Directive 2006/48/EC of the European Parliament and of the Council of  14 June 2006  relating to the taking up and pursuit of the business of credit institutions (recast)   (Text with EEA relevance)
Date: 2006-06-14
Institutions: Council of the European Union, European Parliament
Subjects: credit institution, economic analysis, provision of services, right of establishment

30.6.2006

EN

Official Journal of the European Union

L 177/1

I

(Acts whose publication is obligatory)

DIRECTIVE 2006/48/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL

of 14 June 2006

relating to the taking up and pursuit of the business of credit institutions (recast)

(Text with EEA relevance)

THE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE
EUROPEAN UNION,

Having regard to the Treaty establishing the European Commu-
nity, and in particular the first and third sentences of Article 47
(2) thereof,

Having regard to the proposal from the Commission,

Having regard to the Opinion of the European Economic and
Social Committee (1),

Having regard to the Opinion of the European Central Bank (2),

Acting in accordance with the procedure laid down in Article
251 of the Treaty (3),

Whereas:

(1) 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 (4) has been
significantly amended on several occasions. Now that new
it is
amendments are being made to the said Directive,
desirable, in order to clarify matters, that it should be recast.

(2)

(3)

(4)

In order to make it easier to take up and pursue the
business of credit institutions, it is necessary to eliminate
the most obstructive differences between the laws of the
Member States as
to which these
institutions are subject.

the rules

regards

This Directive constitutes the essential instrument for the
achievement of the internal market from the point of view
of both the freedom of establishment and the freedom to
provide financial services, in the field of credit institutions.

The Commission Communication of 11 May 1999 entitled
‘Implementing the framework for financial markets: Action
plan’, listed a number of goals that need to be achieved in
order to complete the internal market in financial services.

(1) OJ C 234, 22.9.2005, p. 8.
(2) OJ C 52, 2.3.2005, p. 37.
(3) Opinion of the European Parliament of 28 September 2005 (not yet
published in the OJ) and Decision of the Council of 7 June 2006.
(4) OJ L 126, 26.5.2000, p. 1. Directive as last amended by Directive

2006/29/EC (OJ L 70, 9.3.2006, p. 50).

The Lisbon European Council of 23 and 24 March 2000 set
implementing the action plan by 2005.
the goal of
Recasting of the provisions on own funds is a key element
of the action plan.

(5) Measures to coordinate credit institutions should, both in
order to protect savings and to create equal conditions of
competition between these institutions, apply to all of
them. Due regard should however be had to the objective
differences in their statutes and their proper aims as laid
down by national laws.

(6)

(7)

for

The scope of those measures should therefore be as broad
as possible, covering all institutions whose business is to
receive repayable funds from the public, whether in the
form of deposits or in other forms such as the continuing
issue of bonds and other comparable securities and to grant
their own account. Exceptions should be
credits
provided for in the case of certain credit institutions to
which this Directive cannot apply. The provisions of this
Directive should not prejudice the application of national
laws which provide for special supplementary authorisa-
tions permitting credit institutions to carry on specific
activities or undertake specific kinds of operations.

It is appropriate to effect only the essential harmonisation
necessary and sufficient to secure the mutual recognition of
authorisation and of prudential
supervision systems,
making possible the granting of a single licence recognised
throughout the Community and the application of the
principle of home Member State prudential supervision.
Therefore, the requirement that a programme of operations
be produced should be seen merely as a factor enabling the
competent authorities to decide on the basis of more
precise information using objective criteria. A measure of
flexibility should nonetheless be possible as regards the
institutions
form of credit
requirements on the legal
concerning the protection of banking names.

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(8)

(9)

Since the objectives of this Directive, namely the introduc-
tion of rules concerning the taking up and pursuit of the
business of credit institutions, and their prudential super-
vision, cannot be sufficiently achieved by the Member
States and can therefore, by reason of the scale and the
the proposed action, be better achieved at
effects of
Community level, the Community may adopt measures, in
accordance with the principle of subsidiarity as set out in
Article 5 of the Treaty. In accordance with the principle of
proportionality, as set out in that Article, this Directive does
not go beyond what is necessary in order to achieve those
objectives.

Equivalent financial requirements for credit institutions are
necessary to ensure similar safeguards for savers and fair
conditions of competition between comparable groups of
credit institutions. Pending further coordination, appro-
priate structural ratios should be formulated making it
possible within the framework of cooperation between
national authorities to observe, in accordance with standard
methods,
the position of comparable types of credit
institutions. This procedure should help to bring about
the gradual approximation of the systems of coefficients
established and applied by the Member States.
is
necessary, however
a distinction between
coefficients intended to ensure the sound management of
credit institutions and those established for the purposes of
economic and monetary policy.

to make

It

should not grant or

(10) The principles of mutual recognition and home Member
State supervision require that Member States' competent
authorities
should withdraw an
authorisation where factors such as the content of the
activities programmes,
the geographical distribution of
activities or the activities actually carried on indicate clearly
that a credit institution has opted for the legal system of
one Member State for the purpose of evading the stricter
standards in force in another Member State within whose
territory it carries on or intends to carry on the greater Part
of its activities. Where there is no such clear indication, but
the majority of the total assets of the entities in a banking
group are located in another Member State the competent
authorities of which are responsible for exercising super-
vision on a consolidated basis, in the context of Articles
125 and 126 responsibility for exercising supervision on a
consolidated basis
should be changed only with the
competent authorities. A credit
agreement of
institution which is a legal person should be authorised
in the Member State in which it has its registered office. A
credit institution which is not a legal person should have its
head office in the Member State in which it has been
authorised. In addition, Member States should require that a
credit institution's head office always be situated in its home
Member State and that it actually operates there.

those

(11) The

competent

authorities

authorise or
continue the authorisation of a credit institution where
they are liable to be prevented from effectively exercising
their supervisory functions by the close links between that

should not

legal persons. Credit
institution and other natural or
institutions already authorised should also satisfy the
competent authorities in that respect.

(12) The reference to the supervisory authorities' effective
exercise of their supervisory functions covers supervision
on a consolidated basis which should be exercised over a
credit institution where the provisions of Community law
so provide. In such cases, the authorities applied to for
authorisation should be able to identify the authorities
competent to exercise supervision on a consolidated basis
over that credit institution.

(13) This Directive enables Member States and/or competent
authorities to apply capital requirements on a solo and
consolidated basis, and to disapply solo where they deem
this appropriate. Solo, consolidated and cross-border
tools in overseeing
consolidated supervision are useful
credit
competent
enables
institutions. This Directive
authorities to support cross border institutions by facilitat-
ing cooperation between them. In particular, the competent
authorities should continue to make use of Articles 42, 131
and 141 to coordinate their activities and information
requests.

(14) Credit institutions authorised in their home Member States
should be allowed to carry on, throughout the Community,
any or all of the activities listed in Annex I by establishing
branches or by providing services.

(15) The Member States may also establish stricter rules than
those laid down in Article 9(1), first subparagraph, Article 9
(2) and Articles 12, 19 to 21, 44 to 52, 75 and 120 to 122
for credit
institutions authorised by their competent
authorities. The Member States may also require that
Article 123 be complied with on an individual or other
basis, and that the sub‑consolidation described in Article 73
(2) be applied to other levels within a group.

(16)

is appropriate to extend mutual recognition to the
It
activities listed in Annex I when they are carried on by
financial
institutions which are subsidiaries of credit
institutions, provided that such subsidiaries are covered
their parent under-
by the consolidated supervision of
takings and meet certain strict conditions.

(17) The host Member State should be able, in connection with
the exercise of the right of establishment and the freedom
to provide services, to require compliance with specific
provisions of its own national laws or regulations on the
Part of institutions not authorised as credit institutions in
their home Member States and with regard to activities not
listed in Annex I provided that, on the one hand, such
provisions are compatible with Community law and are
intended to protect the general good and that, on the other
hand, such institutions or such activities are not subject to
equivalent rules under this legislation or regulations of their
home Member States.

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(18) The Member States should ensure that

to carrying on activities

there are no
obstacles
receiving mutual
recognition in the same manner as in the home Member
State, as long as the latter do not conflict with legal
provisions protecting the general good in the host Member
State.

(19) The rules governing branches of credit institutions having
their head office outside the Community should be
analogous in all Member States. It is important to provide
that such rules may not be more favourable than those for
branches of institutions from another Member State. The
Community should be able to conclude agreements with
third countries providing for the application of rules which
accord such branches the same treatment throughout its
territory. The branches of credit institutions authorised in
third countries should not enjoy the freedom to provide
services under the second paragraph of Article 49 of the
Treaty or the freedom of establishment in Member States
other than those in which they are established.

(20) Agreement should be reached, on the basis of reciprocity,
between the Community and third countries with a view to
allowing the practical exercise of consolidated supervision
over the largest possible geographical area.

(21) Responsibility for supervising the financial soundness of a
credit institution, and in particular its solvency, should lay
with its home Member State. The host Member State's
competent authorities
the
supervision of the liquidity of the branches and monetary
policies. The supervision of market risk should be the
subject of close cooperation between the competent
authorities of the home and host Member States.

should be responsible for

(22) The smooth operation of

the internal banking market
requires not only legal rules but also close and regular
cooperation and significantly enhanced convergence of
regulatory and supervisory practices between the compe-
tent authorities of the Member States. To this end,
in
particular, consideration of problems concerning individual
credit institutions and the mutual exchange of information
should take place in the Committee of European Banking
Supervisors set up by Commission Decision 2004/5/EC (1).
That mutual information procedure should not in any case
replace bilateral cooperation. Without prejudice to their
own powers of control, the competent authorities of the
host Member States should be able, in an emergency, on
their own initiative or following the initiative of
the
competent authorities of home Member State, to verify that
the activities of a credit institution established within their
territories comply with the relevant laws and with the
principles of sound administrative and accounting proce-
dures and adequate internal control.

(23)

It is appropriate to allow the exchange of information
between the competent authorities and authorities or
bodies which, by virtue of their function, help to strengthen

(1) OJ L 3, 7.1.2004, p. 28.

the stability of the financial system. In order to preserve the
confidential nature of the information forwarded, the list of
addressees should remain within strict limits.

(24) Certain behaviour, such as fraud and insider offences, is
liable to affect the stability, including the integrity, of the
financial system, even when involving institutions other
than credit
is necessary to specify the
conditions under which exchange of information in such
cases is authorised.

institutions.

It

(25) Where it is stipulated that information may be disclosed
only with the express agreement of
the competent
authorities, these should be able, where appropriate, to
make their agreement subject to compliance with strict
conditions.

(26) Exchanges of information between, on the one hand, the
competent authorities and, on the other, central banks and
other bodies with a similar function in their capacity as
monetary authorities and, where appropriate, other public
authorities responsible for supervising payment systems
should also be authorised.

competent

(27) For the purpose of strengthening the prudential supervision
of credit institutions and the protection of clients of credit
institutions, auditors should have a duty to report promptly
authorities, wherever, during the
to the
performance of their tasks, they become aware of certain
facts which are liable to have a serious effect on the
financial situation or the administrative and accounting
organisation of a credit institution. For the same reason
Member States should also provide that such a duty applies
in all circumstances where such facts are discovered by an
auditor during the performance of his
in an
undertaking which has close links with a credit institution.
The duty of auditors to communicate, where appropriate, to
the competent authorities certain facts and decisions
concerning a credit institution which they discover during
the performance of their tasks in a non-financial under-
taking should not in itself change the nature of their tasks
in that undertaking nor the manner in which they should
perform those tasks in that undertaking.

tasks

(28) This Directive specifies that for certain own funds items
qualifying criteria should be specified, without prejudice to
the possibility of Member States to apply more stringent
provisions.

(29) According to the nature of the items constituting own
funds, this Directive distinguishes between on the one
hand, items constituting original own funds and, on the
other, those constituting additional own funds.

(30) To reflect the fact that items constituting additional own
funds are not of the same nature as those constituting
original own funds, the amount of the former included in

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own funds should not exceed the original own funds.
Moreover, the amount of certain items of additional own
funds included should not exceed one half of the original
own funds.

(31)

In order to avoid distortions of competition, public credit
institutions
include in their own funds
guarantees granted them by the Member States or local
authorities.

should not

(32) Whenever in the course of supervision it is necessary to
determine the amount of the consolidated own funds of a
group of credit
the calculation should be
effected in accordance with this Directive.

institutions,

(38)

(33) The precise accounting technique to be used for

the
calculation of own funds, their adequacy for the risk to
which a credit institution is exposed, and for the assessment
of the concentration of exposures should take account of
the provisions of Council Directive 86/635/EEC of
8 December 1986 on the annual accounts and consolidated
accounts of banks and other financial institutions (1), which
incorporates certain adaptations of
the provisions of
Seventh Council Directive 83/349/EEC of 13 June 1983
on consolidated accounts (2) or of Regulation (EC) No
1606/2002 of the European Parliament and of the Council
of 19 July 2002 on the application of
international
accounting standards (3), whichever governs the accounting
of the credit institutions under national law.

(34) Minimum capital requirements play a central role in the
institutions and in the mutual
supervision of credit
recognition of supervisory techniques. In that respect, the
provisions on minimum capital requirements should be
considered in conjunction with other specific instruments
also harmonising the fundamental
the
supervision of credit institutions.

techniques for

(35)

In order to prevent distortions of competition and to
strengthen the banking system in the internal market, it is
appropriate to lay down common minimum capital
requirements.

(36) For the purposes of ensuring adequate solvency it

is
important
to lay down minimum capital requirements
which weight assets and off-balance-sheet items according
to the degree of risk.

(37) On this point, on 26 June 2004 the Basel Committee on
Banking Supervision adopted a framework agreement on

(1) OJ L 372, 31.12.1986, p. 1. Directive as last amended by Directive
2003/51/EC of the European Parliament and of the Council (OJ L
178, 17.7.2003, p. 16).

(2) OJ L 193, 18.7.1983, p. 1. Directive as last amended by Directive

2003/51/EC.

(3) OJ L 243, 11.9.2002, p. 1.

the international convergence of capital measurement and
capital requirements. The provisions in this Directive on the
minimum capital requirements of credit institutions, and
the minimum capital provisions in Directive 2006/49/EC of
the European Parliament and of the Council of 14 June
2006 on the capital adequacy of investment firms and
credit institutions (4), form an equivalent to the provisions
of the Basel framework agreement.

It is essential to take account of the diversity of credit
institutions in the Community by providing alternative
approaches to the calculation of minimum capital require-
ments for credit risk incorporating different
levels of
risk‑sensitivity and requiring different degrees of sophisti-
cation. Use of external ratings and credit institutions' own
estimates of individual credit risk parameters represents a
significant enhancement in the risk‑sensitivity and pruden-
tial soundness of the credit risk rules. There should be
appropriate incentives for credit
institutions to move
towards the more risk-sensitive approaches. In producing
the estimates needed to apply the approaches to credit risk
of this Directive, credit institutions will have to adjust their
data processing needs to their clients'
legitimate data
protection interests as governed by the existing Community
legislation on data protection, while enhancing credit risk
measurement and management processes of credit institu-
tions to make methods for determining credit institutions'
regulatory own funds requirements available that reflect the
sophistication of individual credit institutions' processes.
The processing of data should be in accordance with the
rules on transfer of personal data laid down in Directive 95/
46/EC of the European Parliament and of the Council of
24 October 1995 on the protection of individuals with
regard to the processing of personal data and on the free
movement of such data (5). In this regard, the processing of
data in connection with the incurring and management of
exposures to customers should be considered to include the
development and validation of credit risk management and
measurement systems. That serves not only to fulfil the
legitimate interest of credit institutions but also the purpose
of this Directive, to use better methods for risk measure-
ment and management and also use them for regulatory
own funds purposes.

(39) With regard to the use of both external and an institution's
own estimates or internal ratings, account should be taken
of the fact that, at present, only the latter are drawn up by
an entity — the financial
institution itself — which is
subject to a Community authorisation process. In the case
of external ratings use is made of the products of what are
recognised rating agencies, which in the
known as
Community are not currently subject to an authorisation
process. In view of the importance of external ratings in
connection with the calculation of capital requirements
under this Directive, appropriate future authorisation and
supervisory process for rating agencies need to be kept
under review.

(4) See page 201 of this Official Journal
(5) OJ L 281, 23.11.1995, p. 31. Directive as amended by Regulation

(EC) No 1882/2003 (OJ L 284, 31.10.2003, p. 1).

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(40) The minimum capital requirements should be proportion-
ate to the risks addressed. In particular the reduction in risk
levels deriving from having a large number of relatively
small exposures should be reflected in the requirements.

this regard to taking insurance into account in the simple
approaches to calculating capital requirements for opera-
tional risk.

(41) The provisions of this Directive respect the principle of
proportionality, having regard in particular to the diversity
in size and scale of operations and to the range of activities
of credit institutions. Respect of the principle of propor-
tionality also means that
the simplest possible rating
procedures, even in the Internal Ratings Based Approach
(‘IRB Approach’), are recognised for retail exposures.

for

the more

risk-sensitive

In order
to opt

(42) The ‘evolutionary’ nature of this Directive enables credit
institutions to choose amongst three approaches of varying
to allow especially small credit
complexity.
institutions
IRB
Approach, the competent authorities should implement
the provisions of Article 89(1)(a) and (b) whenever
appropriate. Those provisions should be read as such that
exposure classes referred to in Article 86(1)(a) and (b)
include all exposures that are, directly or indirectly, put on a
par with them throughout this Directive. As a general rule,
the competent authorities should not discriminate between
the three approaches with regard to the Supervisory Review
Process, i.e. credit institutions operating according to the
provisions of the Standardised Approach should not for
that reason alone be supervised on a stricter basis.

(43)

Increased recognition should be given to techniques of
credit risk mitigation within a framework of rules designed
to ensure that solvency is not undermined by undue
recognition. The relevant Member States' current customary
banking collateral
should
wherever possible be recognised in the Standardised
Approach, but also in the other approaches.

for mitigating credit

risks

(44)

In order to ensure that the risks and risk reductions arising
from credit institutions' securitisation activities and invest-
ments are appropriately reflected in the minimum capital
requirements of credit institutions it is necessary to include
rules providing for a risk‑sensitive and prudentially sound
treatment of such activities and investments.

(45) Operational

risk is a significant

risk faced by credit
institutions requiring coverage by own funds. It is essential
to take account of the diversity of credit institutions in the
Community by providing alternative approaches to the
calculation of operational risk requirements incorporating
different levels of risk-sensitivity and requiring different
degrees of sophistication. There should be appropriate
incentives for credit institutions to move towards the more
risk-sensitive approaches. In view of the emerging state of
the art for the measurement and management of opera-
tional risk the rules should be kept under review and
updated as appropriate including in relation to the charges
for different business lines and the recognition of risk
mitigation techniques. Particular attention should be paid in

(46)

In order to ensure adequate solvency of credit institutions
within a group it is essential that the minimum capital
requirements apply on the basis of
the consolidated
financial situation of the group. In order to ensure that
own funds are appropriately distributed within the group
and available to protect
the
minimum capital requirements should apply to individual
credit institutions within a group, unless this objective can
be effectively otherwise achieved.

savings where needed,

(47) The essential rules for monitoring large exposures of credit
institutions should be harmonised. Member States should
still be able to adopt provisions more stringent than those
provided for by this Directive.

(48) The monitoring and control of a credit

institution's
exposures should be an integral Part of its supervision.
Therefore, excessive concentration of exposures to a single
client or group of connected clients may result in an
loss. Such a situation can be
unacceptable risk of
considered prejudicial to the solvency of a credit institution.

(49) Since credit institutions in the internal market are engaged
in direct competition, monitoring requirements should be
equivalent throughout the Community.

(50) While it is appropriate to base the definition of exposures
limits to large exposures on that
for the purposes of
provided for
the purposes of minimum own funds
requirements for credit risk, it is not appropriate to refer
on principle to the weightings or degrees of risk. Those
weightings and degrees of risk were devised for the purpose
of establishing a general solvency requirement to cover the
credit risk of credit
the
institutions.
maximum loss that a credit institution may incur through
any single client or group of connected clients it
is
appropriate to adopt rules for the determination of large
exposures which take account of the nominal value of the
exposure without applying weightings or degrees of risk.

In order to limit

(51) While it is desirable, pending further review of the large
the
exposures provisions, to permit the recognition of
effects of credit risk mitigation in a manner similar to that
permitted for minimum capital requirement purposes in
order to limit the calculation requirements, the rules on
credit risk mitigation were designed in the context of the
general diversified credit risk arising from exposures to a
large number of counterparties. Accordingly, recognition of
the effects of such techniques for the purposes of limits to
large exposures designed to limit the maximum loss that
may be incurred through any single client or group of
connected clients should be subject to prudential safe-
guards.

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(52) When a credit institution incurs an exposure to its own
parent undertaking or to other subsidiaries of its parent
undertaking, particular prudence is necessary. The manage-
ment of exposures incurred by credit institutions should be
carried out in a fully autonomous manner, in accordance
with the principles of sound banking management, without
regard to any other considerations. Where the influence
exercised by persons directly or
indirectly holding a
qualifying participation in a credit institution is likely to
operate to the detriment of
the sound and prudent
management of that institution, the competent authorities
should take appropriate measures to put an end to that
situation. In the field of large exposures, specific standards,
including more stringent restrictions, should be laid down
for exposures incurred by a credit institution to its own
group. Such standards need not, however be applied where
the parent undertaking is a financial holding company or a
credit institution or where the other subsidiaries are either
credit or financial
institutions or undertakings offering
ancillary services, provided that all such undertakings are
covered by the supervision of the credit institution on a
consolidated basis.

(58)

In order to be effective, supervision on a consolidated basis
should therefore be applied to all banking groups, including
those the parent undertakings of which are not credit
institutions. The competent authorities should hold the
necessary legal
instruments to be able to exercise such
supervision.

(59)

at

credit

control

least one

In the case of groups with diversified activities where parent
institution
undertakings
subsidiary, the competent authorities should be able to
assess the financial situation of a credit institution in such a
group. The competent authorities should at least have the
means of obtaining from all undertakings within a group
the information necessary for the performance of their
function. Cooperation between the authorities responsible
for the supervision of different financial sectors should be
established in the case of groups of undertakings carrying
financial activities. Pending subsequent
on a range of
coordination, the Member States should be able to lay
down appropriate methods of consolidation for
the
achievement of the objective of this Directive.

(53) Credit institutions should ensure that they have internal
capital that, having regard to the risks to which they are or
may be exposed,
is adequate in quantity, quality and
distribution. Accordingly, credit institutions should have
strategies and processes
for assessing and
maintaining the adequacy of their internal capital.

in place

(60) The Member States should be able to refuse or withdraw
banking authorisation in the case of certain group
structures considered inappropriate for carrying on bank-
ing activities, in particular because such structures could
not be supervised effectively. In this respect the competent
authorities should have the necessary powers to ensure the
sound and prudent management of credit institutions.

(54) Competent authorities have responsibility to be satisfied
that credit institutions have good organisation and adequate
own funds, having regard to the risks to which the credit
institutions are or might be exposed.

(61)

In order for the internal banking market to operate with
increasing effectiveness and for citizens of the Community
is
to be afforded adequate levels of
necessary that competent authorities disclose publicly and
in a way which allows for meaningful comparison the
manner in which this Directive is implemented.

transparency,

it

(55)

for

the internal banking market

In order
to operate
effectively the Committee of European Banking Supervisors
should contribute to the consistent application of
this
Directive and to the convergence of supervisory practices
throughout the Community, and should report on a yearly
basis to the Community institutions on progress made.

(56) For the same reason, and to ensure that Community credit
institutions which are active in several Member States are
not disproportionately burdened as a result of
the
continued responsibilities of
individual Member State
competent authorities for authorisation and supervision,
it
to significantly enhance the cooperation
between competent authorities. In this context, the role of
the consolidating supervisor should be strengthened. The
Committee of European Banking Supervisors
should
support and enhance such cooperation.

is essential

(57) Supervision of credit institutions on a consolidated basis
aims at,
the
depositors of credit institutions and at ensuring the stability
of the financial system.

in particular, protecting the interests of

(62)

In order to strengthen market discipline and stimulate
credit institutions to improve their market strategy, risk
control and internal management organization, appropriate
public disclosure by credit institutions should be provided
for.

(63) The examination of problems connected with matters
covered by this Directive, as well as by other Directives on
the business of credit institutions, requires cooperation
between the competent authorities and the Commission,
particularly when conducted with a view to closer
coordination.

(64) The measures necessary for the implementation of this
Directive should be adopted in accordance with Council
Decision 1999/468/EC of 28 June 1999 laying down the
procedures
implementing powers
the exercise of
conferred on the Commission (1).

for

(1) OJ L 184, 17.7.1999, p. 23.

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(67)

(68)

In order to avoid disruption to markets and to ensure
continuity in overall levels of own funds it is appropriate to
provide for specific transitional arrangements.

the risk-sensitivity of

In view of
the rules relating to
minimum capital requirements, it is desirable to keep under
review whether
these have significant effects on the
economic cycle. The Commission, taking into account the
contribution of the European Central Bank should report
on these aspects to the European Parliament and to the
Council.

(69) The arrangements necessary for the supervision of liquidity

risks should also be harmonised.

(70) This Directive respects fundamental rights and observes the
principles recognised in particular by the Charter of
Fundamental Rights of the European Union as general
principles of Community law.

(71) The obligation to transpose this Directive into national law
should be confined to those provisions which represent a
substantive change as compared with earlier directives. The
obligation to transpose the provisions which are unchanged
exists under the earlier directives.

(72) This Directive

should be without prejudice

to the
obligations of the Member States relating to the time-limits
for transposition into national law of the Directives set out
in Annex XIII, Part B,

(65)

In its resolution of 5 February 2002 on the implementation
of financial services legislation (1) the Parliament requested
that it and the Council should have an equal role in
supervising the way in which the Commission exercises its
executive role in order to reflect the legislative powers of
Parliament under Article 251 of the Treaty. In the solemn
declaration made before the Parliament the same day by its
President,
the Commission supported this request. On
11 December 2002 the Commission proposed amend-
ments to Decision 1999/468/EC, and then submitted an
amended proposal on 22 April 2004. The Parliament does
not consider that this proposal preserves its legislative
prerogatives.
it and the
In the view of the Parliament,
Council should have the opportunity of evaluating the
implementing powers on the Commission
conferral of
within a determined period. It is therefore appropriate to
limit the period during which the Commission may adopt
implementing measures.

(66) The Parliament should be given a period of three months
from the first
transmission of draft amendments and
implementing measures to allow it to examine them and to
give its opinion. However, in urgent and duly justified cases,
it should be possible to shorten this period. If, within that
period, a resolution is adopted by the Parliament,
the
Commission should re‑examine the draft amendments or
measures.

(1) OJ C 284 E, 21.11.2002, p. 115.

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HAVE ADOPTED THIS DIRECTIVE:

TITLE I

SUBJECT MATTER, SCOPE AND DEFINITIONS

CONTENTS

TITLE II

TITLE III

REQUIREMENTS FOR ACCESS TO THE TAKING UP AND PURSUIT OF THE BUSINESS OF
CREDIT INSTITUTIONS

PROVISIONS CONCERNING THE FREEDOM OF ESTABLISHMENT AND THE FREEDOM TO
PROVIDE SERVICES

Section 1

Credit institutions

Section 2

Financial institutions

Section 3

Exercise of the right of establishment

Section 4

Exercise of the freedom to provide services

Section 5

Powers of the competent authorities of the host Member State

TITLE IV

RELATIONS WITH THIRD COUNTRIES

Section 1

Section 2

TITLE V

Notification in relation to third countries' undertakings and conditions of access to the markets of
these countries

Cooperation with third countries' competent authorities regarding supervision on a consolidated
basis

PRINCIPLES AND TECHNICAL INSTRUMENTS FOR PRUDENTIAL SUPERVISION AND
DISCLOSURE

CHAPTER 1

PRINCIPLES OF PRUDENTIAL SUPERVISION

Section 1

Competence of home and host Member State

Section 2

Exchange of information and professional secrecy

Section 3

Duty of persons responsible for the legal control of annual and consolidated accounts

Section 4

Power of sanction and right to apply to the courts

CHAPTER 2

TECHNICAL INSTRUMENTS OF PRUDENTIAL SUPERVISION

Section 1

Own funds

Section 2

Provision against risks

Subsection 1

Level of application

Subsection 2

Calculation of requirements

Subsection 3

Minimum Level of Own Funds

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Section 3

Minimum own funds requirements for credit risk

Subsection 1

Standardised Approach

Subsection 2

Internal Ratings based Approach

Subsection 3

Credit risk mitigation

Subsection 4

Securitisation

Section 4

Minimum own funds requirements for operational risk

Section 5

Large exposures

Section 6

Qualifying holdings outside the financial sector

CHAPTER 3

CREDIT INSTITUTIONS' ASSESSMENT PROCESS

CHAPTER 4

SUPERVISION AND DISCLOSURE BY COMPETENT AUTHORITIES

Section 1

Supervision

Section 2

Disclosure by competent authorities

CHAPTER 5

DISCLOSURE BY CREDIT INSTITUTIONS

TITLE VI

POWERS OF EXECUTION

TITLE VII

TRANSITIONAL AND FINAL PROVISIONS

CHAPTER 1

TRANSITIONAL PROVISIONS

CHAPTER 2

FINAL PROVISIONS

ANNEX I

LIST OF ACTIVITIES SUBJECT TO MUTUAL RECOGNITION

ANNEX II

CLASSIFICATION OF OFF-BALANCE-SHEET ITEMS

ANNEX III

THE TREATMENT OF COUNTERPARTY CREDIT RISK OF DERIVATIVE INSTRUMENTS,
REPURCHASE TRANSACTIONS, SECURITIES OR COMMODITIES LENDING OR BORROWING
TRANSACTIONS, LONG SETTLEMENT TRANSACTIONS AND MARGIN LENDING TRANSAC-
TIONS

Part 1

Part 2

Part 3

Part 4

Part 5

Part 6

Part 7

Definitions

Choice of the Method

Mark‑to-Market Method

Original Exposure Method

Standardised Method

Internal Model Method

Contractual netting

ANNEX IV

TYPES OF DERIVATIVES

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ANNEX V

TECHNICAL CRITERIA CONCERNING THE ORGANISATION AND TREATMENT OF RISKS

ANNEX VI

STANDARDISED APPROACH

Part 1

Part 2

Part 3

Risk weights

Recognition of ECAIs and mapping of their credit assessments

Use of ECAIs' credit assessments for the determination of risk weights

ANNEX VII

INTERNAL RATINGS BASED APPROACH

Part 1

Part 2

Part 3

Part 4

Risk weighted exposure amounts and expected loss amounts

PD, LGD, and Maturity

Exposure value

Minimum Requirements for IRB Approach

ANNEX VIII

CREDIT RISK MITIGATION

Part 1

Part 2

Part 3

Part 4

Part 5

Part 6

Eligibility

Minimum Requirements

Calculating the effects of credit risk mitigation

Maturity mismatches

Combinations of credit risk mitigation in the Standardised Approach

Basket CRM techniques

ANNEX IX

SECURITISATION

Part 1

Part 2

Part 3

Part 4

Definitions for the purposes of Annex IX

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

External credit assessments

Calculation

ANNEX X

OPERATIONAL RISK

Part 1

Part 2

Part 3

Part 4

Part 5

Basic Indicator Approach

Standardised Approach

Advanced Measurement Approaches

Combined use of different methodologies

Loss event type classification

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ANNEX XI

TECHNICAL CRITERIA ON REVIEW AND EVALUATION BY THE COMPETENT AUTHORITIES

ANNEX XII

TECHNICAL CRITERIA ON DISCLOSURE

Part 1

Part 2

Part 3

General criteria

General requirements

Qualifying requirements for the use of particular instruments or methodologies

ANNEX XIII Part A

REPEALED DIRECTIVES, TOGETHER WITH THEIR SUCCESSIVE AMENDMENTS (referred to in
Article 158)

ANNEX XIII Part B

DEADLINES FOR IMPLEMENTATION (referred to in Article 158)

ANNEX XIV

CORRELATION TABLE

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TITLE I

SUBJECT MATTER, SCOPE AND DEFINITIONS

Article 1

— in the Netherlands, the ‘Nederlandse Investeringsbank voor
Ontwikkelingslanden NV’, the ‘NV Noordelijke Ontwikke-
lingsmaatschappij’, the ‘NV Industriebank Limburgs Insti-
tuut
the
‘Overijsselse Ontwikkelingsmaatschappij NV’,

voor Ontwikkeling

en Financiering’

and

1. This Directive lays down rules concerning the taking up and
pursuit of the business of credit institutions, and their prudential
supervision.

— in Austria, undertakings recognised as housing associations
in the public interest and the ‘Österreichische Kontrollbank
AG’,

2. Article 39 and Title V, Chapter 4, Section 1 shall apply to
financial holding companies and mixed-activity holding compa-
nies which have their head offices in the Community.

3. The institutions permanently excluded pursuant to Article 2,
with the exception, however, of the central banks of the Member
States, shall be treated as financial institutions for the purposes of
Article 39 and Title V, Chapter 4, Section 1.

Article 2

This Directive shall not apply to the following:

— the central banks of Member States,

— post office giro institutions,

— in Belgium, the ‘Institut de Réescompte et de Garantie/

Herdiscontering- en Waarborginstituut’,

— in Denmark,

the ‘Dansk Eksportfinansieringsfond’,

the
‘Danmarks Skibskreditfond’, the ‘Dansk Landbrugs Realk-
reditfond’, and the ‘KommuneKredit’,

— in Germany, the ‘Kreditanstalt für Wiederaufbau’, under-
takings which are recognised under the ‘Wohnungsgemein-
nützigkeitsgesetz’ as bodies of State housing policy and are
not mainly engaged in banking transactions, and under-
takings recognised under that law as non-profit housing
undertakings,

— in Greece, the ‘Ταμείο Παρακαταθηκών και Δανείων’ (Tamio

Parakatathikon kai Danion),

— in Spain, the ‘Instituto de Crédito Oficial’,

— in France, the ‘Caisse des dépôts et consignations’,

— in Ireland, credit unions and the friendly societies,

— in Italy, the ‘Cassa depositi e prestiti’,

— in Latvia, the ‘krājaizdevu sabiedrības’, undertakings that are
recognised under the ‘krājaizdevu sabiedrību likums’ as
cooperative undertakings rendering financial services solely
to their members,

— in Lithuania, the ‘kredito unijos’ other than the ‘Centrinė

kredito unija’,

— in Poland,

the ‘Spółdzielcze Kasy Oszczędnościowo —

Kreditowe’ and the ‘Bank Gospodarstwa Krajowego’,

— in Portugal, ‘Caixas Económicas’ existing on 1 January 1986
with the exception of
limited
companies and of the ‘Caixa Económica Montepio Geral’,

those incorporated as

— in Finland, the ‘Teollisen yhteistyön rahasto Oy/Fonden för
industriellt samarbete AB’, and the ‘Finnvera Oyj/Finnvera
Abp’,

— in Sweden, the ‘Svenska Skeppshypotekskassan’,

— in the United Kingdom, the National Savings Bank, the
Commonwealth Development Finance Company Ltd, the
the Scottish
Agricultural Mortgage Corporation Ltd,
Agricultural Securities Corporation Ltd, the Crown Agents
for overseas governments and administrations, credit
unions and municipal banks.

