the 
securitisation  framework,  a  breakdown  by  exposure  type  of  the  amount  of 
impaired and past due exposures securitised, and the losses recognised by the 
credit institution during the period; 

the aggregate amount of securitisation positions retained or purchased, broken 
down by exposure type; 

the aggregate amount of securitisation positions retained or purchased, broken 
down into a meaningful number of risk weight bands. Positions that have been 
risk weighted at 1250% or deducted shall be disclosed separately; 

the  aggregate  outstanding  amount  of  securitised  revolving  exposures 
segregated by the originator’s interest and the investors’ interest; 

a summary of the securitisation activity in the period, including the amount of 
exposures  securitised  (by  exposure  type),  and  recognised  gain  or  loss  on  sale 
by exposure type. 

3. 

14. 

Part  3  -  Qualifying  requirements  for  the  use  of  particular  instruments  or 
methodologies 

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  systems  and  relation  between  internal  and 
external ratings, 

(ii) 

the use of internal estimates other than for calculating risk-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  rating  systems  including  a  description  of 
independence, accountability, and rating systems review; 

(c) 

a  description  of  the  internal  ratings  process,  provided  separately  for  the 
following exposure classes: 

(i) 

central governments and central banks, 

(ii) 

institutions, 

EN 

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(iii)  corporate,  including  SMEs,  specialised  lending  and  purchased  corporate 

receivables, 

(iv) 

retail, for each of the categories of exposures to which the different correlations 
in Annex VII, Part 1, paragraphs 9 to 11 correspond to, 

(v) 

equities; 

(d) 

(e) 

(i) 

(ii) 

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 use own estimates of LGDs or conversion 
factors for the calculation of risk-weighted exposure amounts shall be disclosed 
separately  from  exposures  for  which  the  credit  institutions  do  not  use  such 
estimates;  

for  each  of  the  exposure  classes  central  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:  

the  total  exposures  (for  the  exposure  classes  central  governments  and  central 
banks,  institutions  and  corporate,  the  sum  of  outstanding  loans  and  exposure 
values for undrawn commitments; for equities, the outstanding amount), 

for the credit institutions using own LGD estimates for the calculation of risk-
weighted  exposure  amounts, 
in 
percentage, 

the  exposure-weighted  average  LGD 

(iii) 

the exposure-weighted average risk weight, 

(iv) 

(f) 

(g) 

(h) 

for  the  credit  institutions  using  own  estimates  of  conversion  factors  for  the 
calculation  of  risk-weighted  exposure  amounts,  the  amount  of  undrawn 
commitments  and  exposure-weighted  average  exposure  values  for  each 
exposure class;  

for the retail exposure class and for each of the categories as defined under (c) 
above,  either  the  disclosures  outlined  under  (e)  above  (if  applicable,  on  a 
pooled  basis),  or  an  analysis  of  exposures  (outstanding  loans  and  exposure 
values for undrawn commitments) against a sufficient number of EL grades to 
allow for a meaningful differentiation of credit risk (if applicable, on a pooled 
basis); 

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;  

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 

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(i) 

the credit institution’s estimates against actual outcomes over a longer period. 
At  a  minimum,  this  shall  include  information  on  estimates  of  losses  against 
actual  losses  in  each  exposure  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  the  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  credit  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  description  shall  include  the  types  of  exposure 
included in the exposure class, the definitions, methods and data for estimation and 
validation  of  PD  and,  if  applicable,  LGD  and  conversion  factors,  including 
assumptions  employed  in  the  derivation  of  these  variables,  and  the  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 collateral valuation and management; 

(c) 

a description of the main types of collateral taken by the credit institution; 

(d) 

(e) 

(f) 

(g) 

the  main  types  of  guarantor  and  credit  derivative  counterparty  and  their 
creditworthiness; 

information  about  market  or  credit  risk  concentrations  within  the  credit 
mitigation taken; 

institutions  calculating  risk-weighted  exposure  amounts 

in 
for  credit 
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; 

institutions  calculating  risk-weighted  exposure  amounts 

for  credit 
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 requirement 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 for operational risk shall disclose a description of the 
use of insurance for the purpose of mitigating the risk. 

EN 

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