Article 3

1. One or more credit institutions situated in the same Member
State and which are permanently affiliated, on 15 December
1977, to a central body which supervises them and which is
established in the same Member State, may be exempted from
the requirements of Articles 7 and 11(1)
if, no later than
15 December 1979, national law provides that:

(a)

(b)

(c)

the commitments of
the central body and affiliated
institutions are joint and several liabilities or the commit-
ments of its affiliated institutions are entirely guaranteed by
the central body;

the solvency and liquidity of the central body and of all the
affiliated institutions are monitored as a whole on the basis
of consolidated accounts; and

the management of the central body is empowered to issue
instructions to the management of the affiliated institu-
tions.

Credit
institutions operating locally which are permanently
affiliated, subsequent to 15 December 1977, to a central body
within the meaning of the first subparagraph, may benefit from
they constitute normal
the conditions laid down therein if
additions to the network belonging to that central body.

— in Hungary,

the ‘Magyar Fejlesztési Bank Rt.’ and the

‘Magyar Export-Import Bank Rt.’,

In the case of credit institutions other than those which are set
up in areas newly reclaimed from the sea or have resulted from
scission or mergers of existing institutions dependent or

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answerable to the central body, the Commission, pursuant to the
procedure referred to in Article 151(2) may lay down additional
rules for the application of the second subparagraph including
the repeal of exemptions provided for in the first subparagraph,
where it is of the opinion that the affiliation of new institutions
benefiting from the arrangements laid down in the second
subparagraph might have an adverse effect on competition.

2. A credit institution referred to in the first subparagraph of
paragraph 1, may also be exempted from the provisions of
Articles 9 and 10, and also Title V, Chapter 2, Sections 2, 3, 4, 5
and 6 and Chapter 3 provided that, without prejudice to the
application of those provisions to the central body, the whole as
constituted by the central body together with its affiliated
institutions is subject to those provisions on a consolidated basis.

In case of exemption, Articles 16, 23, 24, 25, 26(1) to (3) and 28
to 37 shall apply to the whole as constituted by the central body
together with its affiliated institutions.

Article 4

For the purposes of this Directive, the following definitions shall
apply:

(1)

‘credit institution’ means:

(a)

an undertaking whose business is to receive deposits
or other repayable funds from the public and to grant
credits for its own account; or

(b)

an electronic money institution within the meaning of
Directive 2000/46/EC (1);

‘authorisation’ means an instrument issued in any form by
the authorities by which the right to carry on the business
of a credit institution is granted;

‘branch’ means a place of business which forms a legally
dependent Part of a credit institution and which carries out
directly all or some of the transactions inherent in the
business of credit institutions;

(7)

(8)

(9)

‘home Member State’ means the Member State in which a
credit institution has been authorised in accordance with
Articles 6 to 9 and 11 to 14;

‘host Member State’ means the Member State in which a
credit institution has a branch or in which it provides
services;

‘control’ means the relationship between a parent under-
taking and a subsidiary, as defined in Article 1 of Directive
83/349/EEC, or a similar relationship between any natural
or legal person and an undertaking;

(10)

‘participation’ for the purposes of points (o) and (p) of
Article 57, Articles 71 to 73 and Title V, Chapter 4 means
participation within the meaning of the first sentence of
Article 17 of Fourth Council Directive 78/660/EEC of
25 July 1978 on the annual accounts of certain types of
companies (2), or the ownership, direct or indirect, of 20 %
or more of the voting rights or capital of an undertaking;

(11)

‘qualifying holding’ means a direct or indirect holding in an
undertaking which represents 10 % or more of the capital
or of the voting rights or which makes it possible to
exercise a significant influence over the management of
that undertaking;

(12)

‘parent undertaking’ means:

(a)

a parent undertaking as defined in Articles 1 and 2 of
Directive 83/349/EEC; or

(b)

for the purposes of Articles 71 to 73, Title V, Chapter
2, Section 5 and Chapter 4, a parent undertaking
within the meaning of Article 1(1) of Directive 83/
349/EEC and any undertaking which, in the opinion
of the competent authorities, effectively exercises a
dominant influence over another undertaking;

‘competent authorities’ means the national authorities
which are empowered by law or regulation to supervise
credit institutions;

(13)

‘subsidiary’ means:

institution,

‘financial institution’ means an undertaking other than a
credit
the principal activity of which is to
acquire holdings or to carry on one or more of the activities
listed in points 2 to 12 of Annex I;

‘institutions’, for the purposes of Sections 2 and 3 of Title V,
Chapter 2, means institutions as defined in Article 3(1)(c) of
Directive 2006/49/EC;

(1) Directive 2000/46/EC of

the
Council of 18 September 2000 on the taking up, pursuit of and
the business of electronic money
prudential
institutions (OJ L 275, 27.10.2000, p. 39).

the European Parliament and of

supervision of

(a)

a subsidiary undertaking as defined in Articles 1 and 2
of Directive 83/349/EEC; or

(b)

for the purposes of Articles 71 to 73, Title V, Chapter
2, Section 5, and Chapter 4 a subsidiary undertaking
within the meaning of Article 1(1) of Directive 83/
in the
349/EEC and any undertaking over which,
opinion of
the competent authorities, a parent
undertaking effectively exercises a dominant influ-
ence.

(2) OJ L 222, 14.8.1978, p. 11. Directive as last amended by Directive

2003/51/EC.

(2)

(3)

(4)

(5)

(6)

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All subsidiaries of subsidiary undertakings shall also be
considered subsidiaries of the undertaking that is their
original parent;

(14)

‘parent credit institution in a Member State’ means a credit
institution which has a credit institution or a financial
institution as a subsidiary or which holds a participation in
such an institution, and which is not itself a subsidiary of
another credit institution authorised in the same Member
State, or of a financial holding company set up in the same
Member State;

(15)

‘parent
financial holding company in a Member State’
means a financial holding company which is not itself a
subsidiary of a credit institution authorised in the same
Member State, or of a financial holding company set up in
the same Member State;

(16)

‘EU parent credit
institution’ means a parent credit
institution in a Member State which is not a subsidiary of
another credit institution authorised in any Member State,
or of a financial holding company set up in any Member
State;

(17)

‘EU parent financial holding company’ means a parent
financial holding company in a Member State which is not
a subsidiary of a credit
institution authorised in any
Member State or of another financial holding company set
up in any Member State;

(21)

‘ancillary services undertaking’ means an undertaking the
principal activity of which consists in owning or managing
property, managing data-processing services, or any other
similar activity which is ancillary to the principal activity of
one or more credit institutions;

(22) ‘operational risk’ means the risk of

loss resulting from
inadequate or failed internal processes, people and systems
or from external events, and includes legal risk;

(23) ‘central banks’ include the European Central Bank unless

otherwise indicated;

(24)

‘dilution risk’ means the risk that an amount receivable is
reduced through cash or non‑cash credits to the obligor;

(25) ‘probability of default’ means the probability of default of a

counterparty over a one year period;

(26) ‘loss’, for the purposes of Title V, Chapter 2, Section 3,
means economic loss, including material discount effects,
and material direct and indirect costs associated with
collecting on the instrument;

(27) ‘loss given default (LGD)’ means the ratio of the loss on an
exposure due to the default of a counterparty to the amount
outstanding at default;

(18)

‘public sector entities’ means non-commercial administra-
tive bodies responsible to central governments, regional
governments or local authorities, or authorities that in the
the competent authorities exercise the same
view of
responsibilities
and local authorities, or
non‑commercial undertakings owned by central govern-
ments that have explicit guarantee arrangements, and may
include self administered bodies governed by law that are
under public supervision;

regional

as

(19)

‘financial holding company’ means a financial institution,
the subsidiary undertakings of which are either exclusively
or mainly credit institutions or financial institutions, at least
one of such subsidiaries being a credit institution, and
which is not a mixed financial holding company within the
meaning of Article 2(15) of Directive 2002/87/EC (1);

(28) ‘conversion factor’ means

the ratio of

the currently
undrawn amount of a commitment that will be drawn
to the currently undrawn
and outstanding at default
amount of the commitment, the extent of the commitment
shall be determined by the advised limit, unless the
unadvised limit is higher;

(29) ‘expected loss (EL)’, for the purposes of Title V, Chapter 2,
Section 3, shall mean the ratio of the amount expected to
be lost on an exposure from a potential default of a
counterparty or dilution over a one year period to the
amount outstanding at default;

(30) ‘credit risk mitigation’ means a technique used by a credit
institution to reduce the credit risk associated with an
exposure or
institution
continues to hold;

exposures which the

credit

(20) ‘mixed-activity holding company’ means a parent under-
taking, other than a financial holding company or a credit
institution or a mixed financial holding company within the
meaning of Article 2(15) of Directive 2002/87/EC, the
subsidiaries of which include at least one credit institution;

(1) Directive 2002/87/EC of the European Parliament and of the Council
of 16 December 2002 on the supplementary supervision of credit
institutions,
firms in a
insurance undertakings and investment
financial conglomerate (OJ L 35, 11.2.2003, p. 1). Directive as
amended by Directive 2005/1/EC.

(31)

‘funded credit protection’ means a technique of credit risk
mitigation where the reduction of the credit risk on the
exposure of a credit institution derives from the right of the
credit institution — in the event of the default of the
counterparty or on the occurrence of other specified credit
events relating to the counterparty — to liquidate, or to
obtain transfer or appropriation of, or to retain certain
assets or amounts, or to reduce the amount of the exposure
to, or to replace it with, the amount of the difference
between the amount of the exposure and the amount of a
claim on the credit institution;

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(32) ‘unfunded credit protection’ means a technique of credit
risk mitigation where the reduction of the credit risk on the
exposure of a credit institution derives from the under-
taking of a third party to pay an amount in the event of the
default of the borrower or on the occurrence of other
specified credit events;

(33) ‘repurchase transaction’ means any transaction governed by
an agreement falling within the definition of ‘repurchase
agreement’ or ‘reverse repurchase agreement’ as defined in
Article 3(1)(m) of Directive 2006/49/EC;

(34) ‘securities or commodities lending or borrowing transac-
tion’ means any transaction falling within the definition of
‘securities or
‘securities or
commodities borrowing’ as defined in Article 3(1)(n) of
Directive 2006/49/EC;

commodities

lending’ or

(35) ‘cash assimilated instrument’ means a certificate of deposit
or other similar instrument issued by the lending credit
institution;

(36) ‘securitisation’ means a transaction or scheme, whereby the
credit risk associated with an exposure or pool of exposures
is tranched, having the following characteristics:

(a)

(b)

payments in the transaction or scheme are dependent
upon the performance of the exposure or pool of
exposures; and

the subordination of tranches determines the distribu-
tion of
the
transaction or scheme;

losses during the ongoing life of

(37)

securitisation special purpose

‘traditional securitisation’ means a securitisation involving
the economic transfer of the exposures being securitised to
entity which issues
a
securities. This shall be accomplished by the transfer of
ownership of the securitised exposures from the originator
credit institution or through sub-participation. The secu-
rities issued do not represent payment obligations of the
originator credit institution;

(38) ‘synthetic securitisation’ means a securitisation where the
tranching is achieved by the use of credit derivatives or
guarantees, and the pool of exposures is not removed from
the balance sheet of the originator credit institution;

(39) ‘tranche’ means a contractually established segment of the
credit risk associated with an exposure or number of
exposures, where a position in the segment entails a risk of
credit loss greater than or less than a position of the same
amount
taking
in each other such segment, without
account of credit protection provided by third parties
directly to the holders of positions in the segment or in
other segments;

(41)

‘originator’ means either of the following:

(a)

itself or

an entity which, either
through related
entities, directly or indirectly, was involved in the
original agreement which created the obligations or
potential obligations of the debtor or potential debtor
giving rise to the exposure being securitised; or

(b)

an entity which purchases a third party's exposures
onto its balance sheet and then securitises them;

(42) ‘sponsor’ means a credit institution other than an originator
credit institution that establishes and manages an asset-
backed commercial paper programme or other securitisa-
tion scheme that purchases exposures from third party
entities;

(43) ‘credit enhancement’ means a contractual arrangement
whereby the credit quality of a position in a securitisation is
improved in relation to what it would have been if the
enhancement had not been provided,
including the
enhancement provided by more junior tranches in the
securitisation and other types of credit protection;

(44) ‘securitisation special purpose entity (SSPE)’ means a
corporation trust or other entity, other than a credit
institution, organised for carrying on a securitisation or
securitisations, the activities of which are limited to those
appropriate to accomplishing that objective, the structure
of which is intended to isolate the obligations of the SSPE
from those of the originator credit institution, and the
holders of the beneficial interests in which have the right to
pledge or exchange those interests without restriction;

(45) ‘group of connected clients’ means:

(a)

(b)

two or more natural or legal persons who, unless it is
shown otherwise, constitute a single risk because one
of them, directly or indirectly, has control over the
other or others; or

two or more natural or legal persons between whom
there is no relationship of control as set out in point
(a) but who are to be regarded as constituting a single
risk because they are so interconnected that, if one of
them were to experience financial problems, the other
or all of the others would be likely to encounter
repayment difficulties;

(46) ‘close links’ means a situation in which two or more natural

or legal persons are linked in any of the following ways:

(a)

participation in the form of ownership, direct or by
way of control, of 20 % or more of the voting rights
or capital of an undertaking;

(b)

control; or

(40) ‘securitisation position’

shall mean an exposure to a

securitisation;

(c)

the fact that both or all are permanently linked to one
and the same third person by a control relationship;

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(47)

‘recognised exchanges’ means exchanges which are recog-
nised as such by the competent authorities and which meet
the following conditions:

institution does not possess
authorisation when the credit
separate own funds or in cases where initial capital is less than
EUR 5 million.

(a)

they function regularly;

(b)

they have rules, issued or approved by the appropriate
authorities of the home country of the exchange,
defining the conditions for the operation of
the
exchange, the conditions of access to the exchange as
well as the conditions that shall be satisfied by a
contract before it can effectively be dealt on the
exchange; and

(c)

they have a clearing mechanism whereby contracts
listed in Annex IV are subject
to daily margin
requirements which, in the opinion of the competent
authorities, provide appropriate protection.

Article 5

Member States shall prohibit persons or undertakings that are
not credit institutions from carrying on the business of taking
deposits or other repayable funds from the public.

The first paragraph shall not apply to the taking of deposits or
other funds repayable by a Member State or by a Member State's
regional or local authorities or by public international bodies of
which one or more Member States are members or to cases
expressly covered by national or Community legislation,
provided that those activities are subject to regulations and
controls intended to protect depositors and investors and
applicable to those cases.

TITLE II

REQUIREMENTS FOR ACCESS TO THE TAKING UP AND
PURSUIT OF THE BUSINESS OF CREDIT INSTITUTIONS

Article 6

shall

Member States
to obtain
require credit
authorisation before commencing their activities. Without
prejudice to Articles 7 to 12,
lay down the
requirements for such authorisation and notify them to the
Commission.

institutions

they shall

Article 7

Member States shall require applications for authorisation to be
accompanied by a programme of operations setting out, inter
alia,
the types of business envisaged and the structural
organisation of the credit institution.

Article 8

Member States may not require the application for authorisation
to be examined in terms of the economic needs of the market.

Article 9

1. Without prejudice to other general conditions laid down by
shall not grant
national

authorities

competent

law,

the

‘Initial capital’ shall comprise capital and reserves as referred to in
Article 57(a) and (b).

Member States may decide that credit institutions which do not
fulfil the requirement of separate own funds and which were in
existence on 15 December 1979 may continue to carry on their
from
business. They may exempt
complying with the
first
subparagraph of Article 11(1).

institutions
contained in the

requirement

such credit

2. Member States may, subject to the following conditions,
grant authorisation to particular categories of credit institutions
the initial capital of which is less than that specified in paragraph
1:

(a)

the initial capital shall be no less than EUR 1 million;

(b)

the Member States concerned shall notify the Commission
of their reasons for exercising this option; and

(c)

the name of each credit institution that does not have the
minimum capital
specified in paragraph 1 shall be
annotated to that effect in the list referred to in Article 14.

Article 10

1. A credit institution's own funds may not fall below the
amount of initial capital required under Article 9 at the time of
its authorisation.

2. Member States may decide that credit institutions already in
existence on 1 January 1993, the own funds of which do not
attain the levels specified for initial capital in Article 9, may
continue to carry on their activities. In that event, their own
funds may not fall below the highest level reached with effect
from 22 December 1989.

3.
If control of a credit institution falling within the category
referred to in paragraph 2 is taken by a natural or legal person
other than the person who controlled the institution previously,
the own funds of that credit institution shall attain at least the
level specified for initial capital in Article 9.

In certain specific circumstances and with the consent of the
4.
competent authorities, where there is a merger of two or more
credit
institutions falling within the category referred to in
paragraph 2, the own funds of the credit institution resulting
from the merger may not fall below the total own funds of the
merged credit institutions at the time of the merger, as long as
the appropriate levels specified in Article 9 have not been
attained.

If, in the cases referred to in paragraphs 1, 2 and 4, the own
5.
funds should be reduced, the competent authorities may, where

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the circumstances justify it, allow a credit institution a limited
period in which to rectify its situation or cease its activities.

administrative provisions, prevent the effective exercise of their
supervisory functions.

Article 11

1. The competent authorities shall grant an authorisation to
the credit institution only when there are at least two persons
who effectively direct the business of the credit institution.

They shall not grant authorisation if these persons are not of
sufficiently good repute or lack sufficient experience to perform
such duties.

2.

Each Member State shall require that:

(a)

any credit institution which is a legal person and which,
under its national law, has a registered office shall have its
head office in the same Member State as its registered office;
and

(b)

any other credit institution shall have its head office in the
Member State which granted its authorisation and in which
it actually carries on its business.

Article 12

1. The competent authorities shall not grant authorisation for
the taking-up of the business of credit institutions unless they
have been informed of the identities of the shareholders or
members, whether direct or indirect, natural or legal persons,
that have qualifying holdings, and of the amounts of those
holdings.

In determining a qualifying holding in the context of this Article,
the voting rights referred to in Article 92 of Directive 2001/34/
EC of the European Parliament and of the Council of 28 May
2001 on the admission of securities to official stock exchange
listing and on information to be published on those securities (1)
shall be taken into consideration.

2. The competent authorities shall not grant authorisation if,
taking into account the need to ensure the sound and prudent
management of a credit institution, they are not satisfied as to the
suitability of the shareholders or members.

The competent authorities shall require credit institutions to
provide them with the information they require to monitor
compliance with the conditions referred to in this paragraph on a
continuous basis.

Article 13

Reasons shall be given whenever a decision not to grant an
authorisation is taken and the applicant shall be notified thereof
within six months of receipt of the application or, should the
latter be incomplete, within six months of the applicant's sending
the information required for the decision. A decision shall, in any
case, be taken within 12 months of the receipt of the application.

Article 14

Every authorisation shall be notified to the Commission.

The name of each credit institution to which authorisation has
been granted shall be entered in a list. The Commission shall
publish that list in the Official Journal of the European Union
and shall keep it up to date.

Article 15

1. The competent authority shall, before granting authorisation
to a credit institution, consult the competent authorities of the
other Member State involved in the following cases:

(a)

the credit institution concerned is a subsidiary of a credit
institution authorised in another Member State;

(b)

(c)

the credit institution concerned is a subsidiary of the parent
undertaking of a credit institution authorised in another
Member State; or

the credit institution concerned is controlled by the same
persons, whether natural or legal, as control a credit
institution authorised in another Member State.

3. Where close links exist between the credit institution and
other natural or legal persons, the competent authorities shall
the
grant authorisation only if
effective exercise of their supervisory functions.

those links do not prevent

2. The competent authority shall, before granting authorisation
to a credit institution, consult the competent authority of a
Member State involved, responsible for
the supervision of
insurance undertakings or investment firms in the following
cases:

The competent authorities shall also not grant authorisation if
the laws, regulations or administrative provisions of a third
country governing one or more natural or legal persons with
institution has close links, or difficulties
which the credit
those laws, regulations or
involved in the enforcement of

(1) OJ L 184, 6.7.2001, p. 1. Directive as last amended by Directive

2005/1/EC.

(a)

(b)

the credit
institution concerned is a subsidiary of an
insurance undertaking or investment firm authorised in the
Community;

the credit institution concerned is a subsidiary of the parent
undertaking of an insurance undertaking or investment
firm authorised in the Community; or

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(c)

the credit institution concerned is controlled by the same
person, whether natural or legal, as controls an insurance
undertaking or investment firm authorised in the Com-
munity.

the same name as they use in the Member State in which their
head office is situated. In the event of there being any danger of
confusion, the host Member State may, for the purposes of
clarification, require that the name be accompanied by certain
explanatory particulars.

3. The relevant competent authorities referred to in paragraphs
1 and 2 shall in particular consult each other when assessing the
suitability of the shareholders and the reputation and experience
of directors involved in the management of another entity of the
same group. They shall exchange any information regarding the
suitability of shareholders and the reputation and experience of
the granting of an
directors which is of
relevance for
authorisation as well as
the ongoing assessment of
compliance with operating conditions.

for

Article 16

Host Member States may not require authorisation or endow-
ment capital for branches of credit institutions authorised in
other Member States. The establishment and supervision of such
branches shall be effected in accordance with Articles 22, 25, 26
(1) to (3), 29 to 37 and 40.

Article 17

1. The competent authorities may withdraw the authorisation
granted to a credit institution only where such an institution:

(a)

(b)

(c)

(d)

does not make use of the authorisation within 12 months,
expressly renounces the authorisation or has ceased to
engage in business for more than six months,
the
Member State concerned has made no provision for the
authorisation to lapse in such cases;

if

has obtained the authorisation through false statements or
any other irregular means;

no longer fulfils the conditions under which authorisation
was granted;

no longer possesses sufficient own funds or can no longer
be relied on to fulfil its obligations towards its creditors, and
in particular no longer provides security for the assets
entrusted to it; or

(e)

falls within one of the other cases where national
provides for withdrawal of authorisation.

law

2. Reasons shall be given for any withdrawal of authorisation
and those concerned informed thereof. Such withdrawal shall be
notified to the Commission.

Article 19

1. The Member States shall require any natural or legal person
who proposes to hold, directly or indirectly, a qualifying holding
in a credit institution first to inform the competent authorities,
telling them of the size of the intended holding. Such a person
shall likewise inform the competent authorities if he proposes to
increase his qualifying holding so that the proportion of the
voting rights or of the capital held by him would reach or exceed
20 %, 33 % or 50 % or so that the credit institution would
become his subsidiary.

Without prejudice to paragraph 2, the competent authorities
shall have a maximum of three months from the date of the
notification provided for in the first and second subparagraphs to
oppose such a plan if, in view of the need to ensure sound and
prudent management of
the credit institution, they are not
satisfied as to the suitability of the person concerned. If they do
not oppose the plan, they may fix a maximum period for its
implementation.

If the person proposing to acquire the holdings referred to in
2.
paragraph 1 is a credit institution,
insurance undertaking or
investment firm authorised in another Member State or the
parent undertaking of a credit institution, insurance undertaking
or investment firm authorised in another Member State or a
natural or legal person controlling a credit institution, insurance
undertaking or investment firm authorised in another Member
State, and if, as a result of that acquisition, the credit institution
in which the acquirer proposes to hold a holding would become
the
a subsidiary or subject
assessment of
to the prior
consultation provided for in Article 15.

the acquisition shall be subject

to the control of

the acquirer,

Article 20

The Member States shall require any natural or legal person who
proposes to dispose, directly or indirectly, of a qualifying holding
in a credit institution first to inform the competent authorities,
telling them of the size of his intended holding. Such a person
shall likewise inform the competent authorities if he proposes to
reduce his qualifying holding so that the proportion of the
voting rights or of the capital held by him would fall below 20 %,
33 % or 50 % or so that the credit institution would cease to be
his subsidiary.

Article 18

Article 21

For the purposes of exercising their activities, credit institutions
may, notwithstanding any provisions in the host Member State
concerning the use of the words ‘bank’, ‘savings bank’ or other
banking names, use throughout the territory of the Community

shall, on becoming aware of any
1. Credit
acquisitions or disposals of holdings in their capital that cause

institutions

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holdings to exceed or fall below one of the thresholds referred to
in Article 19(1) and Article 20, inform the competent authorities
of those acquisitions or disposals.

TITLE III

PROVISIONS CONCERNING THE FREEDOM OF
ESTABLISHMENT AND THE FREEDOM TO PROVIDE SERVICES

the names of

inform the competent
They shall also, at least once a year,
authorities of
shareholders and members
possessing qualifying holdings and the sizes of such holdings
as shown, for example, by the information received at the annual
general meetings of shareholders and members or as a result of
compliance with the regulations relating to companies listed on
stock exchanges.

2. The Member States shall require that, where the influence
exercised by the persons referred to in Article 19(1) is likely to
operate to the detriment of the prudent and sound management
of the institution, the competent authorities shall take appro-
priate measures to put an end to that situation. Such measures
may consist
in injunctions, sanctions against directors and
managers, or the suspension of the exercise of the voting rights
attaching to the shares held by the shareholders or members in
question.

Similar measures shall apply to natural or legal persons who fail
to comply with the obligation to provide prior information, as
laid down in Article 19(1).

If a holding is acquired despite the opposition of the competent
authorities, the Member States shall, regardless of any other
sanctions to be adopted, provide either for exercise of
the
corresponding voting rights to be suspended, or for the nullity of
votes cast or for the possibility of their annulment.

3.
In determining a qualifying holding and other levels of
holding referred to in this Article, the voting rights referred to in
Article 92 of Directive 2001/34/EC shall be taken into
consideration.

S e c t i o n 1

C r e d i t i n s t i t u t i o n s

Article 23

The Member States shall provide that the activities listed in
Annex I may be carried on within their territories, in accordance
with Articles 25, 26(1) to (3), 28(1) and (2) and 29 to 37 either
by the establishment of a branch or by way of the provision of
services, by any credit institution authorised and supervised by
the competent authorities of another Member State, provided
that such activities are covered by the authorisation.

S e c t i o n 2

F i n a n c i a l

i n s t i t u t i o n s

Article 24

1. The Member States shall provide that the activities listed in
Annex I may be carried on within their territories, in accordance
with Articles 25, 26(1) to (3), 28(1) and (2) and 29 to 37, either
by the establishment of a branch or by way of the provision of
services, by any financial institution from another Member State,
whether a subsidiary of a credit institution or the jointly-owned
subsidiary of two or more credit institutions, the memorandum
and Articles of association of which permit the carrying on of
those activities and which fulfils each of the following conditions:

(a)

the parent undertaking or undertakings shall be authorised
as credit institutions in the Member State by the law of
which the financial institution is governed;

Article 22

(b)

the activities in question shall actually be carried on within
the territory of the same Member State;

1. Home Member State competent authorities shall require that
every credit institution have robust governance arrangements,
which include a clear organisational structure with well defined,
transparent and consistent
responsibility, effective
processes to identify, manage, monitor and report the risks it
is or might be exposed to, and adequate internal control
mechanisms,
including sound administrative and accounting
procedures.

lines of

(c)

(d)

the parent undertaking or undertakings shall hold 90 % or
more of the voting rights attaching to shares in the capital
of the financial institution;

the parent undertaking or undertakings shall satisfy the
competent authorities regarding the prudent management
of the financial institution and shall have declared, with the
consent of the relevant home Member State competent
authorities, that they jointly and severally guarantee the
commitments entered into by the financial institution; and

2. The arrangements, processes and mechanisms referred to in
paragraph 1 shall be comprehensive and proportionate to the
nature, scale and complexity of the credit institution's activities.
The technical criteria laid down in Annex V shall be taken into
account.

(e)

the financial institution shall be effectively included, for the
in the consolidated
activities in question in particular,
supervision of the parent undertaking, or of each of the

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parent undertakings, in accordance with Title V, Chapter 4,
Section 1, in particular for the purposes of the minimum
own funds requirements set out in Article 75 for the
control of
the
limitation of holdings provided for in Articles 120 to 122.

large exposures and for purposes of

Compliance with these conditions shall be verified by the
competent authorities of the home Member State and the latter
shall supply the financial
institution with a certificate of
compliance which shall form Part of the notification referred
to in Articles 25 and 28.

The competent authorities of the home Member State shall
ensure the supervision of the financial institution in accordance
with Articles 10(1), 19 to 22, 40, 42 to 52 and 54.

paragraph 2 communicate that information to the competent
authorities of the host Member State and shall inform the credit
institution accordingly.

The home Member State's competent authorities shall also
communicate the amount of own funds and the sum of the
capital requirements under Article 75 of the credit institution.

By way of derogation from the second subparagraph, in the case
referred to in Article 24, the home Member State's competent
authorities shall communicate the amount of own funds of the
financial institution and the sum of the consolidated own funds
and consolidated capital requirements under Article 75 of the
credit institution which is its parent undertaking.

If a financial

referred to in the first
2.
institution as
the
subparagraph of paragraph 1 ceases to fulfil any of
conditions imposed, the home Member State shall notify the
competent authorities of the host Member State and the activities
carried on by that financial institution in the host Member State
shall become subject to the legislation of the host Member State.

4. Where the competent authorities of the home Member State
refuse to communicate the information referred to in paragraph
2 to the competent authorities of the host Member State, they
shall give reasons for their refusal
to the credit institution
concerned within three months of receipt of all the information.

3.
Paragraphs 1 and 2 shall apply mutatis mutandis to
subsidiaries of a financial institution as referred to in the first
subparagraph of paragraph 1.

That refusal or a failure to reply, shall be subject to a right to
apply to the courts in the home Member State.

S e c t i o n 3

Article 26

E x e r c i s e o f t h e r i g h t o f e s t a b l i s h m e n t

Article 25

1. A credit institution wishing to establish a branch within the
territory of another Member State shall notify the competent
authorities of its home Member State.

2. Member States shall require every credit institution wishing
to establish a branch in another Member State to provide the
following information when effecting the notification referred to
in paragraph 1:

(a)

(b)

(c)

(d)

the Member State within the territory of which it plans to
establish a branch;

a programme of operations setting out, inter alia, the types
of business envisaged and the structural organisation of the
branch;

the address
documents may be obtained; and

in the host Member State from which

the names of those to be responsible for the management
of the branch.

3. Unless the competent authorities of the home Member State
have reason to doubt
the administrative
structure or the financial situation of
the credit institution,
taking into account the activities envisaged, they shall within
the information referred to in
three months of receipt of

the adequacy of

1. Before the branch of a credit institution commences its
activities the competent authorities of the host Member State
shall, within two months of receiving the information referred to
in Article 25, prepare for the supervision of the credit institution
in accordance with Section 5 and if necessary indicate the
conditions under which, in the interest of the general good, those
activities shall be carried on in the host Member State.

2. On receipt of a communication from the competent
authorities of the host Member State, or in the event of the
expiry of the period provided for in paragraph 1 without receipt
of any communication from the latter, the branch may be
established and may commence its activities.

In the event of a change in any of

3.
the particulars
communicated pursuant to points (b), (c) or (d) of Article 25
(2), a credit institution shall give written notice of the change in
question to the competent authorities of the home and host
Member States at least one month before making the change so
as to enable the competent authorities of the home Member
State to take a decision pursuant to Article 25 and the competent
authorities of the host Member State to take a decision on the
change pursuant to paragraph 1 of this Article.

commenced their activities,

in
4. Branches which have
accordance with the provisions in force in their host Member
States, before 1 January 1993, shall be presumed to have been
subject
to the procedure laid down in Article 25 and in
paragraphs 1 and 2 of this Article. They shall be governed, from
1 January 1993, by paragraph 3 of this Article and by Articles 23
and 43 as well as Sections 2 and 5.

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Article 27

Any number of places of business set up in the same Member
State by a credit institution with headquarters in another Member
State shall be regarded as a single branch.

S e c t i o n 4

E x e r c i s e o f t h e f r e e d o m t o p r o v i d e s e r v i c e s

Article 28

1. Any credit institution wishing to exercise the freedom to
provide services by carrying on its activities within the territory
of another Member State for the first time shall notify the
competent authorities of
the
activities on the list in Annex I which it intends to carry on.

the home Member State, of

2. The competent authorities of the home Member State shall,
within one month of receipt of the notification provided for in
paragraph 1, send that notification to the competent authorities
of the host Member State.

3. This Article shall not affect
institutions providing services before 1 January 1993.

rights acquired by credit

The competent authorities of the home Member State shall, at
the earliest opportunity, take all appropriate measures to ensure
that the credit institution concerned puts an end to that irregular
situation. The nature of those measures shall be communicated
to the competent authorities of the host Member State.

3.
If, despite the measures taken by the home Member State or
because such measures prove inadequate or are not available in
the Member State in question, the credit institution persists in
violating the legal rules referred to in paragraph 1 in force in the
host Member State, the latter State may, after informing the
competent authorities of
take
appropriate measures to prevent or to punish further irregula-
rities and,
that credit
in so far as is necessary, to prevent
transactions within its
institution from initiating further
territory. The Member States shall ensure that within their
territories it is possible to serve the legal documents necessary for
these measures on credit institutions.

the home Member State,

Article 31

Articles 29 and 30 shall not affect the power of host Member
States to take appropriate measures to prevent or to punish
irregularities committed within their
territories which are
contrary to the legal rules they have adopted in the interests of
the general good. This shall include the possibility of preventing
offending credit institutions from initiating further transactions
within their territories.

S e c t i o n 5

Article 32

P o w e r s o f t h e c o m p e t e n t a u t h o r i t i e s o f t h e
h o s t M e m b e r S t a t e

Article 29

Host Member States may, for statistical purposes, require that all
credit institutions having branches within their territories shall
report periodically on their activities in those host Member States
to the competent authorities of those host Member States.

In discharging the responsibilities imposed on them in Article 41,
host Member States may require that branches of credit
institutions
from other Member States provide the same
information as they require from national credit institutions
for that purpose.

Article 30

1. Where the competent authorities of a host Member State
ascertain that a credit institution having a branch or providing
services within its territory is not complying with the legal
provisions adopted in that State pursuant to the provisions of
this Directive involving powers of
the host Member State's
competent authorities, those authorities shall require the credit
institution concerned to put an end to that irregular situation.

2.
If the credit institution concerned fails to take the necessary
steps, the competent authorities of the host Member State shall
inform the competent authorities of the home Member State
accordingly.

Any measure taken pursuant to Article 30(2) and (3), or Article
31 involving penalties or restrictions on the exercise of the
freedom to provide services shall be properly justified and
communicated to the credit institution concerned. Every such
measure shall be subject to a right of appeal to the courts in the
Member State in which it was taken.

Article 33

the host Member State may,

Before following the procedure provided for in Article 30, the
competent authorities of
in
take any precautionary measures necessary to
emergencies,
protect the interests of depositors, investors and others to whom
services are provided. The Commission and the competent
authorities of
the other Member States concerned shall be
informed of such measures at the earliest opportunity.

The Commission may, after consulting the competent authorities
of the Member States concerned, decide that the Member State in
question shall amend or abolish those measures.

Article 34

Host Member States may exercise the powers conferred on them
under this Directive by taking appropriate measures to prevent
or to punish irregularities committed within their territories.
This shall include the possibility of preventing offending credit
institutions from initiating further transactions within their
territories.

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Article 35

S e c t i o n 2

In the event of the withdrawal of authorisation, the competent
authorities of the host Member State shall be informed and shall
institution
take appropriate measures to prevent
concerned from initiating further transactions within its territory
and to safeguard the interests of depositors.

the credit

Article 36

The Member States shall inform the Commission of the number
and type of cases in which there has been a refusal pursuant to
Articles 25 and 26(1) to (3) or in which measures have been
taken in accordance with Article 30(3).

Article 37

This Section shall not prevent credit institutions with head
offices in other Member States from advertising their services
through all available means of communication in the host
Member State, subject to any rules governing the form and the
content of such advertising adopted in the interests of the general
good.

TITLE IV

RELATIONS WITH THIRD COUNTRIES

S e c t i o n 1

N o t i f i c a t i o n i n r e l a t i o n t o t h i r d c o u n t r i e s '
u n d e r t a k i n g s a n d c o n d i t i o n s o f a c c e s s t o t h e
m a r k e t s o f t h e s e c o u n t r i e s

Article 38

1. Member States shall not apply to branches of credit
institutions having their head office outside the Community,
when commencing or carrying on their business, provisions
which result in more favourable treatment than that accorded to
branches of credit institutions having their head office in the
Community.

2. The competent authorities shall notify the Commission and
the European Banking Committee of all authorisations for
branches granted to credit institutions having their head office
outside the Community.

C o o p e r a t i o n w i t h t h i r d c o u n t r i e s '
c o m p e t e n t a u t h o r i t i e s r e g a r d i n g s u p e r v i s i o n
o n a c o n s o l i d a t e d b a s i s

Article 39

1. The Commission may submit proposals to the Council,
either at the request of a Member State or on its own initiative,
for the negotiation of agreements with one or more third
countries regarding the means of exercising supervision on a
consolidated basis over the following:

(a)

(b)

credit institutions the parent undertakings of which have
their head offices in a third country; or

credit institutions situated in third countries the parent
institutions or
undertakings of which, whether credit
financial holding companies, have their head offices in
the Community.

2. The agreements
particular, seek to ensure the following:

referred to in paragraph 1 shall,

in

(a)

(b)

that the competent authorities of the Member States are
able to obtain the information necessary for the super-
consolidated financial
vision, on the basis of
situations, of credit
financial holding
companies situated in the Community and which have as
subsidiaries credit
institutions
situated outside the Community, or holding participation
in such institutions; and

their
institutions or

institutions or

financial

that the competent authorities of third countries are able to
obtain the information necessary for the supervision of
parent undertakings the head offices of which are situated
within their territories and which have as subsidiaries credit
institutions or financial institutions situated in one or more
Member States or holding participation in such institutions.

3. Without prejudice to Article 300(1) and (2) of the Treaty,
the Commission shall, with the assistance of
the European
Banking Committee, examine the outcome of the negotiations
referred to in paragraph 1 and the resulting situation.

TITLE V

PRINCIPLES AND TECHNICAL INSTRUMENTS FOR
PRUDENTIAL SUPERVISION AND DISCLOSURE

CHAPTER 1

Principles of prudential supervision

S e c t i o n 1

3. Without prejudice to paragraph 1, the Community may,
through agreements concluded with one or more third countries,
agree to apply provisions which accord to branches of a credit
institution having its head office outside the Community
identical treatment throughout the territory of the Community.

Article 40

1. The prudential supervision of a credit institution, including
that of the activities it carries on accordance with Articles 23 and

C o m p e t e n c e o f h o m e a n d h o s t M e m b e r S t a t e

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24, shall be the responsibility of the competent authorities of the
home Member State, without prejudice to those provisions of
this Directive which give responsibility to the competent
authorities of the host Member State.

Paragraph 1 shall not prevent supervision on a consolidated

2.
basis pursuant to this Directive.

Article 41

Host Member States shall, pending further coordination, retain
responsibility in cooperation with the competent authorities of
the home Member State for the supervision of the liquidity of the
branches of credit institutions.

Without prejudice to the measures necessary for the reinforce-
ment of the European Monetary System, host Member States
shall retain complete responsibility for the measures resulting
from the implementation of their monetary policies.

Such measures may not provide for discriminatory or restrictive
treatment based on the fact that a credit institution is authorised
in another Member State.

Article 42

The competent authorities of the Member States concerned shall
collaborate closely in order to supervise the activities of credit
institutions operating, in particular through a branch, in one or
more Member States other than that in which their head offices
are situated. They shall supply one another with all information
concerning the management and ownership of such credit
institutions that is likely to facilitate their supervision and the
examination of the conditions for their authorisation, and all
information likely to facilitate the monitoring of such institu-
tions,
in particular with regard to liquidity, solvency, deposit
guarantees, the limiting of large exposures, administrative and
accounting procedures and internal control mechanisms.

Article 43

1. Host Member States shall provide that, where a credit
institution authorised in another Member State carries on its
activities through a branch, the competent authorities of the
informed the
home Member State may, after having first
competent authorities of
the host Member State, carry out
themselves or through the intermediary of persons they appoint
for that purpose on-the-spot verification of the information
referred to in Article 42.

2. The competent authorities of the home Member State may
also, for purposes of the verification of branches, have recourse
to one of the other procedures laid down in Article 141.

Paragraphs 1 and 2 shall not affect

3.
the
competent authorities of the host Member State to carry out, in
the discharge of their responsibilities under this Directive, on-
the-spot verifications of branches established within their
territory.

the right of

S e c t i o n 2

E x c h a n g e o f

i n f o r m a t i o n a n d p r o f e s s i o n a l

s e c r e c y

Article 44

1. Member States shall provide that all persons working for or
who have worked for the competent authorities, as well as
auditors or experts acting on behalf of the competent authorities,
shall be bound by the obligation of professional secrecy.

information which they may receive in the
No confidential
course of their duties may be divulged to any person or authority
whatsoever, except in summary or collective form, such that
individual credit
institutions cannot be identified, without
prejudice to cases covered by criminal law.

Nevertheless, where a credit
institution has been declared
bankrupt or is being compulsorily wound up, confidential
information which does not concern third parties involved in
attempts to rescue that credit institution may be divulged in civil
or commercial proceedings.

2.
Paragraph 1 shall not prevent the competent authorities of
the various Member States from exchanging information in
accordance with this Directive and with other Directives
applicable to credit
information shall be
institutions. That
subject to the conditions of professional secrecy indicated in
paragraph 1.

Article 45

Competent authorities receiving confidential information under
Article 44 may use it only in the course of their duties and only
for the following purposes:

(a)

to check that the conditions governing the taking-up of the
business of credit institutions are met and to facilitate
monitoring, on a non-consolidated or consolidated basis, of
the conduct of such business, especially with regard to the
large exposures, and
monitoring of
administrative and accounting procedures and internal
control mechanisms;

liquidity, solvency,

(b)

to impose penalties;

(c)

(d)

in an administrative appeal against a decision of
competent authority; or

the

in court proceedings initiated pursuant to Article 55 or to
special provisions provided for in this in other Directives
adopted in the field of credit institutions.

Article 46

Member States may conclude cooperation agreements, providing
for exchanges of information, with the competent authorities of
third countries or with authorities or bodies of third countries as

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defined in Articles 47 and 48(1) only if the information disclosed
is subject to guarantees of professional secrecy at least equivalent
to those referred to in Article 44(1). Such exchange of
information shall be for
the purpose of performing the
supervisory task of the authorities or bodies mentioned.

Where the information originates in another Member State, it
may not be disclosed without the express agreement of the
competent authorities which have disclosed it and, where
appropriate, solely for the purposes for which those authorities
gave their agreement.

(b)

information received in this context shall be subject to the
conditions of professional secrecy specified in Article 44(1);
and

(c) where the information originates in another Member State,
it may not be disclosed without the express agreement of
the competent authorities which have disclosed it and,
where appropriate, solely for the purposes for which those
authorities gave their agreement.

Article 47

Member States shall communicate to the Commission and to the
other Member States the names of the authorities which may
receive information pursuant to this paragraph.

Articles 44(1) and 45 shall not preclude the exchange of
information within a Member State, where there are two or more
competent authorities in the same Member State, or between
Member States, between competent authorities and the follow-
ing:

(a)

(b)

(c)

authorities entrusted with the public duty of supervising
other financial organisations and insurance companies and
the authorities responsible for the supervision of financial
markets;

bodies involved in the liquidation and bankruptcy of credit
institutions and in other similar procedures; and

persons responsible for carrying out statutory audits of the
accounts of credit institutions and other financial institu-
tions;

in the discharge of their supervisory functions.

Articles 44(1) and 45 shall not preclude the disclosure to bodies
which administer deposit-guarantee schemes of
information
necessary to the exercise of their functions.

In both cases, the information received shall be subject to the
conditions of professional secrecy specified in Article 44(1).

Article 48

1. Notwithstanding Articles 44 to 46, Member States may
authorise exchange of
information between the competent
authorities and the following:

(a)

(b)

the authorities
responsible for overseeing the bodies
involved in the liquidation and bankruptcy of credit
institutions and in other similar procedures; and

the authorities responsible for overseeing persons charged
the accounts of
with carrying out statutory audits of
insurance undertakings, credit
investment
firms and other financial institutions.

institutions,

In such cases, Member States shall require fulfilment of at least
the following conditions:

2. Notwithstanding Articles 44 to 46, Member States may,
with the aim of strengthening the stability, including integrity, of
information
the financial system, authorise the exchange of
between the competent authorities and the authorities or bodies
responsible under law for the detection and investigation of
breaches of company law.

In such cases Member States shall require fulfilment of at least
the following conditions:

(a)

the information is for the purpose of performing the task
referred to in the first subparagraph;

(b)

to the
information received in this context
conditions of professional secrecy specified in Article 44(1);
and

is subject

(c) where the information originates in another Member State,
it may not be disclosed without the express agreement of
the competent authorities which have disclosed it and,
where appropriate, solely for the purposes for which those
authorities gave their agreement.

Where, in a Member State, the authorities or bodies referred to in
the first subparagraph perform their
task of detection or
investigation with the aid, in view of their specific competence,
of persons appointed for that purpose and not employed in the
public sector, the possibility of exchanging information provided
for in the first subparagraph may be extended to such persons
under the conditions specified in the second subparagraph.

In order to implement the third subparagraph, the authorities or
bodies referred to in the first subparagraph shall communicate to
the competent authorities which have disclosed the information,
the names and precise responsibilities of the persons to whom it
is to be sent.

Member States shall communicate to the Commission and to the
other Member States the names of the authorities or bodies
which may receive information pursuant to this Article.

(a)

the information shall be for the purpose of performing the
supervisory task referred to in the first subparagraph;

The Commission shall draw up a report on the application of the
provisions of this Article.

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Article 49

S e c t i o n 3

This Section shall not prevent a competent authority from
transmitting information to the following for the purposes of
their tasks:

(a)

central banks and other bodies with a similar function in
their capacity as monetary authorities; and

(b) where appropriate, to other public authorities responsible

for overseeing payment systems.

This Section shall not prevent such authorities or bodies from
communicating to the competent authorities such information
as they may need for the purposes of Article 45.

Information received in this context shall be subject to the
conditions of professional secrecy specified in Article 44(1).

Article 50

Notwithstanding Articles 44(1) and 45, the Member States may,
by virtue of provisions laid down by law, authorise the disclosure
of certain information to other departments of their central
government administrations responsible for legislation on the
supervision of credit institutions, financial institutions, invest-
ment services and insurance companies and to inspectors acting
on behalf of those departments.

However, such disclosures may be made only where necessary
for reasons of prudential control.

Article 51

The Member States shall provide that information received under
Articles 44(2) and 47 and information obtained by means of the
on-the-spot verification referred to in Article 43(1) and (2) may
never be disclosed in the cases referred to in Article 50 except
with the express consent of the competent authorities which
disclosed the information or of the competent authorities of the
Member State in which on-the-spot verification was carried out.

D u t y o f p e r s o n s r e s p o n s i b l e f o r t h e l e g a l
c o n t r o l o f a n n u a l a n d c o n s o l i d a t e d a c c o u n t s

Article 53

least

1. Member States shall provide at
that any person
authorised within the meaning of Directive 84/253/EEC (1)
performing in a credit institution the task described in Article 51
of Directive 78/660/EEC, Article 37 of Directive 83/349/EEC or
Article 31 of Directive 85/611/EEC (2), or any other statutory
task, shall have a duty to report promptly to the competent
authorities any fact or decision concerning that credit institution
of which he has become aware while carrying out that task
which is liable to:

(a)

(b)

(c)

constitute a material breach of the laws, regulations or
administrative provisions which lay down the conditions
governing authorisation or which specifically govern
pursuit of the activities of credit institutions;

affect the continuous functioning of the credit institution;
or

lead to refusal to certify the accounts or to the expression of
reservations.

Member States shall provide at least that that person shall
likewise have a duty to report any fact or decision of which he
becomes aware in the course of carrying out a task as described
in the first sub-paragraph in an undertaking having close links
resulting from a control relationship with the credit institution
within which he is carrying out that task.

2. The disclosure in good faith to the competent authorities, by
persons authorised within the meaning of Directive 84/253/EEC,
of any fact or decision referred to in paragraph 1 shall not
constitute a breach of any restriction on disclosure of
information imposed by contract or by any legislative, regulatory
or administrative provision and shall not involve such persons in
liability of any kind.

S e c t i o n 4

Article 52

P o w e r o f s a n c t i o n a n d r i g h t t o a p p l y t o t h e
c o u r t s

This Section shall not prevent the competent authorities of a
Member State from communicating the information referred to
in Articles 44 to 46 to a clearing house or other similar body
recognised under national law for the provision of clearing or
settlement services for one of their national markets if they
consider that it is necessary to communicate the information in
order to ensure the proper functioning of
those bodies in
relation to defaults or potential defaults by market participants.
The information received in this context shall be subject to the
conditions of professional secrecy specified in Article 44(1).

The Member States shall, however, ensure that
information
received under Article 44(2) may not be disclosed in the
circumstances referred to in this Article without the express
consent of the competent authorities which disclosed it.

Article 54

Without prejudice to the procedures for the withdrawal of
authorisations and the provisions of criminal law, the Member
States shall provide that their respective competent authorities
may, as against credit institutions, or those who effectively

(1) Eighth Council Directive 84/253/EEC of 10 April 1984 on the
approval of persons responsible for carrying out the statutory audits
of accounting documents (OJ L 126, 12.5.1984, p. 20).

(2) Council Directive 85/611/EEC of 20 December 1985 on the
coordination of
laws, regulations and administrative provisions
relating to undertakings for collective investment in transferable
securities (UCITS) (OJ L 375, 31.12.1985, p. 3). Directive as last
amended by Directive 2005/1/EC.

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control the business of credit institutions, which breach laws,
regulations or administrative provisions concerning the super-
vision or pursuit of their activities, adopt or impose penalties or
measures aimed specifically at ending the observed breaches or
the causes of such breaches.

(g)

the commitments of the members of credit institutions set
up as cooperative societies and the joint and several
commitments of
the borrowers of certain institutions
organised as funds, as referred to in Article 64(1); and

Article 55

(h)

fixed-term cumulative preferential shares and subordinated
loan capital as referred to in Article 64(3).

laws,

institution in pursuance of

Member States shall ensure that decisions taken in respect of a
regulations and
credit
administrative provisions adopted in accordance with this
Directive may be subject to the right to apply to the courts.
The same shall apply where no decision is taken, within six
in respect of an application for
months of
authorisation which contains all the information required under
the provisions in force.

its submission,

The following items shall be deducted in accordance with Article
66:

(i)

own shares at book value held by a credit institution;

CHAPTER 2

(j)

intangible assets within the meaning of Article 4(9)
(‘Assets’) of Directive 86/635/EEC;

Technical instruments of prudential supervision

S e c t i o n 1

O w n f u n d s

Article 56

Wherever a Member State lays down by law, regulation or
administrative action a provision in implementation of Com-
munity legislation concerning the prudential supervision of an
operative credit institution which uses the term or refers to the
concept of own funds, it shall bring this term or concept into line
with the definition given in Articles 57 to 61 and Articles 63 to
66.

Article 57

Subject to the limits imposed in Article 66, the unconsolidated
own funds of credit institutions shall consist of the following
items:

(a)

(b)

(c)

(d)

(e)

capital within the meaning of Article 22 of Directive 86/
in so far as it has been paid up, plus share
635/EEC,
premium accounts but excluding cumulative preferential
shares;

reserves within the meaning of Article 23 of Directive 86/
635/EEC and profits and losses brought forward as a result
of the application of the final profit or loss;

funds for general banking risks within the meaning of
Article 38 of Directive 86/635/EEC;

revaluation reserves within the meaning of Article 33 of
Directive 78/660/EEC;

value adjustments within the meaning of Article 37(2) of
Directive 86/635/EEC;

(f)

other items within the meaning of Article 63;

(k) material losses of the current financial year;

(l)

holdings in other credit and financial institutions amount-
ing to more than 10 % of their capital;

(m)

subordinated claims and instruments referred to in Article
63 and Article 64(3) which a credit institution holds in
respect of credit and financial institutions in which it has
holdings exceeding 10 % of the capital in each case;

(n)

holdings in other credit and financial institutions of up to
10 % of their capital, the subordinated claims and the
instruments referred to in Article 63 and Article 64(3)
which a credit institution holds in respect of credit and
financial institutions other than those referred to in points
(l) and (m) in respect of the amount of the total of such
subordinated claims and instruments which
holdings,
exceed 10 % of that credit institution's own funds calculated
before the deduction of items in points (l) to (p);

(o)

participations within the meaning of Article 4(10) which a
credit institution holds in:

(i)

insurance undertakings within the meaning of Article
6 of Directive 73/239/EEC (1), Article 4 of Directive
2002/83/EC (2) or Article 1(b) of Directive 98/78/
EC (3),

(1) First Council Directive 73/239/EEC of 24 July 1973 on the
coordination of
laws, regulations and administrative provisions
relating to the taking-up and pursuit of the business of direct
insurance other than life assurance (OJ L 228, 16.8.1973, p. 3).
Directive as last amended by Directive 2005/1/EC.

(2) Directive 2002/83/EC of

the European Parliament and of

the
Council of 5 November 2002 concerning life assurance (OJ L 345,
19.12.2002, p. 1). Directive as last amended by Directive 2005/1/EC.
(3) Directive 98/78/EC of the European Parliament and of the Council of
27 October 1998 on the supplementary supervision of insurance
undertakings in an insurance group (OJ L 330, 5.12.1998, p. 1).
Directive as last amended by Directive 2005/1/EC.

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(ii)

reinsurance undertakings within the meaning of
Article 1(c) of Directive 98/78/EC, or

scope of consolidation. The method chosen shall be applied in a
consistent manner over time.

(iii)

insurance holding companies within the meaning of
Article 1(i) of Directive 98/78/EC;

Article 60

(p)

each of the following items which the credit institution
holds in respect of the entities defined in point (o) in which
it holds a participation:

(i)

instruments referred to in Article 16(3) of Directive
73/239/EEC, and

(ii)

instruments referred to in Article 27(3) of Directive
2002/83/EC;

(q)

for credit institutions calculating risk-weighted exposure
amounts under Section 3, Subsection 2, negative amounts
resulting from the calculation in Annex VII, Part 1, point 36
and expected loss amounts calculated in accordance with
Annex VII, Part 1 points 32 and 33; and

(r)

the exposure amount of securitisation positions which
receive a risk weight of 1 250 % under Annex IX, Part 4,
calculated in the manner there specified.

For the purposes of point (b), the Member States may permit
inclusion of interim profits before a formal decision has been
these profits have been verified by persons
taken only if
responsible for the auditing of the accounts and if it is proved to
the satisfaction of the competent authorities that the amount
thereof has been evaluated in accordance with the principles set
out in Directive 86/635/EEC and is net of any foreseeable charge
or dividend.

Member States may provide that for the calculation of own funds
on a stand-alone basis, credit institutions subject to supervision
on a consolidated basis in accordance with Chapter 4, Section 1,
or to supplementary supervision in accordance with Directive
2002/87/EC, need not deduct the items referred to in points (l) to
(p) of Article 57 which are held in credit institutions, financial
institutions, insurance or reinsurance undertakings or insurance
holding companies, which are included in the scope of
consolidated or supplementary supervision.

This provision shall apply to all the prudential rules harmonised
by Community acts.

Article 61

The concept of own funds as defined in points (a) to (h) of Article
57 embodies a maximum number of items and amounts. The use
of those items and the fixing of lower ceilings, and the deduction
of items other than those listed in points (i) to (r) of Article 57
shall be left to the discretion of the Member States.

The items listed in points (a) to (e) of Article 57 shall be available
to a credit institution for unrestricted and immediate use to cover
risks or losses as soon as these occur. The amount shall be net of
any foreseeable tax charge at the moment of its calculation or be
suitably adjusted in so far as such tax charges reduce the amount
up to which these items may be applied to cover risks or losses.

Article 62

In the case of a credit institution which is the originator of a
securitisation, net gains arising from the capitalisation of future
income from the securitised assets and providing credit
enhancement to positions in the securitisation shall be excluded
from the item specified in point (b).

Member States may report to the Commission on the progress
achieved in convergence with a view to a common definition of
own funds. On the basis of these reports the Commission shall, if
appropriate, by 1 January 2009, submit a proposal to the
European Parliament and to the Council for amendment of this
Section.

Article 58

Article 63

reinsurance undertaking or

Where shares in another credit institution, financial institution,
insurance holding
insurance or
company are held temporarily for the purposes of a financial
assistance operation designed to reorganise and save that entity,
the competent authority may waive the provisions on deduction
referred to in points (l) to (p) of Article 57.

Article 59

As an alternative to the deduction of the items referred to in
points (o) and (p) of Article 57, Member States may allow their
credit institutions to apply mutatis mutandis methods 1, 2 or 3
of Annex I to Directive 2002/87/EC. Method 1 (accounting
consolidation) may be applied only if the competent authority is
confident about the level of integrated management and internal
control regarding the entities which would be included in the

1. The concept of own funds used by a Member State may
include other
their legal or
items provided that, whatever
they have the following
accounting designations might be,
characteristics:

(a)

(b)

(c)

they are freely available to the credit institution to cover
normal banking risks where revenue or capital losses have
not yet been identified;

their existence is disclosed in internal accounting records;
and

their amount is determined by the management of the
credit institution, verified by independent auditors, made
known to the competent authorities and placed under the
supervision of the latter.

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Securities of indeterminate duration and other instruments
2.
that fulfil the following conditions may also be accepted as other
items:

they may not be reimbursed on the bearer's initiative or
without the prior agreement of the competent authority;

the debt agreement shall provide for the credit institution to
have the option of deferring the payment of interest on the
debt;

3. Member States or the competent authorities may include
fixed-term cumulative preferential shares referred to in point (h)
of Article 57 and subordinated loan capital referred to in that
provision in own funds, if binding agreements exist under which,
in the event of the bankruptcy or liquidation of the credit
institution, they rank after the claims of all other creditors and
are not to be repaid until all other debts outstanding at the time
have been settled.

Subordinated loan capital shall fulfil the following additional
criteria:

the lender's claims on the credit institution shall be wholly
subordinated to those of all non-subordinated creditors;

(a)

only fully paid-up funds may be taken into account;

(a)

(b)

(c)

(d)

the documents governing the issue of the securities shall
provide for debt and unpaid interest to be such as to absorb
losses, whilst leaving the credit institution in a position to
continue trading; and

(e)

only fully paid-up amounts shall be taken into account.

To these securities and other
instruments may be added
cumulative preferential shares other than those referred to in
point (h) of Article 57.

3.
For credit institutions calculating risk-weighted exposure
amounts under Section 3, Subsection 2, positive amounts
resulting from the calculation in Annex VII, Part 1, point 36,
may, up to 0,6 % of risk weighted exposure amounts calculated
under Subsection 2, be accepted as other items. For these credit
institutions value adjustments and provisions included in the
calculation referred to in Annex VII, Part 1, point 36 and value
adjustments and provisions for exposures referred to in point (e)
of Article 57 shall not be included in own funds other than in
accordance with this paragraph. For
risk-
weighted exposure amounts shall not include those calculated
in respect of securitisation positions which have a risk weight of
1 250 %.

these purposes,

Article 64

1. The commitments of the members of credit institutions set
up as cooperative societies referred to in point (g) of Article 57,
shall comprise those societies' uncalled capital, together with the
legal commitments of
those cooperative
societies to make additional non-refundable payments should
in which case it shall be
the credit institution incur a loss,
possible to demand those payments without delay.

the members of

The joint and several commitments of borrowers in the case of
credit institutions organised as funds shall be treated in the same
way as the preceding items.

(b)

the loans involved shall have an original maturity of at least
five years, after which they may be repaid;

(c)

(d)

the extent to which they may rank as own funds shall be
gradually reduced during at least the last five years before
the repayment date; and

the loan agreement shall not include any clause providing
that in specified circumstances, other than the winding-up
of the credit institution, the debt shall become repayable
before the agreed repayment date.

For the purposes of point (b) of the second subparagraph, if the
maturity of the debt is not fixed, the loans involved shall be
repayable only subject to five years' notice unless the loans are no
longer considered as own funds or unless the prior consent of
the competent authorities is specifically required for early
repayment. The competent authorities may grant permission
for the early repayment of such loans provided the request is
made at the initiative of the issuer and the solvency of the credit
institution in question is not affected.

4. Credit institutions shall not include in own funds either the
fair value reserves related to gains or losses on cash flow hedges
of financial instruments measured at amortised cost, or any gains
or losses on their liabilities valued at fair value that are due to
changes in the credit institutions' own credit standing.

Article 65

1. Where the calculation is to be made on a consolidated basis,
the consolidated amounts relating to the items listed under
Article 57 shall be used in accordance with the rules laid down in
Chapter 4, Section 1. Moreover, the following may, when they are
credit (‘negative’) items, be regarded as consolidated reserves for
the calculation of own funds:

All such items may be included in own funds in so far as they are
counted as the own funds of institutions of this category under
national law.

(a)

any minority interests within the meaning of Article 21 of
Directive 83/349/EEC, where the global integration method
is used;

2. Member States shall not include in the own funds of public
credit institutions guarantees which they or their local authorities
extend to such entities.

(b)

the first consolidation difference within the meaning of
Articles 19, 30 and 31 of Directive 83/349/EEC;

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(c)

(d)

the translation differences included in consolidated reserves
in accordance with Article 39(6) of Directive 86/635/EEC;
and

any difference resulting from the inclusion of certain
participating interests in accordance with the method
prescribed in Article 33 of Directive 83/349/EEC.

2. Where the items referred to in points (a) to (d) of paragraph
1 are debit (‘positive’)
items, they shall be deducted in the
calculation of consolidated own funds.

Article 66

1. The items referred to in points (d) to (h) of Article 57, shall
be subject to the following limits:

the total of the items in points (d) to (h) may not exceed a
maximum of 100 % of the items in points (a) plus (b) and
(c) minus (i) to (k); and

(a)

(b)

S e c t i o n 2

P r o v i s i o n a g a i n s t r i s k s

S u b s e c t i o n 1

L e v e l o f a p p l i c a t i o n

Article 68

1. Credit institutions shall comply with the obligations laid
down in Articles 22 and 75 and Section 5 on an individual basis.

Every credit institution which is neither a subsidiary in the
2.
Member State where it is authorised and supervised, nor a parent
undertaking, and every credit institution not included in the
consolidation pursuant to Article 73, shall comply with the
obligations laid down in Articles 120 and 123 on an individual
basis.

3.
Every credit institution which is neither a parent under-
taking, nor a subsidiary, and every credit institution not included
in the consolidation pursuant to Article 73, shall comply with
the obligations laid down in Chapter 5 on an individual basis.

the total of the items in points (g) to (h) may not exceed a
maximum of 50 % of the items in points (a) plus (b) and (c)
minus (i) to (k).

Article 69

2. The total of the items in points (l) to (r) of Article 57 shall be
deducted half from the total of the items (a) to (c) minus (i) to (k),
and half from the total of the items (d) to (h) of Article 57, after
application of the limits laid down in paragraph 1 of this Article.
To the extent that half of the total of the items (l) to (r) exceeds
the total of the items (d) to (h) of Article 57, the excess shall be
deducted from the total of the items (a) to (c) minus (i) to (k) of
Article 57. Items in point (r) of Article 57 shall not be deducted if
they have been included in the calculation of risk-weighted
exposure amounts for the purposes of Article 75 as specified in
Annex IX, Part 4.

3.
For the purposes of Sections 5 and 6, the provisions laid
down in this Section shall be read without taking into account
the items referred to in points (q) and (r) of Article 57 and Article
63(3).

4. The competent authorities may authorise credit institutions
to exceed the limits laid down in paragraph 1 in temporary and
exceptional circumstances.

Article 67

Compliance with the conditions laid down in this Section shall
be proved to the satisfaction of the competent authorities.

institution are subject

1. The Member States may choose not to apply Article 68(1) to
any subsidiary of a credit institution, where both the subsidiary
to authorisation and
and the credit
supervision by the Member State concerned, and the subsidiary is
included in the supervision on a consolidated basis of the credit
institution which is the parent undertaking, and all of
the
following conditions are satisfied, in order to ensure that own
funds are distributed adequately among the parent undertaking
and the subsidiaries:

(a)

(b)

there is no current or foreseen material practical or legal
transfer of own funds or
impediment
repayment of liabilities by its parent undertaking;

to the prompt

the parent undertaking satisfies the competent
either
the
authority regarding the prudent management of
subsidiary and has declared, with the consent of
the
competent authority, that it guarantees the commitments
entered into by the subsidiary, or the risks in the subsidiary
are of negligible interest;

(c)

the risk evaluation, measurement and control procedures of
the parent undertaking cover the subsidiary; and

(d)

the parent undertaking holds more than 50 % of the voting
rights attaching to shares in the capital of the subsidiary
and/or has the right to appoint or remove a majority of the
the subsidiary
the management body of
members of
described in Article 11.

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2. The Member States may exercise the option provided for in
paragraph 1 where the parent undertaking is a financial holding
company set up in the same Member State as the credit
institution, provided that it is subject to the same supervision as
that exercised over credit institutions, and in particular to the
standards laid down in Article 71(1).

3. The Member States may choose not to apply Article 68(1) to
a parent credit institution in a Member State where that credit
institution is subject to authorisation and supervision by the
Member State concerned, and it is included in the supervision on
a consolidated basis, and all
the following conditions are
satisfied,
in order to ensure that own funds are distributed
adequately among the parent undertaking and the subsidiaries:

(a)

(b)

there is no current or foreseen material practical or legal
impediment
transfer of own funds or
repayment of liabilities to the parent credit institution in a
Member State; and

to the prompt

the risk evaluation, measurement and control procedures
relevant
for consolidated supervision cover the parent
credit institution in a Member State.

The competent authority which makes use of this paragraph
inform the competent authorities of all other Member
shall
States.

4. Without prejudice to the generality of Article 144, the
the Member States exercising the
competent authority of
discretion laid down in paragraph 3 shall publicly disclose, in
the manner indicated in Article 144:

(a)

(b)

criteria it applies to determine that there is no current or
foreseen material practical or legal
to the
prompt transfer of own funds or repayment of liabilities;

impediment

the number of parent credit institutions which benefit from
the exercise of the discretion laid down in paragraph 3 and
the number of these which incorporate subsidiaries in a
third country; and

(c)

on an aggregate basis for the Member State:

(i)

(ii)

the total amount of own funds on the consolidated
basis of the parent credit institution in a Member
State, which benefits
the
discretion laid down in paragraph 3, which are held
in subsidiaries in a third country;

from the exercise of

the percentage of total own funds on the consolidated
basis of parent credit institutions in a Member State
which benefits from the exercise of the discretion laid
down in paragraph 3, represented by own funds
which are held in subsidiaries in a third country; and

(iii)

the percentage of total minimum own funds required
under Article 75 on the consolidated basis of parent
credit institutions in a Member State, which benefits
the discretion laid down in
from the exercise of

paragraph 3, represented by own funds which are held
in subsidiaries in a third country.

Article 70

1.
Subject to paragraphs 2 to 4 of this Article, the competent
authorities may allow on a case by case basis parent credit
institutions to incorporate in the calculation of their requirement
under Article 68(1) subsidiaries which meet the conditions laid
down in points (c) and (d) of Article 69(1), and whose material
exposures or material
liabilities are to that parent credit
institution.

2. The treatment in paragraph 1 shall be allowed only where
the parent credit institution demonstrates fully to the competent
authorities the circumstances and arrangements, including legal
arrangements, by virtue of which there is no material practical or
legal impediment, and none are foreseen, to the prompt transfer
of own funds, or repayment of
liabilities when due by the
subsidiary to its parent undertaking.

3. Where a competent authority exercises the discretion laid
down in paragraph 1, it shall on a regular basis and not less than
once a year inform the competent authorities of all the other
Member States of the use made of paragraph 1 and of the
circumstances and arrangements referred to in paragraph 2.
Where the subsidiary is in a third country,
the competent
authorities shall provide the same information to the competent
authorities of that third country as well.

4. Without prejudice to the generality of Article 144, a
competent authority which exercises the discretion laid down in
paragraph 1 shall publicly disclose, in the manner indicated in
Article 144:

(a)

(b)

the criteria it applies to determine that there is no current
or foreseen material practical or legal impediment to the
prompt transfer of own funds or repayment of liabilities;

the number of parent credit institutions which benefit from
the exercise of the discretion laid down in paragraph 1 and
the number of these which incorporate subsidiaries in a
third country; and

(c)

on an aggregate basis for the Member State:

(i)

(ii)

the total amount of own funds of parent credit
institutions which benefit from the exercise of the
discretion laid down in paragraph 1 which are held in
subsidiaries in a third country;

the percentage of total own funds of parent credit
institutions which benefit from the exercise of the
discretion laid down in paragraph 1 represented by
own funds which are held in subsidiaries in a third
country; and

(iii)

the percentage of total minimum own funds required
under Article 75 of parent credit institutions which

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benefit from the exercise of the discretion laid down
in paragraph 1 represented by own funds which are
held in subsidiaries in a third country.

Article 73

Article 71

1. The Member States or the competent authorities responsible
for exercising supervision on a consolidated basis pursuant to
Articles 125 and 126 may decide in the following cases that a
credit
institution or ancillary services
undertaking which is a subsidiary or in which a participation
is held need not be included in the consolidation:

institution,

financial

1. Without prejudice to Articles 68 to 70, parent credit
institutions in a Member State shall comply, to the extent and in
the manner prescribed in Article 133, with the obligations laid
down in Articles 75, 120, 123 and Section 5 on the basis of their
consolidated financial situation.

(a) where the undertaking concerned is situated in a third
country where there are legal impediments to the transfer
of the necessary information;

2. Without prejudice to Articles 68 to 70, credit institutions
controlled by a parent financial holding company in a Member
State shall comply, to the extent and in the manner prescribed in
Article 133, with the obligations laid down in Articles 75, 120,
123 and Section 5 on the basis of the consolidated financial
situation of that financial holding company.

(b) where, in the opinion of the competent authorities, the
undertaking concerned is of negligible interest only with
respect to the objectives of monitoring credit institutions
and in any event where the balance-sheet total of the
undertaking concerned is less than the smaller of
the
following two amounts:

Where more than one credit institution is controlled by a parent
financial holding company in a Member State,
the first
subparagraph shall apply only to the credit institution to which
supervision on a consolidated basis applies in accordance with
Articles 125 and 126.

(i)

EUR 10 million, or

(ii)

1 % of the balance-sheet total of the parent under-
taking or the undertaking that holds the participation,

Article 72

EU parent

1.
obligations laid down in Chapter 5 on the basis of
consolidated financial situation.

shall comply with the
their

institutions

credit

Significant subsidiaries of EU parent credit institutions shall
disclose the information specified in Annex XII, Part 1, point 5,
on an individual or sub-consolidated basis.

2. Credit institutions controlled by an EU parent financial
holding company shall comply with the obligations laid down in
Chapter 5 on the basis of the consolidated financial situation of
that financial holding company.

Significant subsidiaries of EU parent financial holding companies
shall disclose the information specified in Annex XII, Part 1,
point 5, on an individual or sub‑consolidated basis.

3. The competent authorities responsible for exercising super-
vision on a consolidated basis pursuant to Articles 125 and 126
may decide not to apply in full or in part paragraphs 1 and 2 to
the credit institutions which are included within comparable
disclosures provided on a consolidated basis by a parent
undertaking established in a third country.

(c) where,

in the opinion of

the competent authorities
responsible for exercising supervision on a consolidated
basis, the consolidation of the financial situation of the
undertaking concerned would be inappropriate or mislead-
ing as far as the objectives of the supervision of credit
institutions are concerned.

in the cases referred to in point

the first
If,
subparagraph, several undertakings meet the above criteria
set out therein, they shall nevertheless be included in the
consolidation where collectively they are of non-negligible
interest with respect to the specified objectives.

(b) of

require

authorities

2. Competent
subsidiary credit
shall
institutions to apply the requirements laid down in Articles 75,
120 and 123 and Section 5 on a sub-consolidated basis if those
credit institutions, or the parent undertaking where it
is a
financial holding company, have a credit institution or a financial
institution or an asset management company as defined in
Article 2(5) of Directive 2002/87/EC as a subsidiary in a third
country, or hold a participation in such an undertaking.

3. Competent authorities shall require the parent undertakings
and subsidiaries subject to this Directive to meet the obligations
laid down in Article 22 on a consolidated or sub‑consolidated
basis,
and
mechanisms are consistent and well-integrated and that any
data and information relevant to the purpose of supervision can
be produced.

arrangements, processes

to ensure

their

that

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S u b s e c t i o n 2

C a l c u l a t i o n o f r e q u i r e m e n t s

Ratings Based Approach provided for in Articles 84 to 89 to
calculate their risk-weighted exposure amounts for the purposes
of Article 75(a).

Article 74

Article 77

1.
Save where otherwise provided, the valuation of assets and
off-balance-sheet items shall be effected in accordance with the
accounting framework to which the credit institution is subject
under Regulation (EC) No 1606/2002 and Directive 86/635/EEC.

2. Notwithstanding the requirements laid down in Articles 68
to 72,
the calculations to verify the compliance of credit
institutions with the obligations laid down in Article 75 shall be
carried out not less than twice each year.

The credit institutions shall communicate the results and any
component data required to the competent authorities.

S u b s e c t i o n 3

M i n i m u m l e v e l o f o w n f u n d s

Article 75

Without prejudice to Article 136, Member States shall require
credit institutions to provide own funds which are at all times
more than or equal
the following capital
to the sum of
requirements:

(a)

(b)

(c)

(d)

for credit risk and dilution risk in respect of all of their
business activities with the exception of their trading book
business and illiquid assets if deducted from own funds
under Article 13(2)(d) of Directive 2006/49/EC, 8 % of the
total of their risk-weighted exposure amounts calculated in
accordance with Section 3;

in respect of their trading-book business, for position risk,
settlement and counter‑party risk and, in so far as the limits
laid down in Articles 111 to 117 are authorised to be
exceeded, for large exposures exceeding such limits, the
capital requirements determined in accordance with Article
18 and Chapter V, Section 4 of Directive 2006/49/EC;

in respect of all of their business activities, for foreign-
exchange risk and for commodities
the capital
requirements determined according to Article 18 of
Directive 2006/49/EC; and

risk,

in respect of all of their business activities, for operational
risk, the capital requirements determined in accordance
with Section 4.

S e c t i o n 3

‘Exposure’ for the purposes of this Section means an asset or off-
balance sheet item.

S u b s e c t i o n 1

S t a n d a r d i s e d a p p r o a c h

Article 78

1.
Subject to paragraph 2, the exposure value of an asset item
shall be its balance-sheet value and the exposure value of an
off‑balance sheet item listed in Annex II shall be the following
percentage of its value: 100 % if it is a full-risk item, 50 % if it is a
medium-risk item, 20 % if it is a medium/low-risk item, 0 % if it
is a low-risk item. The off-balance sheet items referred to in the
this paragraph shall be assigned to risk
first sentence of
categories as indicated in Annex II.
In the case of a credit
institution using the Financial Collateral Comprehensive Method
under Annex VIII, Part 3, where an exposure takes the form of
securities or commodities sold, posted or lent under a repurchase
transaction or under a securities or commodities lending or
borrowing transaction, and margin lending transactions the
exposure value shall be increased by the volatility adjustment
appropriate to such securities or commodities as prescribed in
Annex VIII, Part 3, points 34 to 59.

2. The exposure value of a derivative instrument listed in
Annex IV shall be determined in accordance with Annex III with
the effects of contracts of novation and other netting agreements
taken into account
those methods in
for the purposes of
accordance with Annex III. The exposure value of repurchase
transactions, securities or commodities lending or borrowing
transactions, long settlement transactions and margin lending
transactions may be determined either in accordance with Annex
III or Annex VIII.

3. Where an exposure is subject to funded credit protection,
the exposure value applicable to that item may be modified in
accordance with Subsection 3.

4. Notwithstanding paragraph 2, the exposure value of credit
risk exposures outstanding, as determined by the competent
authorities, with a central counterparty shall be determined in
accordance with Annex III, Part 2, point 6, provided that the
central counterparty's counterparty credit risk exposures with all
participants in its arrangements are fully collateralised on a daily
basis.

M i n i m u m o w n f u n d s r e q u i r e m e n t s f o r c r e d i t
r i s k

Article 79

Article 76

Each exposure shall be assigned to one of the following

1.
exposure classes:

Credit institutions shall apply either the Standardised Approach
if permitted by the
provided for in Articles 78 to 83 or,
competent authorities in accordance with Article 84, the Internal

(a)

claims or contingent claims on central governments or
central banks;

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claims or contingent claims on regional governments or
local authorities;

(3) The present value of retail minimum lease payments is
eligible for the retail exposure class.

claims or contingent claims on administrative bodies and
non-commercial undertakings;

Article 80

(b)

(c)

(d)

claims or contingent claims on multilateral development
banks;

(e)

claims or contingent claims on international organisations;

(f)

claims or contingent claims on institutions;

(g)

claims or contingent claims on corporates;

(h)

retail claims or contingent retail claims;

(i)

claims or contingent claims secured on real estate property;

(j)

past due items;

(k)

items belonging to regulatory high-risk categories;

(l)

claims in the form of covered bonds;

(m)

securitisation positions;

(n)

short-term claims on institutions and corporate;

1. To calculate risk-weighted exposure amounts, risk weights
shall be applied to all exposures, unless deducted from own
funds, in accordance with the provisions of Annex VI, Part 1. The
application of risk weights shall be based on the exposure class
to which the exposure is assigned and, to the extent specified in
Annex VI, Part 1,
its credit quality. Credit quality may be
determined by reference to the credit assessments of External
Credit Assessment Institutions (‘ECAIs’) in accordance with the
provisions of Articles 81 to 83 or the credit assessments of
Export Credit Agencies as described in Annex VI, Part 1.

2.
For the purposes of applying a risk weight, as referred to in
paragraph 1, the exposure value shall be multiplied by the risk
weight
specified or determined in accordance with this
Subsection.

For

3.
the purposes of calculating risk-weighted exposure
amounts for exposures to institutions, Member States shall
decide whether to adopt the method based on the credit quality
of
the jurisdiction in which the
institution is incorporated or the method based on the credit
quality of the counterparty institution in accordance with Annex
VI.

the central government of

(o)

claims in the form of collective investment undertakings
(‘CIU’); or

4. Notwithstanding paragraph 1, where an exposure is subject
to credit protection the risk weight applicable to that item may
be modified in accordance with Subsection 3.

(p)

other items.

2. To be eligible for the retail exposure class referred to in point
(h) of paragraph 1, an exposure shall meet
the following
conditions:

(a)

(b)

(c)

the exposure shall be either to an individual person or
persons, or to a small or medium sized entity;

the exposure shall be one of a significant number of
exposures with similar characteristics such that the risks
associated with such lending are substantially reduced; and

the total amount owed to the credit institution and parent
undertakings and its subsidiaries, including any past due
exposure, by the obligor client or group of connected
clients, but excluding claims or contingent claims secured
to the
on residential
knowledge of the credit institution, exceed EUR 1 million.
The credit institution shall take reasonable steps to acquire
this knowledge.

real estate collateral, shall not,

Securities shall not be eligible for the retail exposure class.

5. Risk-weighted exposure amounts for securitised exposures
shall be calculated in accordance with Subsection 4.

the

Exposures

risk-weighted exposure
6.
amounts for which is not otherwise provided for under this
Subsection shall be assigned a risk-weight of 100 %.

calculation of

7. With the exception of exposures giving rise to liabilities in
the form of the items referred to in paragraphs (a) to (h) of
Article 57, competent authorities may exempt
from the
requirements of paragraph 1 of this Article the exposures of a
its parent
credit
undertaking, its subsidiary, a subsidiary of its parent undertaking
or an undertaking linked by a relationship within the meaning of
Article 12(1) of Directive 83/349/EEC, provided that
the
following conditions are met:

institution to a counterparty which is

(a)

the counterparty is an institution or a financial holding
company, financial institution, asset management company
or ancillary services undertaking subject to appropriate
prudential requirements;

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(b)

the counterparty is included in the same consolidation as
the credit institution on a full basis;

(g) members of the institutional protection scheme are obliged
to give advance notice of at least 24 months if they wish to
end the arrangements;

(c)

the counterparty is subject to the same risk evaluation,
measurement and control procedures as the credit institu-
tion;

(d)

the counterparty is established in the same Member State as
the credit institution; and

(e)

there is no current or foreseen material practical or legal
impediment
transfer of own funds or
repayment of liabilities from the counterparty to the credit
institution.

to the prompt

In such a case, a risk weight of 0 % shall be assigned.

8. With the exception of exposures giving rise to liabilities in
the form of the items referred to in points (a) to (h) of Article 57,
competent authorities may exempt from the requirements of
paragraph 1 of this Article the exposures to counterparties which
are members of the same institutional protection scheme as the
lending credit institution, provided that the following conditions
are met:

(a)

(b)

(c)

(d)

(e)

(f)

the requirements set out
paragraph 7;

in points (a),

(d) and (e) of

the credit institution and the counterparty have entered into
a contractual or statutory liability arrangement which
protects those institutions and in particular ensures their
liquidity and solvency to avoid bankruptcy in case it
becomes necessary (referred to below as an institutional
protection scheme);

the arrangements ensure that the institutional protection
scheme will be able to grant support necessary under its
commitment from funds readily available to it;

the institutional protection scheme disposes of suitable and
the monitoring and
uniformly stipulated systems for
classification of risk (which gives a complete overview of
the risk situations of all the individual members and the
institutional protection scheme as a whole) with corre-
sponding possibilities to take influence; those systems shall
suitably monitor defaulted exposures in accordance with
Annex VII, Part 4, point 44;

the institutional protection scheme conducts its own risk
review which is communicated to the individual members;

the institutional protection scheme draws up and publishes
once in a year either, a consolidated report comprising the
balance sheet, the profit-and-loss account, the situation
report and the risk report, concerning the institutional
protection scheme as a whole, or a report comprising the
aggregated balance sheet, the aggregated profit‑and‑loss
account, the situation report and the risk report, concern-
ing the institutional protection scheme as a whole;

(h)

(i)

(j)

the multiple use of elements eligible for the calculation of
own funds (‘multiple gearing’) as well as any inappropriate
creation of own funds between the members of
the
institutional protection scheme shall be eliminated;

the institutional protection scheme shall be based on a
broad membership of credit institutions of a predominantly
homogeneous business profile; and

the adequacy of the systems referred to in point (d) is
approved and monitored at regular intervals by the relevant
competent authorities.

In such a case, a risk weight of 0 % shall be assigned.

Article 81

1. An external credit assessment may be used to determine the
risk weight of an exposure in accordance with Article 80 only if
the ECAI which provides it has been recognised as eligible for
those purposes by the competent authorities (‘an eligible ECAI’
for the purposes of this Subsection).

2. Competent authorities shall recognise an ECAI as eligible for
the purposes of Article 80 only if they are satisfied that its
assessment methodology complies with the requirements of
objectivity, independence, ongoing review and transparency, and
that the resulting credit assessments meet the requirements of
credibility and transparency. For those purposes, the competent
authorities shall take into account the technical criteria set out in
Annex VI, Part 2.

If an ECAI has been recognised as eligible by the competent
3.
authorities of a Member State, the competent authorities of other
Member States may recognise that ECAI as eligible without
carrying out their own evaluation process.

4. Competent authorities shall make publicly available an
explanation of the recognition process, and a list of eligible
ECAIs.

Article 82

1. The competent authorities shall determine,
taking into
account the technical criteria set out in Annex VI, Part 2, with
which of the credit quality steps set out in Part 1 of that Annex
the relevant credit assessments of an eligible ECAI are to be
associated. Those determinations shall be objective and con-
sistent.

2. When the competent authorities of a Member State have
the competent
made a determination under paragraph 1,
authorities of other Member States may recognise
that
determination without carrying out their own determination
process.

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Article 83

1. The use of ECAI credit assessments for the calculation of a
credit
institution's risk‑weighted exposure amounts shall be
consistent and in accordance with Annex VI, Part 3. Credit
assessments shall not be used selectively.

2. Credit
However, with the permission of
authority, they may use unsolicited assessments.

institutions shall use solicited credit assessments.
the relevant competent

S u b s e c t i o n 2

I n t e r n a l R a t i n g s B a s e d A p p r o a c h

Article 84

In accordance with this Subsection, the competent autho-
1.
rities may permit credit
institutions to calculate their risk-
weighted exposure amounts using the Internal Ratings Based
Approach (‘IRB Approach’). Explicit permission shall be required
in the case of each credit institution.

2.
Permission shall be given only if the competent authority is
satisfied that the credit institution's systems for the management
and rating of credit risk exposures are sound and implemented
with integrity and, in particular, that they meet the following
standards in accordance with Annex VII, Part 4:

(a)

(b)

(c)

(d)

the credit institution's rating systems provide for a mean-
ingful assessment of obligor and transaction characteristics,
a meaningful differentiation of risk and accurate and
consistent quantitative estimates of risk;

internal ratings and default and loss estimates used in the
calculation of capital requirements and associated systems
and processes play an essential role in the risk management
and decision-making process, and in the credit approval,
internal
allocation and corporate governance
functions of the credit institution;

capital

institution has a credit

the credit
responsible for its rating systems that
independent and free from undue influence;

risk control unit
is appropriately

the credit institution collects and stores all relevant data to
provide effective support to its credit risk measurement and
management process; and

(e)

the credit institution documents its rating systems and the
rationale for their design and validates its rating systems.

Where an EU parent credit institution and its subsidiaries or an
EU parent financial holding company and its subsidiaries use the
IRB Approach on a unified basis, the competent authorities may
allow minimum requirements of Annex VII, Part 4 to be met by
the parent and its subsidiaries considered together.

classes in question rating systems that were broadly in line with
the minimum requirements set out in Annex VII, Part 4 for
internal risk measurement and management purposes for at least
three years prior to its qualification to use the IRB Approach.

4. A credit institution applying for the use of own estimates of
LGDs and/or conversion factors shall demonstrate that it has
been estimating and employing own estimates of LGDs and/or
conversion factors in a manner that was broadly consistent with
the minimum requirements for use of own estimates of those
parameters set out in Annex VII, Part 4 for at least three years
prior to qualification to use own estimates of LGDs and/or
conversion factors.

5.
If a credit institution ceases to comply with the requirements
set out in this Subsection, it shall either present to the competent
authority a plan for a timely return to compliance or
demonstrate that the effect of non-compliance is immaterial.

6. When the IRB Approach is intended to be used by the EU
parent credit institution and its subsidiaries, or by the EU parent
financial holding company and its subsidiaries, the competent
authorities of the different legal entities shall cooperate closely as
provided for in Articles 129 to 132.

Article 85

1. Without prejudice to Article 89, credit institutions and any
parent undertaking and its subsidiaries shall implement the IRB
Approach for all exposures.

imple-
Subject to the approval of the competent authorities,
mentation may be carried out sequentially across the different
exposure classes, referred to in Article 86, within the same
business unit, across different business units in the same group
or for the use of own estimates of LGDs or conversion factors for
the calculation of risk weights for exposures to corporates,
institutions, and central governments and central banks.

In the case of the retail exposure class referred to in Article 86,
implementation may be carried out sequentially across the
categories of exposures to which the different correlations in
Annex VII, Part 1, points 10 to 13 correspond.

2.
Implementation as referred to in paragraph 1 shall be carried
out within a reasonable period of time to be agreed with the
competent authorities. The implementation shall be carried out
subject
to strict conditions determined by the competent
authorities. Those conditions shall be designed to ensure that
the flexibility under paragraph 1 is not used selectively with the
purpose of achieving reduced minimum capital requirements in
respect of those exposure classes or business units that are yet to
be included in the IRB Approach or in the use of own estimates
of LGDs and/or conversion factors.

3. A credit institution applying for the use of the IRB Approach
shall demonstrate that it has been using for the IRB exposure

3. Credit institutions using the IRB Approach for any exposure
class shall at the same time use the IRB Approach for the equity
exposure class.

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Subject to paragraphs 1 to 3 of this Article and Article 89,
4.
credit institutions which have obtained permission under Article
84 to use the IRB Approach shall not revert to the use of
Subsection 1 for the calculation of risk-weighted exposure
amounts except for demonstrated good cause and subject to the
approval of the competent authorities.

5.
Subject to paragraphs 1 and 2 of this Article and Article 89,
credit institutions which have obtained permission under Article
87(9) to use own estimates of LGDs and conversion factors, shall
not revert to the use of LGD values and conversion factors
referred to in Article 87(8) except for demonstrated good cause
and subject to the approval of the competent authorities.

Article 86

Each exposure shall be assigned to one of the following

1.
exposure classes:

(a)

claims or contingent claims on central governments and
central banks;

(b)

claims or contingent claims on institutions;

(b)

exposures to Public Sector Entities which are treated as
exposures to institutions under the Subsection 1; and

(c)

exposures to Multilateral Development Banks which do not
attract a 0 % risk weight under Subsection 1.

4. To be eligible for the retail exposure class referred to in point
(d) of paragraph 1, exposures shall meet the following criteria:

(a)

they shall be either to an individual person or persons, or to
a small or medium sized entity, provided in the latter case
that the total amount owed to the credit institution and
parent undertakings and its subsidiaries, including any past
due exposure, by the obligor client or group of connected
clients, but excluding claims or contingent claims secured
to the
on residential
knowledge of the credit institution, which shall have taken
reasonable steps to confirm the situation, exceed EUR 1
million;

real estate collateral, shall not,

(b)

they are treated by the credit
management consistently over
manner;

institution in its risk
time and in a similar

(c)

claims or contingent claims on corporates;

(c)

they are not managed just as individually as exposures in
the corporate exposure class; and

(d)

retail claims or contingent retail claims;

(e)

equity claims;

(f)

securitisation positions; or

(d)

they each represent one of a significant number of similarly
managed exposures.

The present value of retail minimum lease payments is eligible
for the retail exposure class.

(g)

other non credit-obligation assets.

5. The following exposures shall be classed as equity exposures:

2. The following exposures shall be treated as exposures to
central governments and central banks:

(a)

non-debt exposures conveying a subordinated, residual
claim on the assets or income of the issuer; and

(a)

(b)

exposures to regional governments,
local authorities or
public sector entities which are treated as exposures to
central governments under Subsection 1; and

(b)

debt exposures the economic substance of which is similar
to the exposures specified in point (a).

exposures to Multilateral Development Banks and Interna-
tional Organisations which attract a risk weight of 0 %
under Subsection 1.

6. Within the corporate exposure class, credit institutions shall
separately identify as specialised lending exposures, exposures
which possess the following characteristics:

3. The following exposures shall be treated as exposures to
institutions:

(a)

the exposure is to an entity which was created specifically
to finance and/or operate physical assets;

(a)

exposures to regional governments and local authorities
which are not treated as exposures to central governments
under Subsection 1;

(b)

the contractual arrangements give the lender a substantial
degree of control over the assets and the income that they
generate; and

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(c)

the primary source of repayment of the obligation is the
income generated by the assets being financed, rather than
the
commercial
enterprise.

independent

capacity of

a broader

7. Any credit obligation not assigned to the exposure classes
referred to in points (a), (b) and (d) to (f) of paragraph 1 shall be
assigned to the exposure class referred to in point (c) of that
paragraph.

include the residual value of

8. The exposure class referred to in point (g) of paragraph 1
shall
leased properties if not
included in the lease exposure as defined in Annex VII, Part 3,
paragraph 4.

9. The methodology used by the credit institution for assigning
exposures to different exposure classes shall be appropriate and
consistent over time.

Article 87

1. The risk-weighted exposure amounts for credit risk for
exposures belonging to one of the exposure classes referred to in
points (a) to (e) or (g) of Article 86(1) shall, unless deducted from
own funds, be calculated in accordance with Annex VII, Part 1,
points 1 to 27.

2. The risk-weighted exposure amounts for dilution risk for
purchased receivables shall be calculated according to Annex VII,
Part 1, point 28. Where a credit institution has full recourse in
respect of purchased receivables for default risk and for dilution
risk, to the seller of the purchased receivables, the provisions of
Articles 87 and 88 in relation to purchased receivables need not
be applied. The exposure may instead be treated as a
collateralised exposure.

3. The calculation of risk-weighted exposure amounts for credit
risk and dilution risk shall be based on the relevant parameters
associated with the exposure in question. These shall include
probability of default (PD), LGD, maturity (M) and exposure
value of the exposure. PD and LGD may be considered separately
or jointly, in accordance with Annex VII, Part 2.

lending exposures under Annex VII, Part 1, point 6 and shall
approve credit institution assignment methodologies.

6.
For exposures belonging to the exposure classes referred to
in points (a) to (d) of Article 86(1), credit institutions shall
provide their own estimates of PDs in accordance with Article 84
and Annex VII, Part 4.

7.
For exposures belonging to the exposure class referred to in
point (d) of Article 86(1), credit institutions shall provide own
estimates of LGDs and conversion factors in accordance with
Article 84 and Annex VII, Part 4.

8.
For exposures belonging to the exposure classes referred to
in points (a) to (c) of Article 86(1), credit institutions shall apply
the LGD values set out in Annex VII, Part 2, point 8, and the
conversion factors set out in Annex VII, Part 3, point 9(a) to (d).

9. Notwithstanding paragraph 8, for all exposures belonging to
the exposure classes referred to in points (a) to (c) of Article 86
(1), competent authorities may permit credit institutions to use
own estimates of LGDs and conversion factors in accordance
with Article 84 and Annex VII, Part 4.

risk-weighted exposure

10. The
securitised
exposures and for exposures belonging to the exposure class
referred to in point (f) of Article 86(1) shall be calculated in
accordance with Subsection 4.

amounts

for

11. Where exposures in the form of a collective investment
undertaking (CIU) meet the criteria set out in Annex VI, Part 1,
points 77 and 78 and the credit institution is aware of all of the
underlying exposures of the CIU, the credit institution shall look
through to those underlying exposures in order to calculate risk-
weighted exposure amounts and expected loss amounts in
accordance with the methods set out in this Subsection.

Where the credit institution does not meet the conditions for
using the methods set out in this Subsection, risk weighted
exposure amounts and expected loss amounts shall be calculated
in accordance with the following approaches:

the calculation of

risk-
4. Notwithstanding paragraph 3,
weighted exposure amounts for credit risk for all exposures
belonging to the exposure class referred to in point (e) of Article
86(1) shall be calculated in accordance with Annex VII, Part 1,
points 17 to 26 subject to approval of the competent authorities.
Competent authorities shall only allow a credit institution to use
the approach set out in Annex VII, Part 1, points 25 and 26 if the
credit institution meets the minimum requirements set out in
Annex VII, Part 4, points 115 to 123.

(a)

for exposures belonging to the exposure class referred to in
point (e) of Article 86(1), the approach set out in Annex
VII, Part 1, points 19 to 21. If, for those purposes, the credit
institution is unable to differentiate between private equity,
exchange-traded and other equity exposures, it shall treat
the exposures concerned as other equity exposures;

(b)

for all other underlying exposures, the approach set out in
Subsection 1, subject to the following modifications:

5. Notwithstanding paragraph 3,
risk
weighted exposure amounts for credit risk for specialised lending
exposures may be calculated in accordance with Annex VII, Part
1, point 6. Competent authorities shall publish guidance on how
institutions should assign risk weights to specialised
credit

the calculation of

(i)

are

exposures

assigned to the

the
appropriate
exposure class and attributed the risk weight of the
credit quality step immediately above the credit quality
step that would normally be assigned to the exposure,
and

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(ii)

exposures assigned to the higher credit quality steps,
to which a risk weight of 150 % would normally be
attributed, are assigned a risk weight of 200 %.

12. Where exposures in the form of a CIU do not meet the
criteria set out in Annex VI, Part 1, points 77 and 78, or the
credit institution is not aware of all of the underlying exposures
of the CIU, the credit institution shall
look through to the
underlying exposures and calculate risk-weighted exposure
amounts and expected loss amounts in accordance with the
approach set out in Annex VII, Part 1, points 19 to 21. If, for
those purposes, the credit institution is unable to differentiate
between private equity, exchange-traded and other equity
exposures, it shall treat the exposures concerned as other equity
exposures. For these purposes, non equity exposures are assigned
to one of the classes (private equity, exchange traded equity or
other equity) set out in Annex VII, Part 1, point 19 and unknown
exposures are assigned to other equity class.

Alternatively to the method described above, credit institutions
may calculate themselves or may rely on a third party to calculate
and report the average risk weighted exposure amounts based on
the CIU's underlying exposures in accordance with the following
approaches, provided that the correctness of the calculation and
the report is adequately ensured:

(a)

for exposures belonging to the exposure class referred to in
point (e) of Article 86(1), the approach set out in Annex
VII, Part 1, points 19 to 21. If, for those purposes, the credit
institution is unable to differentiate between private equity,
exchange‑traded and other equity exposures, it shall treat
the exposures concerned as other equity exposures; or

(b)

for all other underlying exposures, the approach set out in
Subsection 1, subject to the following modifications:

(i)

are

exposures

assigned to the

appropriate
the
exposure class and attributed the risk weight of the
credit quality step immediately above the credit quality
step that would normally be assigned to the exposure,
and

(ii)

exposures assigned to the higher credit quality steps,
to which a risk weight of 150 % would normally be
attributed, are assigned a risk weight of 200 %.

Article 88

1. The expected loss amounts for exposures belonging to one
of the exposure classes referred to in points (a) to (e) of Article
86(1) shall be calculated in accordance with the methods set out
in Annex VII, Part 1, points 29 to 35.

exposure amounts in accordance with Article 87. For defaulted
exposures, where credit institutions use own estimates of LGDs,
expected loss (‘EL’) shall be the credit institution's best estimate of
EL (‘ELBE,’) for the defaulted exposure, in accordance with Annex
VII, Part 4, point 80.

3. The expected loss amounts for securitised exposures shall be
calculated in accordance with Subsection 4.

4. The expected loss amount for exposures belonging to the
exposure class referred to in point (g) of Article 86(1) shall be
zero.

5. The expected loss amounts for dilution risk of purchased
receivables shall be calculated in accordance with the methods
set out in Annex VII, Part 1, point 35.

6. The expected loss amounts for exposures referred to in
Article 87(11) and (12) shall be calculated in accordance with the
methods set out in Annex VII, Part 1, points 29 to 35.

Article 89

Subject to the approval of the competent authorities, credit
1.
institutions permitted to use the IRB Approach in the calculation
of risk-weighted exposure amounts and expected loss amounts
for one or more exposure classes may apply Subsection 1 for the
following:

(a)

(b)

(c)

(d)

the exposure class referred to in point (a) of Article 86(1),
where the number of material counterparties is limited and
it would be unduly burdensome for the credit institution to
implement a rating system for these counterparties;

the exposure class referred to in point (b) of Article 86(1),
where the number of material counterparties is limited and
it would be unduly burdensome for the credit institution to
implement a rating system for these counterparties;

exposures in non-significant business units as well as
exposure classes that are immaterial in terms of size and
perceived risk profile;

exposures to central governments of the home Member
State and to their regional governments, local authorities
and administrative bodies, provided that:

(i)

there is no difference in risk between the exposures to
that central government and those other exposures
because of specific public arrangements, and

(ii)

exposures to the central government are assigned a
0 % risk weight under Subsection 1;

2. The calculation of expected loss amounts in accordance with
Annex VII, Part 1, points 29 to 35 shall be based on the same
input figures of PD, LGD and the exposure value for each
exposure as being used for the calculation of risk-weighted

(e)

exposures of a credit institution to a counterparty which is
its parent undertaking, its subsidiary or a subsidiary of its
parent undertaking provided that the counterparty is an

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(f)

(g)

asset management

financial
institution or a financial holding company,
ancillary
institution,
company or
services undertaking subject
to appropriate prudential
requirements or an undertaking linked by a relationship
within the meaning of Article 12(1) of Directive 83/349/
EEC and exposures between credit institutions which meet
the requirements set out in Article 80(8);

(a) or as relevant expected loss amounts for the
75 point
purposes of the calculation referred to in point (q) of Article 57,
and Article 63(3).

Article 92

equity exposures to entities whose credit obligations qualify
for a 0 % risk weight under Subsection 1 (including those
publicly sponsored entities where a zero risk weight can be
applied);

1. The technique used to provide the credit protection together
with the actions and steps taken and procedures and policies
implemented by the lending credit institution shall be such as to
result
in credit protection arrangements which are legally
effective and enforceable in all relevant jurisdictions.

equity exposures incurred under legislative programmes to
promote specified sectors of the economy that provide
significant subsidies for
to the credit
institution and involve some form of government oversight
and restrictions on the equity investments. This exclusion is
limited to an aggregate of 10 % of original own funds plus
additional own funds;

the investment

(h)

the exposures identified in Annex VI, Part 1, point 40
meeting the conditions specified therein; or

(i)

State and State-reinsured guarantees pursuant to Annex
VIII, Part 2, point 19.

This paragraph shall not prevent the competent authorities of
other Member States to allow the application of the rules of
Subsection 1 for equity exposures which have been allowed for
this treatment in other Member States.

2.
For the purposes of paragraph 1, the equity exposure class of
a credit institution shall be considered material if their aggregate
value, excluding equity exposures incurred under legislative
programmes as referred to in paragraph 1, point (g), exceeds, on
average over the preceding year, 10 % of the credit institution's
own funds. If the number of those equity exposures is less than
10 individual holdings, that threshold shall be 5 % of the credit
institution's own funds.

S u b s e c t i o n 3

C r e d i t r i s k m i t i g a t i o n

Article 90

2. The lending credit institution shall take all appropriate steps
to ensure the effectiveness of the credit protection arrangement
and to address related risks.

3.
In the case of funded credit protection, to be eligible for
recognition the assets relied upon shall be sufficiently liquid and
their value over time sufficiently stable to provide appropriate
certainty as to the credit protection achieved having regard to the
approach used to calculate risk-weighted exposure amounts and
to the degree of recognition allowed. Eligibility shall be limited to
the assets set out in Annex VIII, Part 1.

4.
In the case of funded credit protection, the lending credit
institution shall have the right to liquidate or retain, in a timely
manner, the assets from which the protection derives in the event
of the default, insolvency or bankruptcy of the obligor — or
other credit event set out in the transaction documentation —
and, where applicable, of the custodian holding the collateral.
The degree of correlation between the value of the assets relied
upon for protection and the credit quality of the obligor shall not
be undue.

5.
In the case of unfunded credit protection, to be eligible for
recognition the party giving the undertaking shall be sufficiently
legally effective and
reliable, and the protection agreement
enforceable in the relevant jurisdictions, to provide appropriate
certainty as to the credit protection achieved having regard to the
approach used to calculate risk‑weighted exposure amounts and
to the degree of recognition allowed. Eligibility shall be limited to
the protection providers and types of protection agreement set
out in Annex VIII, Part 1.

6. The minimum requirements set out in Annex VIII, Part 2
shall be complied with.

For the purposes of this Subsection, ‘lending credit institution’
shall mean the credit institution which has the exposure in
question, whether or not deriving from a loan.

Article 93

Article 91

Credit
institutions using the Standardised Approach under
Articles 78 to 83 or using the IRB Approach under Articles 84
to 89, but not using their own estimates of LGD and conversion
factors under Articles 87 and 88, may recognise credit risk
mitigation in accordance with this Subsection in the calculation
of risk-weighted exposure amounts for the purposes of Article

1. Where the requirements of Article 92 are met
the
calculation of risk-weighted exposure amounts, and, as relevant,
expected loss amounts, may be modified in accordance with
Annex VIII, Parts 3 to 6.

2. No exposure in respect of which credit risk mitigation is
obtained shall produce a higher risk-weighted exposure amount
or expected loss amount than an otherwise identical exposure in
respect of which there is no credit risk mitigation.

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3. Where the risk-weighted exposure amount already takes
account of credit protection under Articles 78 to 83 or Articles
84 to 89, as relevant, the calculation of the credit protection shall
not be further recognised under this Subsection.

3. Where a securitisation position is subject to funded or
unfunded credit protection the risk‑weight to be applied to that
position may be modified in accordance with Articles 90 to 93,
read in conjunction with Annex IX.

S u b s e c t i o n 4

S e c u r i t i s a t i o n

Article 94

Where a credit institution uses the Standardised Approach set
out in Articles 78 to 83 for the calculation of risk-weighted
exposure amounts for the exposure class to which the securitised
exposures would be assigned under Article 79, it shall calculate
the risk-weighted exposure amount for a securitisation position
in accordance with Annex IX, Part 4, points 1 to 36.

In all other cases, it shall calculate the risk-weighted exposure
amount in accordance with Annex IX, Part 4, points 1 to 5 and
37 to 76.

Article 95

1. Where significant credit risk associated with securitised
exposures has been transferred from the originator credit
institution in accordance with the terms of Annex IX, Part 2,
that credit institution may:

(a)

(b)

in the case of a traditional securitisation, exclude from its
calculation of risk‑weighted exposure amounts, and, as
relevant, expected loss amounts, the exposures which it has
securitised; and

in the case of a synthetic securitisation, calculate risk-
weighted exposure amounts, and, as relevant, expected loss
amounts,
in
in respect of
accordance with Annex IX, Part 2.

the securitised exposures

2. Where paragraph 1 applies, the originator credit institution
shall calculate the risk‑weighted exposure amounts prescribed in
Annex IX for the positions that it may hold in the securitisation.

Where the originator credit institution fails to transfer significant
credit risk in accordance with paragraph 1, it need not calculate
risk-weighted exposure amounts for any positions it may have in
the securitisation in question.

Article 96

1. To calculate the risk-weighted exposure amount of a
securitisation position, risk weights shall be assigned to the
exposure value of the position in accordance with Annex IX,
the position, which may be
based on the credit quality of
determined by reference to an ECAI credit assessment or
otherwise, as set out in Annex IX.

tranches in a
2. Where there is an exposure to different
securitisation, the exposure to each tranche shall be considered a
separate securitisation position. The providers of credit protec-
tion to securitisation positions shall be considered to hold
positions in the securitisation. Securitisation positions shall
include exposures to a securitisation arising from interest rate or
currency derivative contracts.

4.
Subject to point (r) of Article 57 and Article 66(2), the risk-
weighted exposure amount shall be included in the credit
institution's total of risk-weighted exposure amounts for the
purposes of Article 75(a).

Article 97

1. An ECAI credit assessment may be used to determine the
risk weight of a securitisation position in accordance with Article
96 only if the ECAI has been recognised as eligible by the
competent authorities for this purpose (hereinafter ‘an eligible
ECAI’).

2. The competent authorities shall recognise an ECAI as eligible
for the purposes of paragraph 1 only if they are satisfied as to its
compliance with the requirements laid down in Article 81, taking
into account the technical criteria in Annex VI, Part 2, and that it
has a demonstrated ability in the area of securitisation, which
may be evidenced by a strong market acceptance.

If an ECAI has been recognised as eligible by the competent
3.
authorities of a Member State for the purposes of paragraph 1,
the competent authorities of other Member States may recognise
that ECAI as eligible for those purposes without carrying out
their own evaluation process.

4. The competent authorities shall make publicly available an
explanation of the recognition process and a list of eligible
ECAIs.

5. To be used for the purposes of paragraph 1, a credit
assessment of an eligible ECAI shall comply with the principles
of credibility and transparency as elaborated in Annex IX, Part 3.

Article 98

1.
For the purposes of applying risk weights to securitisation
positions, the competent authorities shall determine with which
of the credit quality steps set out in Annex IX the relevant credit
assessments of an eligible ECAI are to be associated. Those
determinations shall be objective and consistent.

2. When the competent authorities of a Member State have
the competent
made a determination under paragraph 1,
that
authorities of other Member States may recognise
determination without carrying out their own determination
process.

Article 99

The use of ECAI credit assessments for the calculation of a credit
institution's risk-weighted exposure amounts under Article 96
shall be consistent and in accordance with Annex IX, Part 3.
Credit assessments shall not be used selectively.

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Article 100

Article 103

1. Where there is a securitisation of revolving exposures
subject to an early amortisation provision, the originator credit
in accordance with Annex IX, an
institution shall calculate,
additional risk-weighted exposure amount in respect of the risk
that the levels of credit risk to which it is exposed may increase
following the operation of the early amortisation provision.

2.
For those purposes, a ‘revolving exposure’ shall be an
exposure whereby customers' outstanding balances are permitted
to fluctuate based on their decisions to borrow and repay, up to
an agreed limit, and an early amortisation provision shall be a
contractual clause which requires, on the occurrence of defined
events, investors' positions to be redeemed before the originally
stated maturity of the securities issued.

Article 101

institution which,

1. An originator credit
in respect of a
securitisation, has made use of Article 95 in the calculation of
risk-weighted exposure amounts or a sponsor credit institution
shall not, with a view to reducing potential or actual losses to
investors, provide support
to the securitisation beyond its
contractual obligations.

If an originator credit

2.
institution or a sponsor credit
institution fails to comply with paragraph 1 in respect of a
securitisation,
the competent authority shall require it at a
minimum, to hold capital against all of the securitised exposures
as if they had not been securitised. The credit institution shall
disclose publicly that it has provided non‑contractual support
and the regulatory capital impact of having done so.

S e c t i o n 4

The capital requirement for operational risk under the Basic
Indicator Approach shall be a certain percentage of a relevant
indicator, in accordance with the parameters set out in Annex X,
Part 1.

Article 104

1. Under the Standardised Approach, credit institutions shall
divide their activities into a number of business lines as set out in
Annex X, Part 2.

2.
For each business line, credit institutions shall calculate a
capital requirement for operational risk as a certain percentage of
a relevant indicator, in accordance with the parameters set out in
Annex X, Part 2.

3.
For certain business lines, the competent authorities may
under certain conditions authorise a credit institution to use an
alternative relevant indicator for determining its capital require-
ment for operational risk as set out in Annex X, Part 2, points 5
to 11.

for operational risk under the
4. The capital requirement
Standardised Approach shall be the sum of
the capital
requirements for operational risk across all individual business
lines.

5. The parameters for the Standardised Approach are set out in
Annex X, Part 2.

6. To qualify for use of the Standardised Approach, credit
institutions shall meet the criteria set out in Annex X, Part 2.

M i n i m u m o w n f u n d s r e q u i r e m e n t s f o r
o p e r a t i o n a l r i s k

Article 105

Article 102

1. Competent authorities shall require credit institutions to
hold own funds against operational risk in accordance with the
approaches set out in Articles 103, 104 and 105.

2. Without prejudice to paragraph 4, credit institutions that use
the approach set out in Article 104 shall not revert to the use of
the approach set out in Article 103, except for demonstrated
good cause and subject to approval by the competent authorities.

3. Without prejudice to paragraph 4, credit institutions that use
the approach set out in Article 105 shall not revert to the use of
for
the approaches set out
demonstrated good cause and subject
to approval by the
competent authorities.

in Articles 103 or 104 except

4. Competent authorities may allow credit institutions to use a
combination of approaches in accordance with Annex X, Part 4.

1. Credit
institutions may use Advanced Measurement
Approaches based on their own operational risk measurement
systems, provided that
the competent authority expressly
approves the use of the models concerned for calculating the
own funds requirement.

2. Credit institutions shall satisfy their competent authorities
that they meet the qualifying criteria set out in Annex X, Part 3.

3. When an Advanced Measurement Approach is intended to
be used by an EU parent credit institution and its subsidiaries or
by the subsidiaries of an EU parent financial holding company,
the competent authorities of the different legal entities shall
cooperate closely as provided for in Articles 129 to 132. The
application shall include the elements listed in Annex X, Part 3.

4. Where an EU parent credit institution and its subsidiaries or
the subsidiaries of an EU parent financial holding company use
an Advanced Measurement Approach on a unified basis, the
competent authorities may allow the qualifying criteria set out in
Annex X, Part 3 to be met by the parent and its subsidiaries
considered together.

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S e c t i o n 5

L a r g e e x p o s u r e s

Article 106

‘Exposures’, for the purposes of this Section, shall mean any
1.
asset or off‑balance‑sheet
item referred to in Section 3,
Subsection 1, without application of the risk weights or degrees
of risk there provided for.

Exposures arising from the items referred to in Annex IV shall be
calculated in accordance with one of the methods set out in
Annex III. For the purposes of this Section, Annex III, Part 2,
point 2 shall also apply.

All elements entirely covered by own funds may, with the
agreement of the competent authorities, be excluded from the
determination of exposures, provided that such own funds are
not
institution's own funds for the
purposes of Article 75 or in the calculation of other monitoring
ratios provided for in this Directive and in other Community
acts.

included in the credit

2.

Exposures shall not include either of the following:

(a)

(b)

in the case of foreign exchange transactions, exposures
incurred in the ordinary course of settlement during the 48
hours following payment; or

in the case of transactions for the purchase or sale of
securities, exposures incurred in the ordinary course of
settlement during the five working days following payment
or delivery of the securities, whichever is the earlier.

Article 107

For the purposes of applying this Section, the term ‘credit
institution’ shall cover the following:

changes to them, in accordance with this Directive, and for that
of monitoring those exposures in the light of each credit
institution's own exposure policies.

Article 110

1. A credit institution shall report every large exposure to the
competent authorities.

Member States shall provide that reporting is to be carried out, at
their discretion, in accordance with one of the following two
methods:

(a)

large exposures at

reporting of all
least once a year,
combined with reporting during the year of all new large
exposures and any increases in existing large exposures of at
least 20 % with respect to the previous communication; or

(b)

reporting of all large exposures at least four times a year.

2.
Except in the case of credit institutions relying on Article
114 for the recognition of collateral in calculating the value of
exposures for the purposes of paragraphs 1, 2 and 3 of Article
111, exposures exempted under Article 113(3)(a) to (d) and (f) to
(h) need not be reported as laid down in paragraph 1 and the
reporting frequency laid down in point (b) of paragraph 1 of this
Article may be reduced to twice a year for the exposures referred
to in Article 113(3)(e) and (i), and in Articles 115 and 116.

Where a credit institution invokes this paragraph, it shall keep a
record of the grounds advanced for at least one year after the
event giving rise to the dispensation, so that the competent
authorities may establish whether it is justified.

3. Member States may require credit institutions to analyse
their exposures to collateral issuers for possible concentrations
and where appropriate take action or report any significant
findings to their competent authority.

(a)

(b)

a credit institution, including its branches in third countries;
and

Article 111

any private or public undertaking, including its branches,
which meets the definition of ‘credit institution’ and has
been authorised in a third country.

1. A credit institution may not incur an exposure to a client or
group of connected clients the value of which exceed 25 % of its
own funds.

Article 108

A credit institution's exposure to a client or group of connected
clients shall be considered a large exposure where its value is
equal to or exceeds 10 % of its own funds.

Article 109

The competent authorities
require that every credit
shall
institution have sound administrative and accounting procedures
and adequate internal control mechanisms for the purposes of
large exposures and subsequent
identifying and recording all

2. Where that client or group of connected clients is the parent
undertaking or subsidiary of the credit institution and/or one or
more subsidiaries of that parent undertaking, the percentage laid
down in paragraph 1 shall be reduced to 20 %. Member States
may, however, exempt the exposures incurred to such clients
from the 20 % limit if they provide for specific monitoring of
such exposures by other measures or procedures. They shall
inform the Commission and the European Banking Committee
of the content of such measures or procedures.

3. A credit institution may not incur large exposures which in
total exceed 800 % of its own funds.

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4. A credit institution shall at all times comply with the limits
laid down in paragraphs 1, 2 and 3 in respect of its exposures. If
in an exceptional case exposures exceed those limits, that fact
shall be reported without delay to the competent authorities
which may, where the circumstances warrant it, allow the credit
institution a limited period of time in which to comply with the
limits.

Article 112

1.
For the purposes of Articles 113 to 117, the term ‘guarantee’
shall include credit derivatives recognised under Articles 90 to
93 other than credit linked notes.

2.
Subject to paragraph 3, where, under Articles 113 to 117, the
recognition of funded or unfunded credit protection may be
permitted, this shall be subject to compliance with the eligibility
requirements and other minimum requirements, set out under
Articles 90 to 93 for the purposes of calculating risk-weighted
exposure amounts under Articles 78 to 83.

3. Where a credit institution relies upon Article 114(2), the
recognition of funded credit protection shall be subject to the
relevant requirements under Articles 84 to 89.

Article 113

1. Member States may impose limits more stringent than those
laid down in Article 111.

2. Member States may fully or partially exempt
from the
application of Article 111(1), (2) and (3) exposures incurred by a
credit institution to its parent undertaking, to other subsidiaries
of that parent undertaking or to its own subsidiaries, in so far as
those undertakings are covered by the supervision on a
consolidated basis to which the credit institution itself is subject,
in accordance with this Directive or with equivalent standards in
force in a third country.

3. Member States may fully or partially exempt the following
exposures from the application of Article 111:

(a)

(b)

(c)

asset items constituting claims on central governments or
central banks which, unsecured, would be assigned a 0 %
risk weight under Articles 78 to 83;

asset items constituting claims on international organisa-
tions or multilateral development banks which, unsecured,
would be assigned a 0 % risk weight under Articles 78 to
83;

carrying the

items constituting claims

asset
explicit
guarantees of central governments, central banks, interna-
tional organisations, multilateral development banks or
public sector entities, where unsecured claims on the entity
providing the guarantee would be assigned a 0 % risk
weight under Articles 78 to 83;

multilateral development banks or public sector entities,
where unsecured claims on the entity to which the exposure
is attributable or by which it is guaranteed would be
assigned a 0 % risk weight under Articles 78 to 83;

asset items constituting claims on and other exposures to
central governments or central banks not mentioned in
point (a) which are denominated and, where applicable,
funded in the national currencies of the borrowers;

asset items and other exposures secured, to the satisfaction
of the competent authorities, by collateral in the form of
debt securities issued by central governments or central
banks,
international organisations, multilateral develop-
ment banks, Member States' regional governments, local
authorities or public sector entities, which securities
constitute claims on their issuer which would be assigned
a 0 % risk weighting under Articles 78 to 83;

asset items and other exposures secured, to the satisfaction
of the competent authorities, by collateral in the form of
cash deposits placed with the lending credit institution or
with a credit institution which is the parent undertaking or
a subsidiary of the lending institution;

asset items and other exposures secured, to the satisfaction
of the competent authorities, by collateral in the form of
certificates of deposit
lending credit
institution or by a credit institution which is the parent
undertaking or a subsidiary of the lending credit institution
and lodged with either of them;

issued by the

asset items constituting claims on and other exposures to
institutions, with a maturity of one year or less, but not
constituting such institutions" own funds;

asset items constituting claims on and other exposures to
those institutions which are not credit institutions but
which fulfil the conditions referred to in Annex VI, Part 1,
point 85, with a maturity of one year or less, and secured in
accordance with the same point;

(e)

(f)

(g)

(h)

(i)

(j)

(k)

bills of trade and other similar bills, with a maturity of one
year or
less, bearing the signatures of other credit
institutions;

(l)

covered bonds falling within the terms of Annex VI, Part 1,
points 68 to 70;

(m) pending subsequent coordination, holdings in the insurance
companies referred to in Article 122(1) up to 40 % of the
institution acquiring such a
own funds of
holding;

the credit

(d)

other exposures attributable to, or guaranteed by, central
international organisations,
governments, central banks,

(n)

asset items constituting claims on regional or central credit
institutions with which the lending credit institution is
associated in a network in accordance with legal or

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(o)

(p)

statutory provisions and which are responsible, under those
provisions, for cash‑clearing operations within the network;

exposures secured, to the satisfaction of the competent
authorities, by collateral in the form of securities other than
those referred to in point (f);

secured,

the competent
to the satisfaction of
loans
authorities, by mortgages on residential property or by
shares in Finnish residential housing companies, operating
in accordance with the Finnish Housing Company Act of
legislation and leasing
1991 or subsequent equivalent
transactions under which the lessor retains full ownership
of the residential property leased for as long as the lessee
has not exercised his option to purchase, in all cases up to
50 % of the value of the residential property concerned;

(q)

the following, where they would receive a 50 % risk weight
under Articles 78 to 83, and only up to 50 % of the value of
the property concerned:

(i)

exposures secured by mortgages on offices or other
commercial premises, or 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; and

(ii)

exposures related to property leasing transactions
concerning offices or other commercial premises;

for the purposes of point (ii), until 31 December 2011, the
competent authorities of each Member State may allow
credit institutions to recognise 100 % of the value of the
property concerned. At
this
treatment shall be reviewed. Member States shall inform
the Commission of the use they make of this preferential
treatment;

the end of

this period,

(r)

(s)

(t)

50 % of
referred to in Annex II;

the medium/low‑risk off‑balance‑sheet

items

subject to the competent authorities' agreement, guarantees
other than loan guarantees which have a legal or regulatory
basis and are given for their members by mutual guarantee
schemes possessing the status of credit institutions, subject
to a weighting of 20 % of their amount; and

the low‑risk off‑balance‑sheet items referred to in Annex II,
to the extent that an agreement has been concluded with
the client or group of connected clients under which the
exposure may be incurred only if it has been ascertained
that it will not cause the limits applicable under Article 111
(1) to (3) to be exceeded.

Cash received under a credit linked note issued by the credit
institution and loans and deposits of a counterparty to or with
the credit institution which are subject to an on‑balance sheet
netting agreement recognised under Articles 90 to 93 shall be
deemed to fall under point (g).

For the purposes of point (o), the securities used as collateral
shall be valued at market price, have a value that exceeds the
exposures guaranteed and be either traded on a stock exchange
or effectively negotiable and regularly quoted on a market
operated under the auspices of recognised professional operators
and allowing, to the satisfaction of the competent authorities of
the Member State of origin of the credit institution, for the
establishment of an objective price such that the excess value of
the securities may be verified at any time. The excess value
required shall be 100 %. It shall, however, be 150 % in the case of
shares and 50 % in the case of debt securities issued by
institutions, Member State regional governments or
local
authorities other than those referred to in sub‑point (f), and in
the case of debt securities issued by multilateral development
banks other than those assigned a 0 % risk weight under Articles
78 to 83. Where there is a mismatch between the maturity of the
exposure and the maturity of the credit protection, the collateral
shall not be recognised. Securities used as collateral may not
constitute credit institutions' own funds.

For the purposes of point (p), the value of the property shall be
calculated, to the satisfaction of the competent authorities, on the
basis of strict valuation standards laid down by law, regulation or
administrative provisions. Valuation shall be carried out at least
once a year. For the purposes of point (p), residential property
shall mean a residence to be occupied or let by the borrower.

Member States shall inform the Commission of any exemption
granted under point (s) in order to ensure that it does not result
in a distortion of competition.

Article 114

1.
Subject to paragraph 3, for the purposes of calculating the
value of exposures for the purposes of Article 111(1) to (3)
Member States may, in respect of credit institutions using the
Financial Collateral Comprehensive Method under Articles 90 to
93, in the alternative to availing of the full or partial exemptions
permitted under points (f), (g), (h), and (o) of Article 113(3),
permit such credit institutions to use a value lower than the value
of the exposure, but no lower than the total of the fully‑adjusted
exposure values of their exposures to the client or group of
connected clients.

For these purposes,
‘fully adjusted exposure value’ means that
calculated under Articles 90 to 93 taking into account the credit
risk mitigation, volatility adjustments,
and any maturity
mismatch (E*).

Where this paragraph is applied to a credit institution, points (f),
(g), (h), and (o) of Article 113(3) shall not apply to the credit
institution in question.

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Subject to paragraph 3, a credit institution permitted to use
2.
own estimates of LGDs and conversion factors for an exposure
class under Articles 84 to 89 may be permitted, where it is able
to the satisfaction of the competent authorities to estimate the
effects of financial collateral on their exposures separately from
in
other LGD‑relevant aspects,
calculating the value of exposures for the purposes of Article
111(1) to (3).

to recognise such effects

Competent authorities shall be satisfied as to the suitability of the
estimates produced by the credit institution for use for the
reduction of the exposure value for the purposes of compliance
with the provisions of Article 111.

Where a credit institution is permitted to use its own estimates of
the effects of
it shall do so on a basis
consistent with the approach adopted in the calculation of capital
requirements.

financial collateral,

Credit institutions permitted to use own estimates of LGDs and
conversion factors for an exposure class under Articles 84 to 89
which do not calculate the value of their exposures using the
method referred to in the first subparagraph may be permitted to
use the approach set out in paragraph 1 or the exemption set out
in Article 113(3)(o) for calculating the value of exposures. A
credit institution shall use only one of these two methods.

3. A credit institution that is permitted to use the methods
described in paragraphs 1 and 2 in calculating the value of
exposures for the purposes of Article 111(1) to (3), shall conduct
periodic stress tests of their credit-risk concentrations, including
in relation to the realisable value of any collateral taken.

These periodic stress tests shall address risks arising from
potential changes in market conditions that could adversely
impact the credit institutions' adequacy of own funds and risks
arising from the realisation of collateral in stressed situations.

The credit institution shall satisfy the competent authorities that
the stress tests carried out are adequate and appropriate for the
assessment of such risks.

In the event that such a stress test indicates a lower realisable
value of collateral taken than would be permitted to be taken
into account under paragraphs 1 and 2 as appropriate, the value
of collateral permitted to be recognised in calculating the value of
exposures for the purposes of Article 111(1) to (3) shall be
reduced accordingly.

Such credit
strategies to address concentration risk:

institutions shall

include the following in their

(c)

policies and procedures relating to concentration risk
arising from the application of credit
risk mitigation
techniques, and in particular large indirect credit exposures,
for example to a single issuer of securities taken as
collateral.

4. Where the effects of collateral are recognised under the
terms of paragraphs 1 or 2, Member States may treat any covered
Part of the exposure as having been incurred to the collateral
issuer rather than to the client.

Article 115

1.
For the purposes of Article 111(1) to (3), Member States may
assign a weighting of 20 % to asset items constituting claims on
Member States' regional governments and local authorities where
those claims would be assigned a 20 % risk weight under Articles
78 to 83 and to other exposures to or guaranteed by such
governments and authorities claims on which are assigned a
20 % risk weight under Articles 78 to 83. However, Member
States may reduce that rate to 0 % in respect of asset items
constituting claims on Member States' regional governments and
local authorities where those claims would be assigned a 0 % risk
weight under Article 78 to 83 and to other exposures to or
guaranteed by such governments and authorities claims on
which are assigned a 0 % risk weight under Articles 78 to 83.

2.
For the purposes of Article 111(1) to (3), Member States may
assign a weighting of 20 % to asset items constituting claims on
and other exposures to institutions with a maturity of more than
one but not more than three years and a weighting of 50 % to
asset items constituting claims on institutions with a maturity of
more than three years, provided that the latter are represented by
debt instruments that were issued by a institution and that those
debt
the competent
authorities, effectively negotiable on a market made up of
professional operators and are subject to daily quotation on that
market, or the issue of which was authorised by the competent
the issuing
authorities of
institutions. In no case may any of these items constitute own
funds.

the Member State of origin of

in the opinion of

instruments are,

Article 116

By way of derogation from Article 113(3)(i) and Article 115(2),
Member States may assign a weighting of 20 % to asset items
constituting claims on and other exposures to institutions,
regardless of their maturity.

Article 117

(a)

(b)

policies and procedures to address risks arising from
maturity mismatches between exposures and any credit
protection on those exposures;

1. Where an exposure to a client is guaranteed by a third party,
or by collateral in the form of securities issued by a third party
under the conditions laid down in Article 113(3)(o), Member
States may:

policies and procedures in the event that a stress test
indicates a lower realisable value of collateral than taken
into account under paragraphs 1 and 2; and

(a)

treat the exposure as having been incurred to the guarantor
rather than to the client; or

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(b)

treat the exposure as having been incurred to the third
party rather than to the client, if the exposure defined in
Article 113(3)(o)
is guaranteed by collateral under the
conditions there laid down.

2. Where Member States apply the treatment provided for in
point (a) of paragraph 1:

2. The total amount of a credit institution's qualifying holdings
in undertakings other than credit institutions, financial institu-
tions or undertakings carrying on activities which are a direct
extension of banking or concern services ancillary to banking,
such as leasing, factoring, the management of unit trusts, the
management of data processing services, or any other similar
activity may not exceed 60 % of its own funds.

(a) where the guarantee is denominated in a currency different
from that
in which the exposure is denominated the
amount of the exposure deemed to be covered will be
calculated in accordance with the provisions on the
treatment of currency mismatch for unfunded credit
protection in Annex VIII;

3. The limits laid down in paragraphs 1 and 2 may be exceeded
only in exceptional circumstances. In such cases, however, the
competent authorities shall require a credit institution either to
increase its own funds or to take other equivalent measures.

Article 121

(b)

a mismatch between the maturity of the exposure and the
maturity of the protection will be treated in accordance
with the provisions on the treatment of maturity mismatch
in Annex VIII; and

(c)

partial coverage may be recognised in accordance with the
treatment set out in Annex VIII.

Shares held temporarily during a financial reconstruction or
rescue operation or during the normal course of underwriting or
in an institution's own name on behalf of others shall not be
counted as qualifying holdings for the purpose of calculating the
limits laid down in Articles 120(1) and (2). Shares which are not
financial fixed assets as defined in Article 35(2) of Directive 86/
635/EEC shall not be included in the calculation.

Article 118

Article 122

Where compliance by a credit institution on an individual or
sub‑consolidated basis with the obligations imposed in this
Section is disapplied under Article 69(1), or the provisions of
Article 70 are applied in the case of parent credit institutions in a
Member State, measures must be taken to ensure the satisfactory
allocation of risks within the group.

Article 119

By 31 December 2007, the Commission shall submit to the
European Parliament and to the Council a report on the
functioning of
together with any appropriate
proposals.

this Section,

S e c t i o n 6

1. The Member States need not apply the limits laid down in
Articles 120(1) and (2) to holdings in insurance companies as
in
defined in Directives 73/239/EEC and 2002/83/EC, or
reinsurance companies as defined in Directive 98/78/EC.

2. The Member States may provide that
the competent
authorities are not to apply the limits laid down in Article 120
(1) and (2) if they provide that 100 % of the amounts by which a
credit institution's qualifying holdings exceed those limits shall
be covered by own funds and that the latter shall not be included
in the calculation required under Article 75. If both the limits laid
down in Article 120(1) and (2) are exceeded, the amount to be
covered by own funds shall be the greater of the excess amounts.

CHAPTER 3

Credit institutions' assessment process

Q u a l i f y i n g h o l d i n g s o u t s i d e t h e f i n a n c i a l
s e c t o r

Article 123

Article 120

1. No credit institution may have a qualifying holding the
its own funds in an
amount of which exceeds 15 % of
undertaking which is neither a credit institution, nor a financial
institution, nor an undertaking carrying on activities which are a
direct extension of banking or concern services ancillary to
banking, such as leasing, factoring, the management of unit
trusts, the management of data processing services or any other
similar activity.

institutions shall have in place sound, effective and
Credit
complete strategies and processes to assess and maintain on an
ongoing basis the amounts, types and distribution of internal
capital that they consider adequate to cover the nature and level
of the risks to which they are or might be exposed.

These strategies and processes shall be subject to regular internal
review to ensure that they remain comprehensive and propor-
tionate to the nature, scale and complexity of the activities of the
credit institution concerned.

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CHAPTER 4

Article 126

Supervision and disclosure by competent authorities

S e c t i o n 1

S u p e r v i s i o n

Article 124

1. Taking into account the technical criteria set out in Annex
XI, the competent authorities shall review the arrangements,
strategies, processes and mechanisms implemented by the credit
institutions to comply with this Directive and evaluate the risks
to which the credit institutions are or might be exposed.

2. The scope of
the review and evaluation referred to in
paragraph 1 shall be that of the requirements of this Directive.

3. On the basis of the review and evaluation referred to in
paragraph 1, the competent authorities shall determine whether
the arrangements, strategies, processes and mechanisms imple-
mented by the credit institutions and the own funds held by
these ensure a sound management and coverage of their risks.

4. Competent authorities shall establish the frequency and
intensity of the review and evaluation referred to in paragraph 1
having regard to the size, systemic importance, nature, scale and
complexity of the activities of the credit institution concerned
and taking into account the principle of proportionality. The
review and evaluation shall be updated at least on an annual
basis.

5. The
review and evaluation performed by competent
authorities shall include the exposure of credit institutions to
the interest rate risk arising from non‑trading activities. Measures
shall be required in the case of institutions whose economic
value declines by more than 20 % of their own funds as a result
of a sudden and unexpected change in interest rates the size of
which shall be prescribed by the competent authorities and shall
not differ between credit institutions.

Article 125

1. Where a parent undertaking is a parent credit institution in a
Member State or an EU parent credit institution, supervision on a
consolidated basis
competent
authorities that authorised it under Article 6.

exercised by the

shall be

2. Where the parent of a credit institution is a parent financial
holding company in a Member State or an EU parent financial
holding company, supervision on a consolidated basis shall be
exercised by the competent authorities that authorised that credit
institution under Article 6.

1. Where credit institutions authorised in two or more Member
States have as their parent the same parent financial holding
company in a Member State or the same EU parent financial
holding company, supervision on a consolidated basis shall be
exercised by the competent authorities of the credit institution
authorised in the Member State in which the financial holding
company was set up.

Where the parents of credit institutions authorised in two or
more Member States comprise more than one financial holding
company with head offices in different Member States and there
is a credit institution in each of these States, supervision on a
consolidated basis shall be exercised by the competent authority
of the credit institution with the largest balance sheet total.

these credit

2. Where more than one credit institution authorised in the
the same financial holding
Community has as its parent
company and none of
institutions has been
authorised in the Member State in which the financial holding
company was set up, supervision on a consolidated basis shall be
exercised by the competent authority that authorised the credit
institution with the largest balance sheet total, which shall be
considered, for the purposes of this Directive, as the credit
financial holding
institution controlled by an EU parent
company.

In particular cases,

3.
the competent authorities may by
common agreement waive the criteria referred to in paragraphs
1 and 2 if their application would be inappropriate, taking into
account the credit institutions and the relative importance of
their activities in different countries, and appoint a different
competent authority to exercise supervision on a consolidated
basis. In these cases, before taking their decision, the competent
authorities shall give the EU parent credit institution, or EU
parent financial holding company, or credit institution with the
largest balance sheet total, as appropriate, an opportunity to state
its opinion on that decision.

4. The competent authorities shall notify the Commission of
any agreement falling within paragraph 3.

Article 127

1. Member States shall adopt any measures necessary, where
appropriate, to include financial holding companies in con-
solidated supervision. Without prejudice to Article 135, the
consolidation of the financial situation of the financial holding
the competent
company shall not
authorities are required to play a supervisory role in relation to
the financial holding company on a stand‑alone basis.

in any way imply that

2. When the competent authorities of a Member State do not
include a credit
institution subsidiary in supervision on a
consolidated basis under one of the cases provided for in points
(b) and (c) of Article 73(1), the competent authorities of the
Member State in which that credit
institution subsidiary is
situated may ask the parent undertaking for information which
may facilitate their supervision of that credit institution.

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3. Member States shall provide that their competent authorities
responsible for exercising supervision on a consolidated basis
may ask the subsidiaries of a credit institution or a financial
holding company, which are not included within the scope of
supervision on a consolidated basis for the information referred
to in Article 137. In such a case, the procedures for transmitting
and verifying the information laid down in that Article shall
apply.

reservations of the other competent authorities expressed during
the six months period. The decision shall be provided to the
applicant and the other competent authorities by the competent
authority referred to in paragraph 1.

The decisions referred to in the third and fifth subparagraphs
shall be recognised as determinative and applied by the
competent authorities in the Member States concerned.

Article 128

Article 130

Where Member States have more than one competent authority
for the prudential supervision of credit institutions and financial
institutions, Member States shall take the requisite measures to
organise coordination between such authorities.

Article 129

the competent authority responsible for

In addition to the obligations imposed by the provisions of
1.
this Directive,
the
exercise of supervision on a consolidated basis of EU parent
credit institutions and credit institutions controlled by EU parent
financial holding companies shall carry out the following tasks:

(a)

(b)

coordination of the gathering and dissemination of relevant
or essential information in going concern and emergency
situations; and

planning and coordination of supervisory activities in going
concern as well as in emergency situations, including in
relation to the activities in Article 124, in cooperation with
the competent authorities involved.

2.
In the case of applications for the permissions referred to in
Articles 84(1), 87(9) and 105 and in Annex III, Part 6,
respectively, submitted by an EU parent credit institution and
its subsidiaries, or jointly by the subsidiaries of an EU parent
financial holding company, the competent authorities shall work
together, in full consultation, to decide whether or not to grant
the permission sought and to determine the terms and
conditions, if any, to which such permission should be subject.

An application as referred to in the first subparagraph shall be
submitted only to the competent authority referred to in
paragraph 1.

The competent authorities shall do everything within their power
to reach a joint decision on the application within six months.
This joint decision shall be set out in a document containing the
fully reasoned decision which shall be provided to the applicant
by the competent authority referred to in paragraph 1.

receipt of

The period referred to in subparagraph 3 shall begin on the date
of
the complete application by the competent
authority referred to in paragraph 1. The competent authority
referred to in paragraph 1 shall forward the complete application
to the other competent authorities without delay.

In the absence of a joint decision between the competent
authorities within six months, the competent authority referred
to in paragraph 1 shall make its own decision on the application.
The decision shall be set out in a document containing the fully
reasoned decision and shall take into account the views and

1. Where an emergency situation arises within a banking group
which potentially jeopardises the stability of the financial system
in any of the Member States where entities of a group have been
authorised, the competent authority responsible for the exercise
of supervision on a consolidated basis shall alert as soon as is
practicable, subject to Chapter 1, Section 2,
the authorities
referred to in Article 49(a) and Article 50. This obligation shall
apply to all competent authorities identified under Articles 125
and 126 in relation to a particular group, and to the competent
authority identified under Article 129(1). Where possible, the
competent authority shall use existing defined channels of
communication.

2. The competent authority responsible for supervision on a
consolidated basis shall, when it needs information which has
already been given to another competent authority, contact this
authority whenever possible in order to prevent duplication of
reporting to the various authorities involved in supervision.

Article 131

In order to facilitate and establish effective supervision, the
competent authority responsible for supervision on a consoli-
dated basis and the other competent authorities shall have
written coordination and cooperation arrangements in place.

Under these arrangements additional tasks may be entrusted to
the competent authority responsible for supervision on a
consolidated basis and procedures for
the decision‑making
process and for cooperation with other competent authorities,
may be specified.

The competent authorities
responsible for authorising the
subsidiary of a parent undertaking which is a credit institution
may, by bilateral agreement, delegate their responsibility for
supervision to the competent authorities which authorised and
supervise the parent undertaking so that they assume respon-
sibility for supervising the subsidiary in accordance with this
Directive. The Commission shall be kept
the
existence and content of such agreements. It shall forward such
information to the competent authorities of the other Member
States and to the European Banking Committee.

informed of

Article 132

1. The competent authorities shall cooperate closely with each
other. They shall provide one another with any information
which is essential or relevant for the exercise of the other
authorities' supervisory tasks under this Directive. In this regard,
the competent authorities shall communicate on request all
information and shall communicate on their own
relevant
initiative all essential information.

Information referred to in the first subparagraph shall be
regarded as essential
it could materially influence the
assessment of the financial soundness of a credit institution or
financial institution in another Member State.

if

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In particular, competent authorities responsible for consolidated
supervision of EU parent credit institutions and credit institu-
tions controlled by EU parent financial holding companies shall
provide the competent authorities in other Member States who
supervise
relevant
information. In determining the extent of relevant information,
the importance of these subsidiaries within the financial system
in those Member States shall be taken into account.

these parents with all

subsidiaries of

The essential information referred to in the first subparagraph
shall include, in particular, the following items:

(a)

(b)

(c)

identification of the group structure of all major credit
the competent
institutions in a group, as well as of
authorities of the credit institutions in the group;

procedures for the collection of information from the credit
institutions
that
information;

in a group, and the verification of

adverse developments in credit institutions or in other
entities of a group, which could seriously affect the credit
institutions; and

(d) major

sanctions and exceptional measures

taken by
competent authorities in accordance with this Directive,
including the imposition of an additional capital charge
under Article 136 and the imposition of any limitation on
the use of the Advanced Measurement Approach for the
calculation of the own funds requirements under Article
105.

2. The competent authorities responsible for the supervision of
credit institutions controlled by an EU parent credit institution
shall whenever possible contact the competent authority referred
to in Article 129(1) when they need information regarding the
implementation of approaches and methodologies set out in this
Directive that may already be available to that competent
authority.

3. The competent authorities concerned shall, prior to their
decision, consult each other with regard to the following items,
where these decisions are of importance for other competent
authorities' supervisory tasks:

However, a competent authority may decide not to consult in
cases of urgency or where such consultation may jeopardise the
In this case,
effectiveness of
the competent
the decisions.
authority shall, without delay,
inform the other competent
authorities.

Article 133

1. The competent authorities responsible for supervision on a
consolidated basis shall, for the purposes of supervision, require
full consolidation of all the credit institutions and financial
institutions which are subsidiaries of a parent undertaking.

However, the competent authorities may require only propor-
tional consolidation where, in their opinion, the liability of a
parent undertaking holding a share of the capital is limited to
that share of the capital in view of the liability of the other
shareholders or members whose solvency is satisfactory. The
liability of the other shareholders and members shall be clearly
established,
if necessary by means of formal signed commit-
ments.

In the case where undertakings are linked by a relationship
within the meaning of Article 12(1) of Directive 83/349/EEC, the
competent authorities shall determine how consolidation is to be
carried out.

2. The competent authorities responsible for supervision on a
consolidated basis shall require the proportional consolidation of
participations in credit institutions and financial
institutions
managed by an undertaking included in the consolidation
together with one or more undertakings not included in the
consolidation, where those undertakings' liability is limited to the
share of the capital they hold.

3.
In the case of participations or capital ties other than those
referred to in paragraphs 1 and 2, the competent authorities shall
determine whether and how consolidation is to be carried out. In
particular, they may permit or require use of the equity method.
That method shall not, however, constitute inclusion of the
undertakings concerned in supervision on a consolidated basis.

Article 134

(a)

changes in the shareholder, organisational or management
structure of credit institutions in a group, which require the
approval or authorisation of competent authorities; and

1. Without prejudice to Article 133, the competent authorities
shall determine whether and how consolidation is to be carried
out in the following cases:

(b) major sanctions or exceptional measures taken by compe-
tent authorities, including the imposition of an additional
capital charge under Article 136 and the imposition of any
limitation on the use of
the Advances Measurement
Approaches for the calculation of the own funds require-
ments under Article 105.

the purposes of point

For
the competent authority
responsible for supervision on a consolidated basis shall always
be consulted.

(b),

(a) where, in the opinion of the competent authorities, a credit
institution exercises a significant influence over one or
more credit
institutions, but
without holding a participation or other capital ties in
these institutions; and

institutions or

financial

(b) where two or more credit

financial
institutions are placed under single management other
than pursuant to a contract or clauses of their memoranda
or Articles of association.

institutions or

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In particular, the competent authorities may permit, or require
use of, the method provided for in Article 12 of Directive 83/
349/EEC. That method shall not, however, constitute inclusion of
the undertakings concerned in consolidated supervision.

2. Where consolidated supervision is required pursuant to
Articles 125 and 126, ancillary services undertakings and asset
management companies as defined in Directive 2002/87/EC
in the cases, and in
shall be included in consolidations
laid down in Article 133 and
accordance with the methods,
paragraph 1 of this Article.

Article 135

The Member States shall require that persons who effectively
direct
the business of a financial holding company be of
sufficiently good repute and have sufficient experience to
perform those duties.

the

authorities

competent

responsible

the
company,
authorisation and supervision of those credit institutions shall,
by approaching the mixed‑activity holding company and its
subsidiaries either directly or via credit institution subsidiaries,
require them to supply any information which would be relevant
for the purpose of supervising the credit institution subsidiaries.

for

2. Member States shall provide that their competent authorities
may carry out, or have carried out by external
inspectors,
inspections to verify information received from
on‑the‑spot
mixed‑activity holding companies and their subsidiaries. If the
mixed‑activity holding company or one of its subsidiaries is an
insurance undertaking, the procedure laid down in Article 140(1)
may also be used. If a mixed‑activity holding company or one of
its subsidiaries is situated in a Member State other than that in
which the credit institution subsidiary is situated, on‑the‑spot
verification of information shall be carried out in accordance
with the procedure laid down in Article 141.

Article 136

Article 138

1. Competent authorities shall require any credit institution
that does not meet the requirements of this Directive to take the
necessary actions or steps at an early stage to address the
situation.

For those purposes, the measures available to the competent
authorities shall include the following:

(a)

(b)

(c)

(d)

(e)

obliging credit institutions to hold own funds in excess of
the minimum level laid down in Article 75;

requiring the reinforcement of the arrangements, processes,
mechanisms and strategies implemented to comply with
Articles 22 and 123;

requiring credit institutions to apply a specific provisioning
policy or treatment of assets in terms of own funds
requirements;

restricting or limiting the business, operations or network
of credit institutions; and

requiring the reduction of the risk inherent in the activities,
products and systems of credit institutions.

1. Without prejudice to Chapter 2, Section 5, Member States
shall provide that, where the parent undertaking of one or more
credit
the
institutions is a mixed‑activity holding company,
competent authorities responsible for the supervision of these
credit
supervision over
transactions between the credit institution and the mixed‑activity
holding company and its subsidiaries.

exercise general

institutions

shall

2. Competent authorities shall require credit institutions to
have in place adequate risk management processes and internal
control mechanisms, including sound reporting and accounting
procedures, in order to identify, measure, monitor and control
transactions with their parent mixed‑activity holding company
and its subsidiaries appropriately. Competent authorities shall
require the reporting by the credit institution of any significant
transaction with these entities other than the one referred to in
Article 110. These procedures and significant transactions shall
be subject to overview by the competent authorities.

Where these intra‑group transactions are a threat to a credit
institution's financial position, the competent authority respon-
sible for the supervision of the institution shall take appropriate
measures.

The adoption of these measures shall be subject to Chapter 1,
Section 2.

Article 139

2. A specific own funds requirement in excess of the minimum
level laid down in Article 75 shall be imposed by the competent
authorities at least on the credit institutions which do not meet
the requirements laid down in Articles 22, 109 and 123, or in
respect of which a negative determination has been made on the
issue described in Article 124, paragraph 3, if the sole application
of other measures is unlikely to improve the arrangements,
processes, mechanisms and strategies sufficiently within an
appropriate timeframe.

1. Member States shall take the necessary steps to ensure that
there are no legal
impediments preventing the exchange, as
between undertakings included within the scope of supervision
on a consolidated basis, mixed‑activity holding companies and
their subsidiaries, or subsidiaries of the kind covered in Article
127(3), of any information which would be relevant for the
purposes of supervision in accordance with Articles 124 to 138
and this Article.

Article 137

1.
Pending further coordination of consolidation methods,
Member States shall provide that, where the parent undertaking
of one or more credit institutions is a mixed‑activity holding

2. Where a parent undertaking and any of its subsidiaries that
are credit institutions are situated in different Member States, the
competent authorities of each Member State shall communicate
to each other all relevant information which may allow or aid the
exercise of supervision on a consolidated basis.

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Where the competent authorities of the Member State in which a
parent undertaking is situated do not
themselves exercise
supervision on a consolidated basis pursuant to Articles 125
and 126, they may be invited by the competent authorities
responsible for exercising such supervision to ask the parent
undertaking for any information which would be relevant for the
purposes of supervision on a consolidated basis and to transmit
it to these authorities.

that verification carried out. The authorities which receive such a
request shall, within the framework of their competence, act
upon it either by carrying out the verification themselves, by
allowing the authorities who made the request to carry it out, or
by allowing an auditor or expert to carry it out.1 The competent
authority which made the request may, if it so wishes, participate
in the verification when it does not carry out the verification
itself.

3. Member States shall authorise the exchange between their
competent authorities of
the information referred to in
paragraph 2, on the understanding that, in the case of financial
holding companies, financial
institutions or ancillary services
undertakings, the collection or possession of information shall
not in any way imply that the competent authorities are required
to play a supervisory role in relation to those institutions or
undertakings standing alone.

their

shall authorise

competent
Similarly, Member States
authorities to exchange the information referred to in Article
137 on the understanding that the collection or possession of
information does not in any way imply that the competent
authorities play a supervisory role in relation to the mixed‑ac-
tivity holding company and those of its subsidiaries which are
not credit institutions, or to subsidiaries of the kind covered in
Article 127(3).

Article 140

1. Where a credit institution, financial holding company or a
mixed‑activity holding company controls one or more sub-
sidiaries which are insurance companies or other undertakings
providing investment services which are subject to authorisation,
the competent authorities and the authorities entrusted with the
public task of supervising insurance undertakings or those other
undertakings providing investment services
shall cooperate
closely. Without prejudice to their respective responsibilities,
those authorities shall provide one another with any information
likely to simplify their task and to allow supervision of the
activity and overall financial situation of the undertakings they
supervise.

2.
Information received, in the framework of supervision on a
consolidated basis, and in particular any exchange of information
between competent authorities which is provided for in this
to the obligation of professional
Directive, shall be subject
secrecy defined in Chapter 1, Section 2.

3. The competent authorities responsible for supervision on a
consolidated basis shall establish lists of the financial holding
companies referred to in Article 71(2) . Those lists shall be
communicated to the competent authorities of
the other
Member States and to the Commission.

Article 141

Where, in applying this Directive, the competent authorities of
one Member State wish in specific cases to verify the information
concerning a credit institution, a financial holding company, a
a
financial
mixed‑activity holding company, a subsidiary of
the kind
covered in Article 137 or a subsidiary of the kind covered in
Article 127(3), situated in another Member State, they shall ask
the competent authorities of that other Member State to have

an ancillary services undertaking,

institution,

Article 142

Without prejudice to their criminal
law provisions, Member
States shall ensure that penalties or measures aimed at ending
observed breaches or the causes of such breaches may be
imposed on financial holding companies and mixed‑activity
holding companies, or their effective managers, that infringe
laws, regulation or administrative provisions enacted to imple-
ment Articles 124 to 141 and this Article. The competent
authorities shall cooperate closely to ensure that those penalties
or measures produce the desired results, especially when the
central administration or main establishment of a financial
holding company or of a mixed‑activity holding company is not
located at its head office.

Article 143

1. Where a credit institution, the parent undertaking of which
is a credit institution or a financial holding company, the head
to
office of which is in a third country,
is not subject
consolidated supervision under Articles 125 and 126,
the
competent authorities shall verify whether the credit institution
to consolidated supervision by a third‑country
is
competent authority which is equivalent to that governed by
the principles laid down in this Directive.

subject

The verification shall be carried out by the competent authority
which would be responsible for consolidated supervision if
paragraph 3 were to apply, at
the parent
undertaking or of any of the regulated entities authorised in the
Community or on its own initiative. That competent authority
shall consult the other competent authorities involved.

the request of

the European Banking
2. The Commission may request
Committee to give general guidance as
the
to whether
consolidated supervision arrangements of competent authorities
in third countries are likely to achieve the objectives of
consolidated supervision as defined in this Chapter, in relation
to credit institutions, the parent undertaking of which has its
head office in a third country . The Committee shall keep any
such guidance under review and take into account any changes
to the consolidated supervision arrangements applied by such
competent authorities.

The competent authority carrying out the verification specified
in the first subparagraph of paragraph 1 shall take into account
any such guidance. For this purpose the competent authority
shall consult the Committee before taking a decision.

3.
In the absence of such equivalent supervision, Member
States shall apply the provisions of this Directive to the credit
institution by analogy or shall allow their competent authorities
to apply other appropriate supervisory techniques which achieve
the objectives of supervision on a consolidated basis of credit
institutions.

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Those supervisory techniques shall, after consultation with the
other competent authorities involved, be agreed upon by the
competent authority which would be responsible for consoli-
dated supervision.

2. Recognition by the competent authorities under Chapter 2,
Section 3, Subsections 2 and 3 and Article 105 of
the
instruments and methodologies referred to in Annex XII, Part
3 shall be subject to the public disclosure by credit institutions of
the information laid down therein.

Competent authorities may in particular require the establish-
ment of a financial holding company which has its head office in
the Community, and apply the provisions on consolidated
supervision to the consolidated position of that financial holding
company.

3. Credit institutions shall adopt a formal policy to comply
with the disclosure requirements laid down in paragraphs 1 and
2, and have policies for assessing the appropriateness of their
disclosures, including their verification and frequency.

The supervisory techniques shall be designed to achieve the
objectives of consolidated supervision as defined in this Chapter
and shall be notified to the other competent authorities involved
and the Commission.

S e c t i o n 2

4. Credit institutions should, if requested, explain their rating
decisions to SMEs and other corporate applicants for loans,
providing an explanation in writing when asked. Should a
voluntary undertaking by the sector
in this regard prove
inadequate, national measures shall be adopted. The adminis-
trative costs of the explanation have to be at an appropriate rate
to the size of the loan.

D i s c l o s u r e b y c o m p e t e n t a u t h o r i t i e s

Article 146

Article 144

Competent authorities shall disclose the following information:

1. Notwithstanding Article 145, credit institutions may omit
one or more of the disclosures listed in Annex XII, Part 2 if the
information provided by such disclosures is not, in the light of
the criterion specified in Annex XII, Part 1, point 1, regarded as
material.

(a)

(b)

the texts of
laws, regulations, administrative rules and
general guidance adopted in their Member State in the field
of prudential regulation;

the manner of exercise of
available in Community legislation;

the options and discretions

2. Notwithstanding Article 145, credit institutions may omit
one or more items of information included in the disclosures
those items include
listed in Annex XII, Parts 2 and 3 if
information which, in the light of the criteria specified in Annex
XII, Part 1, points 2 and 3,
is regarded as proprietary or
confidential.

(c)

the general criteria and methodologies they use in the
review and evaluation referred to in Article 124; and

(d) without prejudice to the provisions laid down in Chapter 1,
Section 2, aggregate statistical data on key aspects of the
implementation of
framework in each
the prudential
Member State.

The disclosures provided for in the first subparagraph shall be
sufficient to enable a meaningful comparison of the approaches
adopted by the competent authorities of the different Member
States. The disclosures shall be published with a common format,
and updated regularly. The disclosures shall be accessible at a
single electronic location.

CHAPTER 5

Disclosure by credit institutions

Article 145

1.
For the purposes of this Directive, credit institutions shall
publicly disclose the information laid down in Annex XII, Part 2,
subject to the provisions laid down in Article 146.

3.
In the exceptional cases referred to in paragraph 2, the credit
institution concerned shall state in its disclosures the fact that the
specific items of information are not disclosed, the reason for
non‑disclosure, and publish more general information about the
subject matter of the disclosure requirement, except where these
are to be classified as proprietary or confidential under the
criteria set out in Annex XII, Part 1, points 2 and 3.

Article 147

1. Credit
institutions shall publish the disclosures required
under Article 145 on an annual basis at a minimum. Disclosures
shall be published as soon as practicable.

institutions

2. Credit
shall also determine whether more
frequent publication than is provided for in paragraph 1 is
necessary in the light of the criteria set out in Annex XII, Part 1,
point 4.

Article 148

1. Credit institutions may determine the appropriate medium,
location and means of verification to comply effectively with the
disclosure requirements laid down in Article 145. To the degree
feasible, all disclosures shall be provided in one medium or
location.

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Equivalent disclosures made by credit institutions under
2.
accounting,
listing or other requirements may be deemed to
constitute compliance with Article 145. If disclosures are not
included in the financial statements, credit institutions shall
indicate where they can be found.

Article 149

Notwithstanding Articles 146 to 148, Member States shall
empower the competent authorities to require credit institutions:

(a)

(b)

(c)

(d)

to make one or more of the disclosures referred to in
Annex XII, Parts 2 and 3;

to publish one or more disclosures more frequently than
annually, and to set deadlines for publication;

to use specific media and locations for disclosures other
than the financial statements; and

to use specific means of verification for the disclosures not
covered by statutory audit.

TITLE VI

POWERS OF EXECUTION

Article 150

1. Without prejudice, regarding own funds, to the proposal
that the Commission is to submit pursuant to Article 62, the
technical adjustments in the following areas shall be adopted in
accordance with the procedure referred to in Article 151(2):

(h)

(i)

(j)

(k)

(l)

technical adjustments in Articles 56 to 67 and in Article 74
as a result of developments in accounting standards or
requirements which take account of Community legislation
or with regard to convergence of supervisory practices;

amendment of the list of exposure classes in Articles 79
and 86 in order to take account of developments on
financial markets;

the amount specified in Article 79(2)(c), Article 86(4)(a),
Annex VII, Part 1, point 5 and Annex VII, Part 2, point 15
to take into account the effects of inflation;

items in
the list and classification of off‑balance‑sheet
Annexes II and IV and their treatment in the determination
of exposure values for the purposes of Title V, Chapter 2,
Section 3; or

adjustment of the provisions in Annexes V to XII in order
to take account of developments on financial markets (in
particular new financial products) or
in accounting
standards or requirements which take account of Commu-
nity legislation, or with regard to convergence of super-
visory practice.

2. The Commission may adopt the following implementing
measures in accordance with the procedure referred to in Article
151(2):

(a)

(b)

specification of the size of sudden and unexpected changes
in the interest rates referred to in Article 124(5);

a temporary reduction in the minimum level of own funds
laid down in Article 75 and/or the risk weights laid down in
Title V, Chapter 2, Section 3 in order to take account of
specific circumstances;

(a)

(b)

(c)

clarification of the definitions in order to take account, in
the application of
this Directive, of developments on
financial markets;

(c) without prejudice to the report referred to in Article 119,
clarification of exemptions provided for in Articles 111(4),
113, 115 and 116;

clarification of the definitions to ensure uniform applica-
tion of this Directive;

the alignment of
terminology on, and the framing of
definitions in accordance with, subsequent acts on credit
institutions and related matters;

(d)

technical adjustments to the list in Article 2;

(e)

(f)

alteration of the amount of initial capital prescribed in
Article 9 to take account of developments in the economic
and monetary field;

expansion of the content of the list referred to in Articles
23 and 24 and set out in Annex I or adaptation of the
terminology used in that list to take account of develop-
ments on financial markets;

(g)

the areas in which the competent authorities shall exchange
information as listed in Article 42;

(d)

(e)

specification of
the key aspects on which aggregate
statistical data are to be disclosed under Article 144(1)(d);
or

specification of the format, structure, contents list and
annual publication date of the disclosures provided for in
Article 144.

3. None of the implementing measures enacted may change
the essential provisions of this Directive.

4. Without prejudice to the implementing measures already
adopted, upon expiry of a two‑year period following the
adoption of this Directive, and by 1 April 2008 at the latest,
the application of the provisions of this Directive requiring the
technical rules, amendments and decisions in
adoption of
accordance with paragraph 2 shall be suspended. Acting on a
proposal from the Commission and in accordance with the
procedure laid down in Article 251 of the Treaty, the Parliament
and the Council may renew those provisions and, to that end,
shall review them prior to the expiry of the period or by the date
referred to in this paragraph, whichever the earlier.

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Article 151

1. The Commission shall be assisted by the European Banking
Committee established by Commission Decision 2004/10/EC (1).

2. Where reference is made to this paragraph, the procedure
laid down in Article 5 of Decision 1999/468/EC shall apply,
having regard to the provisions of Article 7(3) and Article 8
thereof.

The period laid down in Article 5(6) of Decision 1999/468/EC
shall be three months.

For the third twelve‑month period referred to in paragraph
5.
1, the amount of own funds shall be 80 % of the total minimum
amount of own funds that would be required to be held during
that period by the credit institution under Article 4 of Directive
93/6/EEC as that Directive and Directive 2000/12/EC stood prior
.to 1 January 2007.

6. Compliance with the requirements of paragraphs 1 to 5 shall
be on the basis of amounts of own funds fully adjusted to reflect
differences in the calculation of own funds under Directive 2000/
12/EC and Directive 93/6/EEC as those Directives stood prior to
1 January 2007 and the calculation of own funds under this
Directive deriving from the separate treatments of expected loss
and unexpected loss under Articles 84 to 89 of this Directive.

3. The Committee shall adopt its Rules of Procedure.

For the purposes of paragraphs 1 to 6 of this Article, Articles

7.
68 to 73 shall apply.

TITLE VII

TRANSITIONAL AND FINAL PROVISIONS

CHAPTER 1

Transitional provisions

Article 152

institutions

1. Credit
risk‑weighted exposure
calculating
amounts in accordance with Articles 84 to 89 shall during the
first, second and third twelve‑month periods after 31 December
2006 provide own funds which are at all times more than or
equal to the amounts indicated in paragraphs 3, 4 and 5.

2. Credit
institutions using the Advanced Measurement
Approaches as specified in Article 105 for the calculation of
their capital requirements for operational risk shall, during the
second and third twelve‑month periods after 31 December 2006,
provide own funds which are at all times more than or equal to
the amounts indicated in paragraphs 4 and 5.

3.
For the first twelve‑month period referred to in paragraph 1,
the amount of own funds shall be 95 % of the total minimum
amount of own funds that would be required to be held during
that period by the credit institution under Article 4 of Council
Directive 93/6/EEC of 15 March 1993 on the capital adequacy of
investment firms and credit institutions (2) as that Directive and
Directive 2000/12/EC stood prior to 1 January 2007.

the

For

4.
second twelve‑month period referred to in
paragraph 1, the amount of own funds shall be 90 % of the
total minimum amount of own funds that would be required to
be held during that period by the credit institution under Article
4 of Directive 93/6/EEC as that Directive and Directive 2000/12/
EC stood prior to 1 January 2007.

8. Until 1 January 2008 credit
the
Articles constituting the Standardised Approach set out in Title
V, Chapter 2, Section 3, Subsection 1 as being replaced by
Articles 42 to 46 of Directive 2000/12/EC as those Articles
stood prior to 1 January 2007.

institutions may treat

9. Where the discretion referred to in paragraph 8 is exercised,
the following shall apply concerning the provisions of Directive
2000/12/EC:

(a)

the provisions of that Directive referred to in Articles 42 to
46 shall apply as they stood prior to 1 January 2007;

(b)

‘risk‑adjusted value’ as referred to in Article 42(1) of that
Directive shall mean ‘risk‑weighted exposure amount’;

(c)

the figures produced by Article 42(2) of that Directive shall
be considered risk‑weighted exposure amounts;

(d)

‘credit derivatives’ shall be included in the list of ‘Full risk’
items in Annex II of that Directive; and

(e)

the treatment set out in Article 43(3) of that Directive shall
apply to derivative instruments listed in Annex IV of that
Directive whether on‑ or off‑balance sheet and the figures
produced by the treatment set out in Annex III shall be
considered risk‑weighted exposure amounts.

10. Where the discretion referred to in paragraph 8 is
exercised, the following shall apply in relation to the treatment
of exposures for which the Standardised Approach is used:

(a)

Title V, Chapter 2, Section 3, Subsection 3 relating to the
recognition of credit risk mitigation shall not apply;

(1) OJ L 3, 7.1.2004, p. 36.
(2) OJ L 141, 11.6.1993, p. 1. Directive as last amended by Directive

2005/1/EC.

(b) Title V, Chapter 2, Section 3, Subsection 4 concerning the
treatment of securitisation may be disapplied by competent
authorities.

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11. Where the discretion referred to in paragraph 8 is exercised,
the capital requirement for operational risk under Article 75(d)
shall be reduced by the percentage representing the ratio of the
value of the credit institution's exposures for which risk‑weighted
exposure amounts are calculated in accordance with the
discretion referred to in paragraph 8 to the total value of its
exposures.

12. Where a credit institution calculates risk‑weighted expo-
sure amounts for all of its exposures in accordance with the
discretion referred to in paragraph 8, Articles 48 to 50 of
Directive 2000/12/EC relating to large exposures may apply as
they stood prior to 1 January 2007.

13. Where the discretion referred to in paragraph 8 is
exercised, references to Articles 78 to 83 of this Directive shall
be read as references to Articles 42 to 46 of Directive 2000/12/
EC as those Articles stood prior to 1 January 2007.

14.
If the discretion referred to in paragraph 8 is exercised,
Articles 123, 124, 145 and 149 shall not apply before the date
referred to therein.

Article 153

risk‑weighted exposure amounts

In the calculation of
for
exposures arising from property leasing transactions concerning
offices or other commercial premises situated in their territory
and meeting the criteria set out in Annex VI, Part 1, point 54, the
competent authorities may, until 31 December 2012 allow a
50 % risk weight to be assigned without the application of
Annex VI, Part 1, points 55 and 56.

Until 31 December 2010, competent authorities may, for the
purpose of defining the secured portion of a past due loan for
the purposes of Annex VI, recognise collateral other than eligible
collateral as set out under Articles 90 to 93.

In the calculation of risk weighted exposure amounts for the
purposes of Annex VI, Part 1, point 4, until 31 December 2012
the same risk weight shall be assigned in relation to exposures to
Member States' central governments or central banks denomi-
nated and funded in the domestic currency of any Member State
as would be applied to such exposures denominated and funded
in their domestic currency.

Article 154

1. Until 31 December 2011, the competent authorities of each
Member State may, for the purposes of Annex VI, Part 1, point
61, set the number of days past due up to a figure of 180 for
exposures indicated in Annex VI, Part 1, points 12 to 17 and 41
to 43,
local
to counterparties situated in their territory,
conditions make it appropriate. The specific number may differ
across product lines.

if

Competent authorities which do not exercise the discretion
provided for in the first subparagraph in relation to exposures to
counterparties situated in their territory may set a higher number

of days for exposures to counterparties situated in the territories
of other Member States, the competent authorities of which have
exercised that discretion. The specific number shall fall within 90
days and such figures as the other competent authorities have set
for exposures to such counterparties within their territory.

For credit institutions applying for the use of

2.
the IRB
Approach before 2010, subject to the approval of the competent
authorities, the three‑years' use requirement prescribed in Article
84(3) may be reduced to a period no shorter than one year until
31 December 2009.

For credit institutions applying for the use of own estimates
3.
of LGDs and/or
three year use
requirement prescribed in Article 84(4) may be reduced to two
years until 31 December 2008.

conversion factors,

the

4. Until 31 December 2012, the competent authorities of each
Member State may allow credit institutions to continue to apply
to participations of the type set out in Article 57(o) acquired
before 20 July 2006 the treatment set out in Article 38 of
Directive 2000/12/EC as that article stood prior to 1 January
2007.

5. Until 31 December 2010 the exposure weighted average
LGD for all retail exposures secured by residential properties and
not benefiting from guarantees from central governments shall
not be lower than 10 %.

6. Until 31 December 2017, the competent authorities of the
Member States may exempt from the IRB treatment certain
equity exposures held by credit institutions and EU subsidiaries
of credit institutions in that Member State at 31 December 2007.

The exempted position shall be measured as the number of
shares as of 31 December 2007 and any additional share arising
directly as a result of owning those holdings, as long as they do
not increase the proportional share of ownership in a portfolio
company.

If an acquisition increases the proportional share of ownership in
a specific holding the exceeding Part of the holding shall not be
subject to the exemption. Nor shall the exemption apply to
holdings that were originally subject to the exemption, but have
been sold and then bought back.

Equity exposures covered by this transitional provision shall be
subject to the capital requirements calculated in accordance with
Title V, Chapter 2, Section 3, Subsection 1.

for corporate exposures,

7. Until 31 December 2011,
the
competent authorities of each Member State may set the number
of days past due that all credit institutions in its jurisdiction shall
abide by under the definition of ‘default’ set out in Annex VII,
Part 4, point 44 for exposures to such counterparts situated
within this Member State. The specific number shall fall within
local conditions make it
90‑ up to a figure of 180 days if
appropriate. For exposures to such counterparts situated in the

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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.

Article 155

Until 31 December 2012, for credit institutions the relevant
indicator for the trading and sales business line of which
represents at least 50 % of the total of the relevant indicators for
all of its business lines accordance with Annex X, Part 2, points 1
to 4, Member States may apply a percentage of 15 % to the
business line ‘trading and sales’.

CHAPTER 2

Final provisions

Article 156

The Commission, in cooperation with Member States, and taking
into account the contribution of the European Central Bank,
shall periodically monitor whether this Directive taken as a
together with Directive 2006/49/EC, has significant
whole,
effects on the economic cycle and,
that
examination, shall consider whether any remedial measures are
justified.

in the light of

Based on that analysis and taking into account the contribution
of the European Central Bank, the Commission shall draw up a
biennial report and submit it to the European Parliament and to
the Council, together with any appropriate proposals. Contribu-
tions from credit taking and credit lending parties shall be
adequately acknowledged when the report is drawn up.

By 1 January 2012 the Commission shall, review and report on
the application of this Directive with particular attention to all
aspects of Articles 68 to 73, 80(7), 80(8) and 129, and shall
submit this report to the Parliament and the Council together
with any appropriate proposals.

Article 157

those provisions
provisions and this Directive.

and a correlation table between those

Notwithstanding paragraph 3, Member States shall apply those
provisions from 1 January 2007.

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. They shall also
include a statement that references in existing laws, regulations
and administrative provisions to the directives repealed by this
Directive shall be construed as references to this Directive.
Member States shall determine how such reference is to be made
and how that statement is to be formulated.

2. Member States shall communicate to the Commission the
text of the main provisions of national law which they adopt in
the field covered by this Directive.

3. Member States shall apply, from 1 January 2008, and no
regulations and administrative provisions
earlier,
necessary to comply with Articles 87(9) and 105.

the laws

Article 158

1. Directive 2000/12/EC as amended by the Directives set out
in Annex XIII, Part A, is hereby repealed without prejudice to the
obligations of the Member States concerning the deadlines for
transposition of the said Directives listed in Annex XIII, Part B.

2. References to the repealed Directives shall be construed as
being made to this Directive and should be read in accordance
with the correlation table in Annex XIV.

Article 159

This Directive shall enter into force on the 20th day following its
publication in the Official Journal of the European Union.

Article 160

This Directive is addressed to the Member States.

1. By 31 December 2006 Member States shall adopt and
publish the laws, regulations and administrative provisions
necessary to comply with Articles 4, 22, 57, 61 to 64, 66, 68 to
106, 108, 110 to 115, 117 to 119, 123 to 127, 129 to 132, 133,
136, 144 to 149 and 152 to 155, and Annexes II, III and V to XII.
They shall forthwith communicate to the Commission the text of

Done at Strasbourg, 14 June 2006.

For the European Parliament
The President
J. BORRELL FONTELLES

The President
For the Council
H. WINKLER

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ANNEX I

LIST OF ACTIVITIES SUBJECT TO MUTUAL RECOGNITION

Acceptance of deposits and other repayable funds

Lending including, inter alia: consumer credit, mortgage credit, factoring, with or without recourse, financing of
commercial transactions (including forfeiting)

Financial leasing

Money transmission services

Issuing and administering means of payment (e.g. credit cards, travellers' cheques and bankers' drafts)

Guarantees and commitments

Trading for own account or for account of customers in:

(a) money market instruments (cheques, bills, certificates of deposit, etc.);

(b)

foreign exchange;

(c)

financial futures and options;

(d)

exchange and interest‑rate instruments; or

(e)

transferable securities.

Participation in securities issues and the provision of services related to such issues

Advice to undertakings on capital structure, industrial strategy and related questions and advice as well as services
relating to mergers and the purchase of undertakings

1.

2.

3.

4.

5.

6.

7.

8.

9.

10. Money broking

11.

Portfolio management and advice

12.

Safekeeping and administration of securities

13. Credit reference services

14.

Safe custody services

The services and activities provided for in Sections A and B of Annex I to Directive 2004/39/EC of the European
Parliament and of the Council of 21 April 2004 on markets in financial instruments (1), when referring to the
financial instruments provided for in Section C of Annex I of that Directive, are subject to mutual recognition
according to this Directive.

(1) OJ L 145, 30.4.2004, p. 1. Directive as amended by Directive 2006/31/EC (OJ L 114, 27.4.2006, p. 60).

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ANNEX II

CLASSIFICATION OF OFF‑BALANCE‑SHEET ITEMS

Full risk:

— Guarantees having the character of credit substitutes,

— Credit derivatives,

— Acceptances,

— Endorsements on bills not bearing the name of another credit institution,

— Transactions with recourse,

— Irrevocable standby letters of credit having the character of credit substitutes,

— Assets purchased under outright forward purchase agreements,

— Forward forward deposits,

— The unpaid portion of partly‑paid shares and securities,

— Asset sale and repurchase agreements as defined in Article 12(3) and (5) of Directive 86/635/EEC, and

— Other items also carrying full risk.

Medium risk:

— Documentary credits issued and confirmed (see also ‘Medium/low risk’),

— Warranties and indemnities (including tender, performance, customs and tax bonds) and guarantees not having the

character of credit substitutes,

— Irrevocable standby letters of credit not having the character of credit substitutes,

— Undrawn credit facilities (agreements to lend, purchase securities, provide guarantees or acceptance facilities) with an

original maturity of more than one year,

— Note issuance facilities (NIFs) and revolving underwriting facilities (RUFs), and

— Other items also carrying medium risk and as communicated to the Commission.

Medium/low risk:

— Documentary credits in which underlying shipment acts as collateral and other self‑liquidating transactions,

— Undrawn credit facilities (agreements to lend, purchase securities, provide guarantees or acceptance facilities) with an
original maturity of up to and including one year which may not be cancelled unconditionally at any time without
notice or
that do not effectively provide for automatic cancellation due to deterioration in a borrower's
creditworthiness, and

— Other items also carrying medium/low risk and as communicated to the Commission.

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Low risk:

— Undrawn credit facilities (agreements to lend, purchase securities, provide guarantees or acceptance facilities) which
may be cancelled unconditionally at any time without notice, or that do effectively provide for automatic cancellation
due to deterioration in a borrower's creditworthiness. 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, and

— Other items also carrying low risk and as communicated to the Commission.

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ANNEX III

THE TREATMENT OF COUNTERPARTY CREDIT RISK OF DERIVATIVE INSTRUMENTS, REPURCHASE
TRANSACTIONS, SECURITIES ORCOMMODITIES LENDING OR BORROWING TRANSACTIONS, LONG
SETTLEMENT TRANSACTIONS AND MARGIN LENDING TRANSACTIONS

PART 1

Definitions

For the purposes of this Annex the following definitions shall apply:

General terms

1.

2.

3.

4.

5.

6.

7.

8.

9.

‘Counterparty Credit Risk (CCR)’ means the risk that the counterparty to a transaction could default before the final
settlement of the transaction's cash flows.

‘Central counterparty’ means an entity that legally interposes itself between counterparties to contracts traded within
one or more financial markets, becoming the buyer to every seller and the seller to every buyer.

Transaction types

‘Long Settlement Transactions’ mean transactions where a counterparty undertakes to deliver a security, a commodity,
or a foreign exchange amount against cash, other financial instruments, or commodities, or vice versa, at a settlement
or delivery date that is contractually specified as more than the lower of the market standard for this particular
transaction and five business days after the date on which the credit institution enters into the transaction.

‘Margin Lending Transactions’ mean transactions in which a credit institution extends credit in connection with the
purchase, sale, carrying or trading of securities. Margin lending transactions do not include other loans that happen to
be secured by securities collateral.

Netting sets, hedging sets, and related terms

‘Netting Set’ means a group of transactions with a single counterparty that are subject to a legally enforceable bilateral
netting arrangement and for which netting is recognised under Part 7 of this Annex and Articles 90 to 93. Each
transaction that is not subject to a legally enforceable bilateral netting arrangement, which is recognised under Part 7
of this Annex, should be interpreted as its own netting set for the purpose of this Annex.

‘Risk Position’ means a risk number that is assigned to a transaction under the Standardised Method set out in Part 5
following a predetermined algorithm.

‘Hedging Set’ means a group of risk positions from the transactions within a single netting set for which only their
balance is relevant for determining the exposure value under the Standardised Method set out in Part 5.

‘Margin Agreement’ means a contractual agreement or provisions of an agreement under which one counterparty
shall supply collateral to a second counterparty when an exposure of that second counterparty to the first
counterparty exceeds a specified level.

‘Margin Threshold’ means the largest amount of an exposure that remains outstanding until one party has the right to
call for collateral.

10.

‘Margin Period of Risk’ means the time period from the last exchange of collateral covering a netting set of
transactions with a defaulting counterpart until that counterpart is closed out and the resulting market risk is
re‑hedged.

11.

‘Effective Maturity under the Internal Model Method, for a netting set with maturity greater than one year’ means the
ratio of the sum of expected exposure over the life of the transactions in the netting set discounted at the risk‑free rate

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of return divided by the sum of expected exposure over one year in a netting set discounted at the risk‑free rate. This
effective maturity may be adjusted to reflect rollover risk by replacing expected exposure with effective expected
exposure for forecasting horizons under one year.

12.

‘Cross‑Product Netting’ means the inclusion of transactions of different product categories within the same netting set
pursuant to the Cross‑Product Netting rules set out in this Annex.

13.

For the purposes of Part 5,‘Current Market Value (CMV)’ refers to the net market value of the portfolio of transactions
within the netting set with the counterparty. Both positive and negative market values are used in computing CMV.

Distributions

14.

‘Distribution of Market Values’ means the forecast of the probability distribution of net market values of transactions
within a netting set for some future date (the forecasting horizon), given the realised market value of those
transactions up to the present time.

15.

‘Distribution of Exposures’ means the forecast of the probability distribution of market values that is generated by
setting forecast instances of negative net market values equal to zero.

16.

‘Risk‑Neutral Distribution’ means a distribution of market values or exposures at a future time period where the
distribution is calculated using market implied values such as implied volatilities.

17.

‘Actual Distribution’ means a distribution of market values or exposures at a future time period where the distribution
is calculated using historic or realised values such as volatilities calculated using past price or rate changes.

Exposure measures and adjustments

18.

‘Current Exposure’ means the larger of zero or the market value of a transaction or portfolio of transactions within a
netting set with a counterparty that would be lost upon the default of the counterparty, assuming no recovery on the
value of those transactions in bankruptcy.

19.

‘Peak Exposure’ means a high percentile of the distribution of exposures at any particular future date before the
maturity date of the longest transaction in the netting set.

20.

‘Expected Exposure (EE)’ means the average of the distribution of exposures at any particular future date before the
longest maturity transaction in the netting set matures.

21.

22.

23.

24.

‘Effective Expected Exposure (Effective EE) at a specific date’ means the maximum expected exposure that occurs at
that date or any prior date. Alternatively, it may be defined for a specific date as the greater of the expected exposure at
that date, or the effective exposure at the previous date.

‘Expected Positive Exposure (EPE)’ means the weighted average over time of expected exposures where the weights are
the proportion that an individual expected exposure represents of the entire time interval. When calculating the
minimum capital requirement, the average is taken over the first year or, if all the contracts within the netting set
mature within less than one year, over the time period of the longest maturity contract in the netting set.

‘Effective Expected Positive Exposure (Effective EPE)’ means the weighted average over time of effective expected
exposure over the first year, or, if all the contracts within the netting set mature within less than one year, over the
time period of the longest maturity contract in the netting set, where the weights are the proportion that an individual
expected exposure represents of the entire time interval.

‘Credit Valuation Adjustment’ means an adjustment to the mid‑market valuation of the portfolio of transactions with a
counterparty. This adjustment reflects the market value of the credit risk due to any failure to perform on contractual
agreements with a counterparty. This adjustment may reflect the market value of the credit risk of the counterparty or
the market value of the credit risk of both the credit institution and the counterparty.

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25.

‘One‑Sided Credit Valuation Adjustment’ means a credit valuation adjustment that reflects the market value of the
credit risk of the counterparty to the credit institution, but does not reflect the market value of the credit risk of the
credit institution to the counterparty.

CCR related risks

26.

‘Rollover Risk’ means the amount by which expected positive exposure is understated when future transactions with a
counterpart are expected to be conducted on an ongoing basis. The additional exposure generated by those future
transactions is not included in calculation of EPE.

27.

‘General Wrong‑Way Risk’ arises when the PD of counterparties is positively correlated with general market risk
factors.

28.

‘Specific Wrong‑Way Risk’ arises when the exposure to a particular counterparty is positively correlated with the PD of
the counterparty due to the nature of the transactions with the counterparty. A credit institution shall be considered to
be exposed to Specific Wrong‑Way Risk if the future exposure to a specific counterparty is expected to be high when
the counterparty's PD is also high.

PART 2

Choice of the method

1.

Subject to paragraphs 2 to 7, credit institutions shall determine the exposure value for the contracts listed in Annex IV
with one of the methods set out in Parts 3 to 6. Credit institutions which are not eligible for the treatment set out in
Article 18(2) of Directive 2006/49/EC are not permitted to use the method set out in Part 4. To determine the
exposure value for the contracts listed in point 3 of Annex IV, credit institutions are not permitted to use the method
set out in Part 4.

The combined use of the methods set out in Parts 3 to 6 shall be permitted on a permanent basis within a group, but
not within a single legal entity. Combined use of the methods set out in Parts 3 and 5 within a legal entity shall be
permitted where one of the methods is used for the cases set out in Part 5, point 19.

2.

Subject to the approval of the competent authorities, credit institutions may determine the exposure value for:

(i)

the contracts listed in Annex IV,

(ii)

repurchase transactions,

(iii)

securities or commodities lending or borrowing transactions,

(iv) margin lending transactions, and

(v)

long settlement transactions

using the Internal Model Method as set out in Part 6.

3. When a credit institution purchases credit derivative protection against a non‑trading book exposure, or against a CCR
exposure, it may compute its capital requirement for the hedged asset in accordance with Annex VIII, Part 3, points 83
to 92, or subject to the approval of the competent authorities, in accordance with Annex VII, Part 1, point 4 or
Annex VII, Part 4, points 96 to 104. In these cases, the exposure value for CCR for these credit derivatives is set to
zero.

4.

5.

6.

The exposure value for CCR from sold credit default swaps in the non‑trading book, where they are treated as credit
protection provided by the credit institution and subject to a capital requirement for credit risk for the full notional
amount, is set to zero.

Under all methods set out in Parts 3 to 6, the exposure value for a given counterparty is equal to the sum of the
exposure values calculated for each netting set with that counterparty.

An exposure value of zero for CCR can be attributed to derivative contracts, or repurchase transactions, securities or
long settlement transactions and margin lending transactions
commodities lending or borrowing transactions,

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outstanding with a central counterparty and that have not been rejected by the central counterparty. Furthermore, an
exposure value of zero can be attributed to credit risk exposures to central counterparties that result from the
derivative contracts, repurchase transactions, securities or commodities lending or borrowing transactions, long
settlement transactions and margin lending transactions or other exposures, as determined by the competent
authorities, that the credit institution has outstanding with the central counterparty. The central counterparty CCR
exposures with all participants in its arrangements shall be fully collateralised on a daily basis.

Exposures arising from long settlement transactions can be determined using any of the methods set out in Parts 3 to
6, regardless of
the methods chosen for treating OTC derivatives and repurchase transactions, securities or
commodities lending or borrowing transactions, and margin lending transactions. In calculating capital requirements
for long settlement transactions, credit institutions that use the approach set out in Articles 84 to 89 may assign the
risk weights under the approach set out in Articles 78 to 83 on a permanent basis and irrespective of the materiality
of such positions.

For the methods set out in Parts 3 and 4 the competent authorities must ensure that the notional amount to be taken
into account is an appropriate yardstick for the risk inherent in the contract. Where, for instance, the contract
provides for a multiplication of cash flows, the notional amount must be adjusted in order to take into account the
effects of the multiplication on the risk structure of that contract.

7.

8.

Mark-to-Market Method

PART 3

Step (a): by attaching current market values to contracts (mark‑to‑market), the current replacement cost of all contracts

with positive values is obtained.

Step (b): to obtain a figure for potential future credit exposure, except in the case of single‑currency ‘floating/floating’
interest rate swaps in which only the current replacement cost will be calculated, the notional principal amounts or
underlying values are multiplied by the percentages in Table 1:

Table 1 (1) (2)

Residual
maturity (3)

Interest‑rate
contracts

Contracts
concerning
foreign-
exchange rates
and gold

Contracts
concerning
equities

Contracts
concerning
precious metals
except gold

Contracts
concerning
commodities
other than
precious metals

One year or less

0 %

1 %

6 %

7 %

10 %

Over one year,
not exceeding
five years

0,5 %

5 %

8 %

7 %

12 %

Over five years

1,5 %

7,5 %

10 %

8 %

15 %

(1) Contracts which do not fall within one of the five categories indicated in this table shall be treated as contracts concerning commodities

(2)

(3)

other than precious metals.
For contracts with multiple exchanges of principal, the percentages have to be multiplied by the number of remaining payments still to be
made according to the contract.
For contracts that are structured to settle outstanding exposure following specified payment dates and where the terms are reset such that
the market value of the contract is zero on these specified dates, the residual maturity would be equal to the time until the next reset date.
In the case of interest-rate contracts that meet these criteria and have a remaining maturity of over one year, the percentage shall be no
lower than 0,5 %.

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For the purpose of calculating the potential future credit exposure in accordance with step (b) the competent
authorities may allow credit institutions to apply the percentages in Table 2 instead of those prescribed in Table 1
provided that the institutions make use of the option set out in Annex IV, point 21 to Directive 2006/49/EC for
contracts relating to commodities other than gold within the meaning of paragraph 3 of Annex IV, to this
Directive:

Residual maturity

Precious metals
(except gold)

One year or less

Over one year, not
exceeding five years

Over five years

2 %

5 %

7,5 %

Table 2

Base metals

2,5 %

4 %

8 %

Agricultural
products (softs)

Other, including
energy products

3 %

5 %

9 %

4 %

6 %

10 %

Step (c): the sum of current replacement cost and potential future credit exposure is the exposure value.

Original Exposure Method

PART 4

Step (a): the notional principal amount of each instrument is multiplied by the percentages given in Table 3.

Table 3

Original maturity (1)

Interest-rate contracts

Contracts concerning foreign‑exchange rates
and gold

One year or less

0,5 %

Over one year, not exceeding two years

1 %

Additional allowance for each addi-
tional year

1 %

2 %

5 %

3 %

Step (b): the original exposure thus obtained shall be the exposure value.

PART 5

Standardised Method

1.

The Standardised Method (SM) can be used only for OTC derivatives and long settlement transactions. The exposure
value shall be calculated separately for each netting set. It shall be determined net of collateral, as follows:

exposure value =

(1)

In the case of interest-rate contracts, credit institutions may, subject to the consent of their competent authorities, choose either original
or residual maturity.

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β*maxðCMV − CMC;Σ

j

jΣ

i

RPTij − Σ

l

RPCljj*

CCRMjÞ

where:

CMV = current market value of the portfolio of transactions within the netting set with a counterparty gross of
collateral, that is, where:

CMV = Σ

i

CMVi

where:

CMVi = the current market value of transaction i;

CMC = the current market value of the collateral assigned to the netting set, that is, where:

CMC = Σ

l

CMCl

where

CMCl = the current market value of collateral l;

i = index designating transaction;

l = index designating collateral;

j = index designating hedging set category. These hedging sets correspond to risk factors for which risk positions of
opposite sign can be offset to yield a net risk position on which the exposure measure is then based;

RPTij = risk position from transaction i with respect to hedging set j;

RPClj = risk position from collateral l with respect to hedging set j;

CCRMj = CCR Multiplier set out in Table 5 with respect to hedging set j;

β = 1.4.

Collateral received from a counterparty has a positive sign and collateral posted to a counterparty has a negative sign.

Collateral that is recognised for this method is confined to the collateral that is eligible under point 11 of Part 1 of
Annex VIII to this Directive and point 9 of Annex II to Directive 2006/49/EC.

2. When an OTC derivative transaction with a linear risk profile stipulates the exchange of a financial instrument for a
payment, the payment Part is referred to as the payment leg. Transactions that stipulate the exchange of payment
against payment consist of two payment legs. The payment legs consist of the contractually agreed gross payments,
including the notional amount of the transaction. Credit institutions may disregard the interest rate risk from payment
legs with a remaining maturity of less than one year for the purposes of the following calculations. Credit institutions
may treat transactions that consist of two payment legs that are denominated in the same currency, such as interest
rate swaps, as a single aggregate transaction. The treatment for payment legs applies to the aggregate transaction.

3.

4.

Transactions with a linear risk profile with equities (including equity indices), gold, other precious metals or other
commodities as the underlying financial instruments are mapped to a risk position in the respective equity (or equity
index) or commodity (including gold and other precious metals) and an interest rate risk position for the payment leg.
If the payment leg is denominated in a foreign currency, it is additionally mapped to a risk position in the respective
currency.

Transactions with a linear risk profile with a debt instrument as the underlying instrument are mapped to an interest
rate risk position for the debt instrument and another interest rate risk position for the payment leg. Transactions with
a linear risk profile that stipulate the exchange of payment against payment, including foreign exchange forwards, are
mapped to an interest rate risk position for each of the payment legs. If the underlying debt instrument is
denominated in a foreign currency, the debt instrument is mapped to a risk position in this currency. If a payment leg

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5.

6.

7.

8.

9.

is denominated in foreign currency, the payment leg is again mapped to a risk position in this currency. The exposure
value assigned to a foreign exchange basis swap transaction is zero.

The size of a risk position from a transaction with linear risk profile is the effective notional value (market price
multiplied by quantity) of the underlying financial instruments (including commodities) converted to the credit
institution's domestic currency, except for debt instruments.

For debt instruments and for payment legs, the size of the risk position is the effective notional value of the
outstanding gross payments (including the notional amount) converted to the credit institution's domestic currency,
multiplied by the modified duration of the debt instrument, or payment leg, respectively.

The size of a risk position from a credit default swap is the notional value of the reference debt instrument multiplied
by the remaining maturity of the credit default swap.

The size of a risk position from an OTC derivative with a non‑linear risk profile, including options and swaptions, is
equal to the delta equivalent effective notional value of the financial instrument that underlies the transaction, except
in the case of an underlying debt instrument.

The size of a risk position from an OTC derivative with a non‑linear risk profile, including options and swaptions, of
which the underlying is a debt instrument or a payment leg, is equal to the delta equivalent effective notional value of
the financial instrument or payment leg multiplied by the modified duration of the debt instrument, or payment leg,
respectively.

10.

For the determination of risk positions, collateral received from a counterparty is to be treated as a claim on the
counterparty under a derivative contract (long position) that is due today, while collateral posted is to be treated like
an obligation to the counterparty (short position) that is due today.

11.

Credit institutions may use the following formulae to determine the size and sign of a risk position:

for all instruments other than debt instruments:

effective notional value, or

delta equivalent notional value = pref

∂V
∂p

where:

Pref = price of the underlying instrument, expressed in the reference currency;

V = value of the financial instrument (in the case of an option this is the option price and in the case of a transaction
with a linear risk profile this is the value of the underlying instrument itself);

p = price of the underlying instrument, expressed in the same currency as V;

for debt instruments and the payment legs of all transactions:

effective notional value multiplied by the modified duration, or

delta equivalent in notional value multiplied by the modified duration

∂V
∂r

where:

V = value of the financial instrument (in the case of an option this is the option price and in the case of a transaction
with a linear risk profile this is the value of the underlying instrument itself or of the payment leg, respectively);

r = interest rate level.

If V is denominated in a currency other than the reference currency, the derivative must be converted into the
reference currency by multiplication with the relevant exchange rate.

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12.

The risk positions are to be grouped into hedging sets. For each hedging set, the absolute value amount of the sum of
the resulting risk positions is computed. This sum is termed the ‘net risk position’ and is represented by:

jΣ

i

RPTij − Σ

l

RPCljj

in the formulae set out in paragraph 1.

13.

For interest rate risk positions from money deposits received from the counterparty as collateral, from payment legs
and from underlying debt instruments, to which according to Table 1 of Annex I to Directive 2006/49/EC a capital
charge of 1,60 % or less applies, there are six hedging sets for each currency, as set out in Table 4 below. Hedging sets
are defined by a combination of the criteria ‘maturity’ and ‘referenced interest rates’.

Table 4

Government referenced
interest rates

Non‑government referenced
interest rates

Maturity

Maturity

Maturity

← 1 year

>1 — ← 5 years

> 5 years

← 1 year

>1 — ← 5 years

> 5 years

14.

For interest rate risk positions from underlying debt instruments or payment legs for which the interest rate is linked
to a reference interest rate that represents a general market interest level, the remaining maturity is the length of the
time interval up to the next re‑adjustment of the interest rate. In all other cases, it is the remaining life of the
underlying debt instrument or in the case of a payment leg, the remaining life of the transaction.

15.

There is one hedging set for each issuer of a reference debt instrument that underlies a credit default swap.

16.

For interest rate risk positions from money deposits that are posted with a counterparty as collateral when that
counterparty does not have debt obligations of low specific risk outstanding and from underlying debt instruments, to
which according to Table 1 of Annex I to Directive 2006/49/EC a capital charge of more than 1,60 % applies, there is
one hedging set for each issuer. When a payment leg emulates such a debt instrument, there is also one hedging set for
each issuer of the reference debt instrument. Credit institutions may assign risk positions that arise from debt
instruments of a certain issuer, or from reference debt instruments of the same issuer that are emulated by payment
legs, or that underlie a credit default swap, to the same hedging set.

17. Underlying financial instruments other than debt instruments shall be assigned to the same respective hedging sets
only if they are identical or similar instruments. In all other cases they shall be assigned to separate hedging sets. The
similarity of instruments is established as follows:

— for equities, similar instruments are those of the same issuer. An equity index is treated as a separate issuer;

— for precious metals, similar instruments are those of the same metal. A precious metal index is treated as a

separate precious metal;

— for electric power, similar instruments are those delivery rights and obligations that refer to the same peak or

off‑peak load time interval within any 24‑hour interval; and

— for commodities, similar instruments are those of the same commodity. A commodity index is treated as a

separate commodity.

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18.

The CCR multipliers (CCRM) for the different hedging set categories are set out in Table 5 below:

Table 5

Hedging set categories

Interest Rates

Interest Rates for risk positions from a reference debt instrument that underlies a
credit default swap and to which a capital charge of 1,60 %, or less, applies under
Table 1 of Annex I to Directive 2006/49/EC

instrument or reference debt
Interest Rates for risk positions from a debt
instrument to which a capital charge of more than 1,60 % applies under Table 1 of
Annex I to Directive 2006/49/EC

Exchange Rates

Electric Power

Gold

Equity

Precious Metals (except gold)

Other Commodities (excluding precious metals and electricity power)

1.

2.

3.

4.

5.

6.

7..

8.

9.

10.

Underlying instruments of OTC derivatives that are not in any of the above
categories

CCRM

0,2 %

0,3 %

0,6 %

2,5 %

4 %

5 %

7 %

8,5 %

10 %

10 %

Underlying instruments of OTC derivatives, as referred to in point 10 of Table 5, shall be assigned to separate
individual hedging sets for each category of underlying instrument.

19.

For transactions with a non‑linear risk profile or for payment legs and transactions with debt instruments as
underlying for which the credit institution cannot determine the delta or the modified duration, respectively, with an
instrument model that the competent authority has approved for the purposes of determining the minimum capital
requirements for market risk, the competent authority shall determine the size of the risk positions and the applicable
CCRMjs conservatively. Alternatively, competent authorities may require the use of the method set out in Part 3.
Netting shall not be recognised (that is, the exposure value shall be determined as if there were a netting set that
comprises just the individual transaction).

20. A credit institution shall have internal procedures to verify that, prior to including a transaction in a hedging set, the
transaction is covered by a legally enforceable netting contract that meets the requirements set out in Part 7.

21. A credit institution that makes use of collateral to mitigate its CCR shall have internal procedures to verify that, prior
to recognising the effect of collateral in its calculations, the collateral meets the legal certainty standards set out in
Annex VIII.

PART 6

Internal Model Method

1.

Subject to the approval of the competent authorities, a credit institution may use the Internal Model Method (IMM) to
calculate the exposure value for the transactions in Part 2, paragraph 2(i), or for the transactions in Part 2, point 2(ii),
(iii) and (iv), or for the transactions in Part 2, point 2(i) to (iv). In each of these cases the transactions in Part 2, point

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2(v) may be included as well. Notwithstanding Part 2, point 1, second paragraph, credit institutions may choose not
to apply this method to exposures that are immaterial in size and risk. To apply the IMM, a credit institution shall meet
the requirements set out in this Part.

Subject to the approval of the competent authorities, implementation of the IMM may be carried out sequentially
across different transaction types, and during this period a credit institution may use the methods set out in Part 3 or
Part 5. Notwithstanding the remainder of this Part, credit institutions shall not be required to use a specific type of
model.

For all OTC derivative transactions and for long settlement transactions for which a credit institution has not received
approval to use the IMM, the credit institution shall use the methods set out in Part 3 or Part 5. Combined use of these
two methods is permitted on a permanent basis within a group. Combined use of these two methods within a legal
entity is only permitted where one of the methods is used for the cases set out in Part 5, point 19.

Credit institutions which have obtained permission to use the IMM shall not revert to the use of the methods set out in
Part 3 or Part 5 except for demonstrated good cause and subject to approval of the competent authorities. If a credit
institution ceases to comply with the requirements set out in this Part, it shall either present to the competent
authority a plan for a timely return to compliance or demonstrate that the effect of non‑compliance is immaterial.

Exposure value

The exposure value shall be measured at the level of the netting set. The model shall specify the forecasting
distribution for changes in the market value of the netting set attributable to changes in market variables, such as
interest rates, foreign exchange rates. The model shall then compute the exposure value for the netting set at each
future date given the changes in the market variables. For margined counterparties, the model may also capture future
collateral movements.

Credit institutions may include eligible financial collateral as defined in point 11 of Part 1 of Annex VIII to this
Directive and point 9 of Annex II to Directive 2006/49/EC in their forecasting distributions for changes in the market
value of the netting set, if the quantitative, qualitative and data requirements for the IMM are met for the collateral.

2.

3.

4.

5.

6.

7.

The exposure value shall be calculated as the product of α times Effective EPE, as follows:

Exposure value = α × Effective EPE

where:

alpha (α) shall be 1.4, but competent authorities may require a higher α, and Effective EPE shall be computed by
estimating expected exposure (EEt) as the average exposure at future date t, where the average is taken across possible
future values of relevant market risk factors. The model estimates EE at a series of future dates t1, t2, t3, etc.

8.

Effective EE shall be computed recursively as:

Effective EEtk = max(Effective EEtk‑1; EEtk)

where:

the current date is denoted as t0 and Effective EEt0 equals current exposure.

9.

In this regard, Effective EPE is the average Effective EE during the first year of future exposure. If all contracts in the
netting set mature within less than one year, EPE is the average of EE until all contracts in the netting set mature.
Effective EPE is computed as a weighted average of Effective EE:

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minð1 year;maturityÞ

Σ

k = 1

EffectiveEEtk

(cid:3)Δtk

EffectiveEPE =

where:

the weights Δtk = tk — tk‑1 allow for the case when future exposure is calculated at dates that are not equally spaced
over time.

10.

EE or peak exposure measures shall be calculated based on a distribution of exposures that accounts for the possible
non‑normality of the distribution of exposures.

11.

Credit institutions may use a measure that is more conservative than α multiplied by Effective EPE as calculated
according to the equation above for every counterparty.

12. Notwithstanding point 7, competent authorities may permit credit institutions to use their own estimates of α, subject
to a floor of 1,2, where α shall equal the ratio of internal capital from a full simulation of CCR exposure across
counterparties (numerator) and internal capital based on EPE (denominator). In the denominator, EPE shall be used as
if it were a fixed outstanding amount. Credit institutions shall demonstrate that their internal estimates of α capture in
the numerator material sources of stochastic dependency of distribution of market values of transactions or of
portfolios of transactions across counterparties. Internal estimates of α shall take account of the granularity of
portfolios.

13. A credit institution shall ensure that the numerator and denominator of α are computed in a consistent fashion with
respect to the modelling methodology, parameter specifications and portfolio composition. The approach used shall
be based on the credit institution's internal capital approach, be well documented and be subject to independent
validation. In addition, credit institutions shall review their estimates on at least a quarterly basis, and more frequently
when the composition of the portfolio varies over time. Credit institutions shall also assess the model risk.

14. Where appropriate, volatilities and correlations of market risk factors used in the joint simulation of market and credit
risk should be conditioned on the credit risk factor to reflect potential increases in volatility or correlation in an
economic downturn.

15.

If the netting set is subject to a margin agreement, credit institutions shall use one of the following EPE measures:

(a)

Effective EPE without taking into account the margin agreement;

(b)

the threshold, if positive, under the margin agreement plus an add‑on that reflects the potential increase in
exposure over the margin period of risk. The add‑on is computed as the expected increase in the netting set's
exposure beginning from a current exposure of zero over the margin period of risk. A floor of five business days
for netting sets consisting only of repo‑style transactions subject to daily remargining and daily mark‑to‑market,
and ten business days for all other netting sets is imposed on the margin period of risk used for this purpose; or

(c)

if the model captures the effects of margining when estimating EE, the model's EE measure may be used directly
in the equation in point 8 subject to the approval of the competent authorities.

Minimum requirements for EPE models

16. A credit institution's EPE model shall meet the operational requirements set out in points 17 to 41.

CCR control

17.

The credit institution shall have a control unit that is responsible for the design and implementation of its CCR
management system, including the initial and on‑going validation of the model. This unit shall control input data
integrity and produce and analyse reports on the output of the credit institution's risk measurement model, including
an evaluation of the relationship between measures of risk exposure and credit and trading limits. This unit shall be
independent from units responsible for originating, renewing or trading exposures and free from undue influence; it
shall be adequately staffed; it shall report directly to the senior management of the credit institution. The work of this
unit shall be closely integrated into the day‑to‑day credit risk management process of the credit institution. Its output
shall, accordingly, be an integral Part of the process of planning, monitoring and controlling the credit institution's
credit and overall risk profile.

18. A credit institution shall have CCR management policies, processes and systems that are conceptually sound and
implemented with integrity. A sound CCR management framework shall include the identification, measurement,
management, approval and internal reporting of CCR.

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19. A credit institution's risk management policies shall take account of market, liquidity, and legal and operational risks
that can be associated with CCR. The credit institution shall not undertake business with a counterparty without
assessing its creditworthiness and shall take due account of settlement and pre‑settlement credit risk. These risks shall
be managed as comprehensively as practicable at the counterparty level (aggregating CCR exposures with other credit
exposures) and at the firm‑wide level.

20. A credit institution's board of directors and senior management shall be actively involved in the CCR control process
and shall regard this as an essential aspect of the business to which significant resources need to be devoted. Senior
management shall be aware of the limitations and assumptions of the model used and the impact these can have on
the reliability of the output. Senior management shall also consider the uncertainties of the market environment and
operational issues and be aware of how these are reflected in the model.

21.

The daily reports prepared on a credit institution's exposures to CCR shall be reviewed by a level of management with
sufficient seniority and authority to enforce both reductions of positions taken by individual credit managers or
traders and reductions in the credit institution's overall CCR exposure.

22. A credit institution's CCR management system shall be used in conjunction with internal credit and trading limits.
Credit and trading limits shall be related to the credit institution's risk measurement model in a manner that is
consistent over time and that is well understood by credit managers, traders and senior management.

23. A credit institution's measurement of CCR shall include measuring daily and intra‑day usage of credit lines. The credit
institution shall measure current exposure gross and net of collateral. At portfolio and counterparty level, the credit
institution shall calculate and monitor peak exposure or PFE at the confidence interval chosen by the credit institution.
including by groups of related
The credit institution shall take account of
counterparties, by industry, by market, etc.

large or concentrated positions,

24. A credit institution shall have a routine and rigorous program of stress testing in place as a supplement to the CCR
analysis based on the day‑to‑day output of the credit institution's risk measurement model. The results of this stress
testing shall be reviewed periodically by senior management and shall be reflected in the CCR policies and limits set by
management and the board of directors. Where stress tests reveal particular vulnerability to a given set of
circumstances, prompt steps shall be taken to manage those risks appropriately.

25. A credit institution shall have a routine in place for ensuring compliance with a documented set of internal policies,
controls and procedures concerning the operation of the CCR management system. The credit institution's CCR
management system shall be well documented and shall provide an explanation of the empirical techniques used to
measure CCR.

26. A credit institution shall conduct an independent review of its CCR management system regularly through its own
internal auditing process. This review shall include both the activities of the business units referred to in point 17 and
of the independent CCR control unit. A review of the overall CCR management process shall take place at regular
intervals and shall specifically address, at a minimum:

(a)

the adequacy of the documentation of the CCR management system and process;

(b)

the organisation of the CCR control unit;

(c)

the integration of CCR measures into daily risk management;

(d)

the approval process for risk pricing models and valuation systems used by front and back‑office personnel;

(e)

the validation of any significant change in the CCR measurement process;

(f)

the scope of CCR captured by the risk measurement model;

(g)

the integrity of the management information system;

(h)

the accuracy and completeness of CCR data;

(i)

the verification of the consistency, timeliness and reliability of data sources used to run models, including the
independence of such data sources;

(j)

the accuracy and appropriateness of volatility and correlation assumptions;

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(k)

the accuracy of valuation and risk transformation calculations; and

(l)

the verification of the model's accuracy through frequent back‑testing.

Use test

27.

The distribution of exposures generated by the model used to calculate effective EPE shall be closely integrated into the
day‑to‑day CCR management process of the credit institution. The model's output shall accordingly play an essential
role in the credit approval, CCR management, internal capital allocation and corporate governance of the credit
institution.

28. A credit institution shall have a track record in the use of models that generate a distribution of exposures to CCR.
Thus, the credit institution shall demonstrate that it has been using a model to calculate the distributions of exposures
upon which the EPE calculation is based that meets, broadly, the minimum requirements set out in this Part for at least
one year prior to approval by the competent authorities.

29. The model used to generate a distribution of exposures to CCR shall be Part of a CCR management framework that
includes the identification, measurement, management, approval and internal reporting of CCR. This framework shall
include the measurement of usage of credit lines (aggregating CCR exposures with other credit exposures) and internal
capital allocation. In addition to EPE, a credit institution shall measure and manage current exposures. Where
appropriate, the credit institution shall measure current exposure gross and net of collateral. The use test is satisfied if
a credit institution uses other CCR measures, such as peak exposure or (PFE), based on the distribution of exposures
generated by the same model to compute EPE.

30. A credit institution shall have the systems capability to estimate EE daily if necessary, unless it demonstrates to its
competent authorities that its exposures to CCR warrant less frequent calculation. The credit institution shall compute
EE along a time profile of forecasting horizons that adequately reflects the time structure of future cash flows and
maturity of the contracts and in a manner that is consistent with the materiality and composition of the exposures.

31.

Exposure shall be measured, monitored and controlled over the life of all contracts in the netting set (not just to the
one year horizon). The credit institution shall have procedures in place to identify and control the risks for
counterparties where the exposure rises beyond the one‑year horizon. The forecast increase in exposure shall be an
input into the credit institution's internal capital model.

Stress testing

32. A credit institution shall have in place sound stress testing processes for use in the assessment of capital adequacy for
CCR. These stress measures shall be compared with the measure of EPE and considered by the credit institution as
Part of the process set out in Article 123. Stress testing shall also involve identifying possible events or future changes
in economic conditions that could have unfavourable effects on a credit institution's credit exposures and an
assessment of the credit institution's ability to withstand such changes.

33. The credit institution shall stress test its CCR exposures, including jointly stressing market and credit risk factors.
Stress tests of CCR shall consider concentration risk (to a single counterparty or groups of counterparties), correlation
risk across market and credit risk, and the risk that liquidating the counterparty's positions could move the market.
Stress tests shall also consider the impact on the credit institution's own positions of such market moves and integrate
that impact in its assessment of CCR.

Wrong‑Way Risk

34. Credit institutions shall give due consideration to exposures that give rise to a significant degree of General

Wrong‑Way Risk.

35. Credit institutions shall have procedures in place to identify, monitor and control cases of Specific Wrong‑Way Risk,

beginning at the inception of a transaction and continuing through the life of the transaction.

Integrity of the modelling process

36. The model shall reflect transaction terms and specifications in a timely, complete, and conservative fashion. Such
terms shall include at least contract notional amounts, maturity, reference assets, margining arrangements, netting
arrangements. The terms and specifications shall be maintained in a database that is subject to formal and periodic

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audit. The process for recognising netting arrangements shall require signoff by legal staff to verify the legal
enforceability of netting and be input into the database by an independent unit. The transmission of transaction terms
and specifications data to the model shall also be subject to internal audit and formal reconciliation processes shall be
in place between the model and source data systems to verify on an ongoing basis that transaction terms and
specifications are being reflected in EPE correctly or at least conservatively.

37.

The model shall employ current market data to compute current exposures. When using historical data to estimate
volatility and correlations, at least three years of historical data shall be used and shall be updated quarterly or more
frequently if market conditions warrant. The data shall cover a full range of economic conditions, such as a full
business cycle. A unit independent from the business unit shall validate the price supplied by the business unit. The
data shall be acquired independently of the lines of business, fed into the model in a timely and complete fashion, and
maintained in a database subject to formal and periodic audit. A credit institution shall also have a well‑developed data
integrity process to clean the data of erroneous and/or anomalous observations. To the extent that the model relies on
proxy market data, including, for new products, where three years of historical data may not be available, internal
policies shall identify suitable proxies and the credit institution shall demonstrate empirically that the proxy provides a
conservative representation of the underlying risk under adverse market conditions. If the model includes the effect of
collateral on changes in the market value of the netting set, the credit institution shall have adequate historical data to
model the volatility of the collateral.

38. The model shall be subject to a validation process. The process shall be clearly articulated in credit institutions' policies
and procedures. The validation process shall specify the kind of testing needed to ensure model integrity and identify
conditions under which assumptions are violated and may result in an understatement of EPE. The validation process
shall include a review of the comprehensiveness of the model.

39. A credit institution shall monitor the appropriate risks and have processes in place to adjust its estimation of EPE

when those risks become significant. This includes the following:

(a)

the credit institution shall identify and manage its exposures to specific wrong‑way risk;

(b)

(c)

for exposures with a rising risk profile after one year, the credit institution shall compare on a regular basis the
estimate of EPE over one year with EPE over the life of the exposure; and

for exposures with a residual maturity below one year, the credit institution shall compare on a regular basis the
replacement cost (current exposure) and the realised exposure profile, and/or store data that would allow such a
comparison.

40. A credit institution shall have internal procedures to verify that, prior to including a transaction in a netting set, the
transaction is covered by a legally enforceable netting contract that meets the requirements set out in Part 7.

41. A credit institution that makes use of collateral to mitigate its CCR shall have internal procedures to verify that, prior
to recognising the effect of collateral in its calculations, the collateral meets the legal certainty standards set out in
Annex VIII.

Validation requirements for EPE models

42. A credit institution's EPE model shall meet the following validation requirements:

(a)

the qualitative validation requirements set out in Annex V to Directive 2006/49/EC;

(b)

(c)

(d)

interest rates, foreign exchange rates, equity prices, commodities, and other market risk factors shall be forecast
over long time horizons for measuring CCR exposure. The performance of the forecasting model for market
risk factors shall be validated over a long time horizon;

the pricing models used to calculate CCR exposure for a given scenario of future shocks to market risk factors
shall be tested as Part of the model validation process. Pricing models for options shall account for the
nonlinearity of option value with respect to market risk factors;

the EPE model shall capture transaction-specific information in order to aggregate exposures at the level of the
netting set. A credit institution shall verify that transactions are assigned to the appropriate netting set within
the model;

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(e)

(f)

the EPE model shall also include transaction-specific information to capture the effects of margining. It shall take
into account both the current amount of margin and margin that would be passed between counterparties in
the future. Such a model shall account for the nature of margin agreements (unilateral or bilateral), the
frequency of margin calls, the margin period of risk, the minimum threshold of unmargined exposure the credit
institution is willing to accept, and the minimum transfer amount. Such a model shall either model the mark-to-
market change in the value of collateral posted or apply the rules set out in Annex VIII; and

static, historical back-testing on representative counterparty portfolios shall be Part of the model validation
process. At regular intervals, a credit institution shall conduct such back-testing on a number of representative
counterparty portfolios (actual or hypothetical). These representative portfolios shall be chosen based on their
sensitivity to the material risk factors and correlations to which the credit institution is exposed.

If back-testing indicates that the model is not sufficiently accurate, the competent authorities shall revoke the model
approval or impose appropriate measures to ensure that the model is improved promptly. They may also require
additional own funds to be held by credit institutions pursuant to Article 136.

PART 7

Contractual netting (contracts for novation and other netting agreements)

(a)

Types of netting that competent authorities may recognise

For the purpose of this Part,
‘counterparty’ means any entity (including natural persons) that has the power to
conclude a contractual netting agreement and ‘contractual cross product netting agreement’ means a written bilateral
agreement between a credit institution and a counterparty which creates a single legal obligation covering all included
bilateral master agreements and transactions belonging to different product categories. Contractual cross product
netting agreements do not cover netting other than on a bilateral basis.

For the purposes of cross product netting, the following are considered different product categories:

(i)

repurchase transactions, reverse repurchase transactions, securities and commodities lending and borrowing
transactions,

(ii) margin lending transactions, and

(iii)

the contracts listed in Annex IV.

The competent authorities may recognise as risk-reducing the following types of contractual netting:

(i)

bilateral contracts for novation between a credit institution and its counterparty under which mutual claims and
obligations are automatically amalgamated in such a way that this novation fixes one single net amount each
time novation applies and thus creates a legally binding, single new contract extinguishing former contracts,

(ii)

other bilateral agreements between a credit institution and its counterparty, and

(iii)

contractual cross product netting agreements for credit institutions that have received approval by their
competent authorities to use the method set out in Part 6, for transactions falling under the scope of that
method. Netting across transactions entered by members of a group is not recognised for the purposes of
calculating capital requirements.

(b)

Conditions for recognition

The competent authorities may recognise contractual netting as risk-reducing only under the following conditions:

(i)

a credit institution must have a contractual netting agreement with its counterparty which creates a single legal
obligation, covering all included transactions, such that, in the event of a counterparty's failure to perform
owing to default, bankruptcy, liquidation or any other similar circumstance, the credit institution would have a
claim to receive or an obligation to pay only the net sum of the positive and negative mark-to-market values of
included individual transactions,

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(ii)

a credit institution must have made available to the competent authorities written and reasoned legal opinions
to the effect that, in the event of a legal challenge, the relevant courts and administrative authorities would, in
the cases described under (i), find that the credit institution's claims and obligations would be limited to the net
sum, as described in (i), under:

— the law of the jurisdiction in which the counterparty is incorporated and, if a foreign branch of an

undertaking is involved, also under the law of the jurisdiction in which the branch is located,

— the law that governs the individual transactions included, and

— the law that governs any contract or agreement necessary to effect the contractual netting,

(iii)

a credit institution must have procedures in place to ensure that the legal validity of its contractual netting is
kept under review in the light of possible changes in the relevant laws,

(iv)

the credit institution maintains all required documentation in its files,

(v)

the effects of netting shall be factored into the credit institution's measurement of each counterparty's aggregate
credit risk exposure and the credit institution manages its CCR on such a basis, and

(vi)

credit risk to each counterparty is aggregated to arrive at a single legal exposure across transactions. This
aggregation shall be factored into credit limit purposes and internal capital purposes.

The competent authorities must be satisfied, if necessary after consulting the other competent authorities concerned,
that the contractual netting is legally valid under the law of each of the relevant jurisdictions. If any of the competent
authorities are not satisfied in that respect, the contractual netting agreement will not be recognised as risk-reducing
for either of the counterparties.

The competent authorities may accept reasoned legal opinions drawn up by types of contractual netting.

No contract containing a provision which permits a non-defaulting counterparty to make limited payments only, or
no payments at all, to the estate of the defaulter, even if the defaulter is a net creditor (a ‘walkaway’ clause), may be
recognised as risk-reducing.

In addition, for contractual cross-product netting agreements the following criteria shall be met:

(a)

(b)

(c)

(d)

the net sum referred to in subpoint (b)(i) of this Part shall be the net sum of the positive and negative close out
values of any included individual bilateral master agreement and of the positive and negative mark-to-market
value of the individual transactions (the ‘Cross-Product Net Amount’);

the written and reasoned legal opinions referred to in subpoint (b)(ii) of this Part shall address the validity and
enforceability of the entire contractual cross‑product netting agreement under its terms and the impact of the
netting arrangement on the material provisions of any included individual bilateral master agreement. A legal
opinion shall be generally recognised as such by the legal community in the Member State in which the credit
institution is authorised or a memorandum of law that addresses all relevant issues in a reasoned manner;

the credit institution shall have procedures in place under subpoint (b)(iii) of this Part to verify that any
transaction which is to be included in a netting set is covered by a legal opinion; and

taking into account the contractual cross product netting agreement, the credit institution shall continue to
comply with the requirements for the recognition of bilateral netting and the requirements of Articles 90 to 93
for the recognition of credit risk mitigation, as applicable, with respect to each included individual bilateral
master agreement and transaction.

(c)

Effects of recognition

Netting for the purposes of Parts 5 and 6 shall be recognised as set out therein.

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(i)

Contracts for novation

The single net amounts fixed by contracts for novation, rather than the gross amounts involved, may be
weighted. Thus, in the application of Part 3, in:

— step (a): the current replacement cost, and in

— step (b): the notional principal amounts or underlying values

may be obtained taking account of the contract for novation. In the application of Part 4, in step (a) the notional
principal amount may be calculated taking account of the contract for novation; the percentages of Table 3 must
apply.

(ii) Other netting agreements

In application of Part 3:

— in step (a) the current replacement cost for the contracts included in a netting agreement may be obtained
by taking account of the actual hypothetical net replacement cost which results from the agreement; in the
case where netting leads to a net obligation for the credit institution calculating the net replacement cost,
the current replacement cost is calculated as ‘0’, and

— in step (b) the figure for potential future credit exposure for all contracts included in a netting agreement

may be reduced according to the following formula:

PCEred = 0,4 * PCEgross + 0,6 * NGR * PCEgross

where:

— PCEred =

the reduced figure for potential future credit exposure for all contracts with a given
counterparty included in a legally valid bilateral netting agreement

— PCEgross =

the sum of the figures for potential future credit exposure for all contracts with a
given counterparty which are included in a legally valid bilateral netting agreement
and are calculated by multiplying their notional principal amounts by the percentages
set out in Table 1

— NGR =

‘net-to-gross ratio’: at the discretion of the competent authorities either:

(i)

(ii)

separate calculation: the quotient of the net replacement cost for all contracts
included in a legally valid bilateral netting agreement with a given counterparty
(numerator) and the gross replacement cost for all contracts included in a
legally valid bilateral netting agreement with that counterparty (denominator),
or

aggregate calculation: the quotient of the sum of the net replacement cost
calculated on a bilateral basis for all counterparties taking into account the
contracts included in legally valid netting agreements (numerator) and the gross
replacement cost for all contracts included in legally valid netting agreements
(denominator).

If Member States permit credit institutions a choice of methods, the method chosen is to be used consistently.

For the calculation of the potential future credit exposure according to the above formula perfectly matching contracts
included in the netting agreement may be taken into account as a single contract with a notional principal equivalent
to the net receipts. Perfectly matching contracts are forward foreign-exchange contracts or similar contracts in which a
notional principal is equivalent to cash flows if the cash flows fall due on the same value date and fully or partly in the
same currency.

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In the application of Part 4, in step (a)

— perfectly matching contracts included in the netting agreement may be taken into account as a single contract
with a notional principal equivalent to the net receipts, the notional principal amounts are multiplied by the
percentages given in Table 3, and

— for all other contracts included in a netting agreement, the percentages applicable may be reduced as indicated in

Table 6:

Table 6

Original maturity (1)

Interest-rate
contracts

Foreign-exchange
contracts

One year or less

More than one year but not more than two years

Additional allowance for each additional year

0,35 %

0,75 %

0,75 %

1,50 %

3,75 %

2,25 %

(1)

In the case of interest-rate contracts, credit institutions may, subject to the consent of their competent authorities, choose either original
or residual maturity.

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ANNEX IV

TYPES OF DERIVATIVES

1.

Interest-rate contracts:

(a)

single-currency interest rate swaps;

(b)

basis-swaps;

(c)

forward rate agreements;

(d)

interest-rate futures;

(e)

interest-rate options purchased; and

(f)

other contracts of similar nature.

2.

Foreign-exchange contracts and contracts concerning gold:

(a)

cross-currency interest-rate swaps;

(b)

forward foreign-exchange contracts;

(c)

currency futures;

(d)

currency options purchased;

(e)

other contracts of a similar nature; and

(f)

contracts concerning gold of a nature similar to (a) to (e).

3.

Contracts of a nature similar to those in points 1(a) to (e) and 2(a) to (d) concerning other reference items or indices.
This includes as a minimum all instruments specified in points 4 to 7, 9 and 10 of Section C of Annex I to
Directive 2004/39/EC not otherwise included in points 1 or 2.

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ANNEX V

TECHNICAL CRITERIA CONCERNING THE ORGANISATION AND TREATMENT OF RISKS

1.

GOVERNANCE

1.

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

2.

TREATMENT OF RISKS

The management body described 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.

3.

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.

2.

3.

4.

5.

4.

RESIDUAL RISK

6.

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.

5.

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

6.

SECURITISATION RISK

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.

7.

8.

9.

7.

MARKET RISK

10.

Policies and processes for the measurement and management of all material sources and effects of market risks shall
be implemented.

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8.

INTEREST RATE RISK ARISING FROM NON-TRADING ACTIVITIES

11.

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.

9.

OPERATIONAL RISK

12.

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.

13. Contingency and business continuity plans shall be in place to ensure a credit institution's ability to operate on an

ongoing basis and limit losses in the event of severe business disruption.

10.

LIQUIDITY RISK

14.

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.

15. 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. Without prejudice to points 2 to 7, exposures to central governments and central banks shall be assigned a

100 % risk weight.

2.

Subject to point 3, 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

1

2

3

4

5

6

Risk weight

0 %

20 %

50 %

100 %

100 %

150 %

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.

Exposures to Member States' central governments and central banks denominated and funded in the domestic
currency of that central government and central bank shall be assigned a risk weight of 0 %.

5. When the competent authorities of a third country which apply supervisory and regulatory arrangements at
least equivalent to those applied in the Community assign a risk weight which is lower than that indicated in
point 1 to 2 to exposures to their 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.

1.3. Use of credit assessments by Export Credit Agencies

6.

Export Credit Agency credit assessments shall be recognised by the competent authorities if either of the
following conditions is met:

(a)

(b)

it is a consensus risk score from Export Credit Agencies participating in the OECD ‘Arrangement on
Guidelines for Officially Supported Export Credits’; or

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 eight minimum export
insurance premiums (MEIP) that the OECD agreed methodology establishes.

7.

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

0

1

2

3

4

5

6

7

Risk weight

0 %

0 %

20 %

50 %

100 %

100 %

100 %

150 %

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2.

EXPOSURES TO REGIONAL GOVERNMENTS OR LOCAL AUTHORITIES

8. Without prejudice to points 9 to 11, exposures to regional governments and local authorities shall be risk
weighted as exposures to institutions. This treatment is independent of the exercise of discretion as specified in
Article 80(3). The preferential treatment for short-term exposures specified in points 31, 32 and 37 shall not be
applied.

9.

Exposures to regional governments and local authorities shall 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 risk of default.

Competent authorities shall draw up and make public the list of the regional governments and local authorities
to be risk-weighted like central governments.

10.

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 regional governments and local authorities, except that point 9 shall not apply. In this case for
the purposes of Article 89(1)(a), permission to apply Title V, Chapter 2, Section 3, subsection 1 shall not be
excluded.

11. 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.

3.

EXPOSURES TO ADMINISTRATIVE BODIES AND NON-COMMERCIAL UNDERTAKINGS

3.1. Treatment

12. Without prejudice to points 13 to 17, exposures to administrative bodies and non‑commercial undertakings

shall be assigned a 100 % risk weight.

3.2. Public Sector Entities

13. Without prejudice to points 14 to 17, exposures to public sector entities shall be assigned a 100 % risk weight.

14.

15.

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 as specified in Article 80(3). The preferential treatment for short-term exposures specified in points
31, 32 and 37 shall not be applied.

In exceptional circumstances, exposures to public-sector entities may be treated as exposures to the central
government in whose jurisdiction they are established where in the opinion of the competent authorities there is
no difference in risk between such exposures because of the existence of an appropriate guarantee by the central
government.

16. When the discretion to treat exposures to public-sector entities as exposures to institutions or as exposures to
the central government in whose jurisdiction they are established is exercised by the competent authorities of
one Member State, the competent authorities of another Member State shall allow their credit institutions to
risk-weight exposures to such public-sector entities in the same manner.

17. 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.

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4.

EXPOSURES TO MULTILATERAL DEVELOPMENT BANKS

4.1. Scope

18.

For the purposes of Articles 78 to 83, the Inter-American Investment Corporation, the Black Sea Trade and
Development Bank and the Central American Bank for Economic Integration are considered to be Multilateral
Development Banks (MDB).

4.2. Treatment

19. Without prejudice to points 20 and 21, exposures to multilateral development banks shall be treated in the same
manner as exposures to institutions in accordance with points 29 to 32. The preferential treatment for short-
term exposures as specified in points 31, 32 and 37 shall not apply.

20.

Exposures to the following multilateral development banks shall be assigned 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; and

(l)

the Multilateral Investment Guarantee Agency.

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

Fund.

5.

EXPOSURES TO INTERNATIONAL ORGANISATIONS

22.

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.

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6.

EXPOSURES TO INSTITUTIONS

6.1. Treatment

23. One of the two methods described in points 26 to 27 and 29 to 32 shall apply in determining the risk weights

for exposures to institutions.

24. Without prejudice to the other provisions of points 23 to 39, exposures to 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 shall be risk‑weighted as
exposures to institutions.

6.2. Risk-weight floor on exposures to unrated institutions

25.

Exposures to an unrated institution shall not be assigned 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

1

2

3

4

5

6

Credit quality step to which
central government is
assigned

Risk weight of exposure

20 %

50 %

100 %

100 %

100 %

150 %

27.

28.

For exposures to institutions incorporated in countries where the central government is unrated, the risk weight
shall be not more than 100 %.

For exposures to institutions with an original effective maturity of three months or less, the risk weight shall be
20 %.

6.4. Credit assessment based method

29.

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 %

30.

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

31.

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 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 %

20 %

20 %

50 %

50 %

150 %

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32.

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

33.

If the method specified in points 29 to 32 is applied to exposures to institutions, then the interaction with
specific short-term assessments shall be as follows.

34.

If there is no short-term exposure assessment, the general preferential treatment for short‑term exposures as
specified in point 31 shall apply to all exposures to institutions of up to three months residual maturity.

35.

36.

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
point 31, 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 point 31.

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 point 31, then the general
preferential treatment for short-term exposures shall not be used and all unrated short-term claims shall be
assigned 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

37.

Exposures to institutions of a residual maturity of 3 months or less denominated and funded in the national
currency may, subject to the discretion of the competent authority, be assigned, under both methods described
in points 26 to 27 and 29 to 32, a risk weight that is one category less favourable than the preferential risk
weight, as described in points 4 and 5, assigned to exposures to its central government.

38. No exposures of a residual 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

39.

Investments in equity or regulatory capital instruments issued by institutions shall be risk weighted at 100 %,
unless deducted from the own funds.

6.8 Minimum reserves required by the ECB

40. Where an exposure to an institution is in the form of minimum reserves required by the ECB or by the central
bank of a Member State to be held by the credit institution, Member States may permit the assignment of the
risk weight that would be assigned to exposures to the central bank of the Member State in question provided:

(a)

(b)

the reserves are held in accordance with Regulation (EC) No 1745/2003 of the European Central Bank of
12 September 2003 on the application of minimum reserves (1) or a subsequent replacement regulation
or in accordance with national requirements in all material respects equivalent to that Regulation; and

in the event of the bankruptcy or insolvency of the institution where the reserves are held, the reserves are
fully repaid to the credit institution in a timely manner and are not made available to meet other liabilities
of the institution.

(1) OJ L 250, 2.10.2003, p. 10.

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7.

EXPOSURES TO CORPORATES

7.1. Treatment

41.

Exposures 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 assignment 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 %

100 %

150 %

150 %

42.

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

8.

RETAIL EXPOSURES

43.

Exposures that comply with the criteria listed in Article 79(2) shall be assigned a risk weight of 75 %.

9.

EXPOSURES SECURED BY REAL ESTATE PROPERTY

44. Without prejudice to points 45 to 60, exposures fully secured by real estate property shall be assigned a risk

weight of 100 %.

9.1. Exposures secured by mortgages on residential property

45.

46.

47.

Exposures or any part of an exposure 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, or the
beneficial owner in the case of personal investment companies, 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 %.

Exposures to a tenant under a property leasing transaction concerning residential property under which the
credit institution is the lessor and the tenant has an option to purchase, shall be assigned a risk weight of 35 %
provided that the competent authorities are satisfied that the exposure of the credit institution is fully and
completely secured by its ownership of the property.

48.

In the exercise of their judgement for the purposes of points 45 to 47, competent authorities shall be satisfied
only if the following conditions are met:

(a)

(b)

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;

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, point 8 and the valuation rules set out in
Annex VIII, Part 3, points 62 to 65 are met; and

(d)

the value of the property exceeds the exposures by a substantial margin.

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49. Competent authorities may dispense with the condition contained in point 48(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.

50. When the discretion contained in point 49 is exercised by the competent authorities of a Member State, the
competent authorities of another Member State may allow their credit institutions to assign 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

51.

Subject to the discretion of the competent authorities, exposures or any part of an exposure 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 %.

52.

53.

Subject to the discretion of the 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 the competent authorities, exposures related to property leasing transactions
concerning offices or other commercial premises situated in their territories under which the credit institution is
the lessor and the tenant has an option to purchase may be assigned a risk weight of 50 % provided that the
exposure of the credit institution is fully and completely secured to the satisfaction of the competent authorities
by its ownership of the property.

54. The application of points 51 to 53 is subject to the following conditions:

(a)

(b)

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;

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 facility must not materially depend on any cash flow generated by the underlying
property serving as collateral; and

(c)

the minimum requirements set out in Annex VIII, Part 2, point 8, and the valuation rules set out in
Annex VIII, Part 3, points 62 to 65 are met.

55. The 50 % risk weight shall be assigned 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.

56. A 100 % risk weigh shall be assigned to the Part of the loan that exceeds the limits set out in point 55.

57. When the discretion contained in points 51 to 53 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.

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58. Competent authorities may dispense with the condition contained in point 54(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)

losses stemming from lending collateralised by commercial real estate property up to 50 % of the market
value (or where applicable and if lower 60 % of the mortgage lending value (MLV)) do not exceed 0,3 % of
the outstanding loans collateralised by commercial real estate property in any given year; and

(b)

overall losses stemming from lending collateralised by commercial real estate property must not exceed
0,5 % of the outstanding loans collateralised by commercial real estate property in any given year.

59.

If either of the limits referred to in point 58 is not satisfied in a given year, the eligibility to use point 58 shall
cease and the condition contained in point 54(b) shall apply until the conditions in point 58 are satisfied in a
subsequent year.

60. When the discretion contained in point 58 is exercised by the competent authorities of a Member State, the
competent authorities of another Member State may allow their credit institutions to assign a risk weight of
50 % to such exposures fully and completely secured by mortgages on commercial property.

10.

PAST DUE ITEMS

61. Without prejudice to the provisions contained in points 62 to 65, the unsecured part of any item that is past due
for more than 90 days and which is above a threshold defined by the competent authorities and which reflects a
reasonable level of risk shall be assigned a risk weight of:

(a)

(b)

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

100 %, if value adjustments are no less than 20 % of the unsecured part of the exposure gross of value
adjustments.

62.

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

63. 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 be assigned 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.

64.

Exposures indicated in points 45 to 50 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 exposure gross of value
adjustments, the risk weight to be assigned to the remainder of the exposure may be reduced to 50 % at the
discretion of competent authorities.

65.

Exposures indicated in points 51 to 60 shall be assigned a risk weight of 100 % if they are past due for more
than 90 days.

11.

ITEMS BELONGING TO REGULATORY HIGH-RISK CATEGORIES

66.

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 %.

67.

Competent authorities may permit non past due items to be assigned a 150 % risk weight according to the
provisions of this Part 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; and

(b)

50 %, if value adjustments are no less than 50 % of the exposure value gross of value adjustments.

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12.

EXPOSURES IN THE FORM OF COVERED BONDS

68.

‘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:

(a)

exposures to or guaranteed by central governments, central banks, public sector entities, regional
governments and local authorities in the EU;

(b)

(c)

(d)

(e)

exposures to or guaranteed by non-EU central governments, non-EU central banks, multilateral
development banks, international organisations that qualify for the credit quality step 1 as set out in this
Annex, and exposures to or guaranteed by non-EU public sector entities, non-EU regional governments
and non-EU local authorities that are risk weighted as exposures to institutions or central governments
and central banks according to points 8, 9, 14 or 15 respectively and that qualify for the credit quality step
1 as set out in this Annex, and exposures in the sense of this point that qualify as a minimum for the
credit quality step 2 as set out in this Annex, provided that they do not exceed 20 % of the nominal
amount of outstanding covered bonds of issuing institutions;

exposures to institutions that qualify for the credit quality step 1 as set out in this Annex. The total
exposure of this kind shall not exceed 15 % of the nominal amount of outstanding covered bonds of the
issuing credit institution. Exposures caused by transmission and management of payments of the obligors
of, or liquidation proceeds in respect of, loans secured by real estate to the holders of covered bonds shall
not be comprised by the 15 % limit. Exposures to institutions in the EU with a maturity not exceeding 100
days shall not be comprised by the step 1 requirement but those institutions must as a minimum qualify
for credit quality step 2 as set out in this Annex;

loans secured by residential real estate or shares in Finnish residential housing companies as referred to in
point 46 up to the lesser of the principal amount of the liens that are combined with any prior liens and
80 % of the value of the pledged properties or by senior units issued by French Fonds Communs de
Créances or by equivalent securitisation entities governed by the laws of a Member State securitising
residential real estate exposures provided that at least 90 % of the assets of such Fonds Communs de
Créances or of equivalent securitisation entities governed by the laws of a Member State are composed of
mortgages that are combined with any prior liens up to the lesser of the principal amounts due under the
units, the principal amounts of the liens, and 80 % of the value of the pledged properties and the units
qualify for the credit quality step 1 as set out in this Annex where such units do not exceed 20 % of the
nominal amount of the outstanding issue. Exposures caused by transmission and management of
payments of the obligors of, or liquidation proceeds in respect of, loans secured by pledged properties of
the senior units or debt securities shall not be comprised in calculating the 90 % limit;

loans secured by commercial real estate or shares in Finnish housing companies as referred to in point 52
up to the lesser of the principal amount of the liens that are combined with any prior liens and 60 % of
the value of the pledged properties or by senior units issued by French Fonds Communs de Créances or by
equivalent securitisation entities governed by the laws of a Member State securitising commercial real
estate exposures provided that, at least, 90 % of the assets of such Fonds Communs de Créances or of
equivalent securitisation entities governed by the laws of a Member State are composed of mortgages that
are combined with any prior liens up to the lesser of the principal amounts due under the units, the
principal amounts of the liens, and 60 % of the value of the pledged properties and the units qualify for
the credit quality step 1 as set out in this Annex where such units do not exceed 20 % of the nominal
amount of the outstanding issue. 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 VIII. The bondholders' claim must take priority over all other claims on the
collateral.Exposures caused by transmission and management of payments of
the obligors of, or
loans secured by pledged properties of the senior units or debt
liquidation proceeds in respect of,
securities shall not be comprised in calculating the 90 % limit; or

(f)

loans secured by ships where only liens that are combined with any prior liens within 60 % of the value of
the pledged ship.

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For these purposes ‘collateralised’ includes situations where the assets as described in subpoints (a) to (f) are
exclusively dedicated in law to the protection of the bond‑holders against losses.

Until 31 December 2010 the 20 % limit for senior units issued by French Fonds Communs de Créances or by
equivalent securitisation entities as specified in subpoints (d) and (e) does not apply, provided that those senior
units have a credit assessment by a nominated ECAI which is the most favourable category of credit assessment
made by the ECAI in respect of covered bonds. Before the end of this period this derogation shall be reviewed
and consequent to such review the Commission may as appropriate extend this period in accordance with the
procedure referred to in Article 151(2) with or without a further review clause.

Until 31 December 2010 the figure of 60 % indicated in subpoint (f) can be replaced with a figure of 70 %.
Before the end of this period this derogation shall be reviewed and consequent to such review the Commission
may as appropriate extend this period in accordance with the procedure referred to in Article 151(2) with or
without a further review clause.

69. Credit institutions shall for real estate collateralising covered bonds meet the minimum requirements set out in

Annex VIII Part 2, point 8 and the valuation rules set out in Annex VIII, Part 3, points 62 to 65.

70. Notwithstanding points 68 and 69, 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.

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

(a)

(b)

(c)

(d)

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

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

if the exposures to the institution are assigned a risk weight of 100 %, the covered bond shall be assigned a
risk weight of 50 %; and

if the exposures to the institution are assigned a risk weight of 150 %, the covered bond shall be assigned a
risk weight of 100 %.

13.

ITEMS REPRESENTING SECURITISATION POSITIONS

72. Risk weight exposure amounts for securitisation positions shall be determined in accordance with Articles 94 to

101.

14.

SHORT-TERM EXPOSURES TO INSTITUTIONS AND CORPORATES

73.

Short-term exposures to an institution or corporate for which a credit assessment by a nominated ECAI is
available shall be assigned a risk weight according to Table 7 as follows, 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 7

Credit Quality Step

1

2

3

4

5

6

Risk weight

20 %

50 %

100 %

150 %

150 %

150 %

15.

EXPOSURES IN THE FORM OF COLLECTIVE INVESTMENT UNDERTAKINGS (CIUS)

74. Without prejudice to points 75 to 81, exposures in collective investment undertakings (CIUs) shall be assigned a

risk weight of 100 %.

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75.

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 8, 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 8

Credit quality step

1

2

3

4

5

6

Risk weight

20 %

50 %

100 %

100 %

150 %

150 %

76. 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 %.

77.

Credit institutions may determine the risk weight for a CIU as set out in points 79 to 81, if the following
eligibility criteria are met:

(a)

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

(i)

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

(ii)

cooperation between competent authorities is sufficiently ensured;

(b)

the CIU's prospectus or equivalent document includes:

(i)

the categories of assets in which the CIU is authorised to invest; and

(ii)

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

(c)

the business of the CIU is reported on at least an annual basis to enable an assessment to be made of the
assets and liabilities, income and operations over the reporting period.

78.

If a competent authority approves a third country CIU as eligible, as set out in point 77(a), then a competent
authority in another Member State may make use of this recognition without conducting its own assessment.

79. Where the credit institution is aware of the underlying exposures of a CIU, it may look through 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.

80. 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.

81. Credit institutions may rely on a third party to calculate and report, in accordance with the methods set out in
points 79 and 80, 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

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

100 %.

83.

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 %.

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84. Cash items in the process of collection shall be assigned a 20 % risk weight. Cash in hand and equivalent cash

items shall be assigned a 0 % risk weight.

85. 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.

86. Holdings of equity and other participations, except where deducted from own funds, shall be assigned a risk

weight of at least 100 %.

87. Gold bullion held in own vaults or on an allocated basis to the extent backed by bullion liabilities shall be

assigned a 0 % risk weight.

88.

In the case of asset sale and repurchase agreements and outright forward purchases, the risk weight shall be that
assigned to the assets in question and not to the counterparties to the transactions.

89. 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, and where the
product has an external credit assessment from an eligible ECAI, the risk weights prescribed in Articles 94 to
101 shall be assigned. 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 1 250 % 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.

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; and

(d)

corporate governance of the ECAI.

1.3. Ongoing review

4.

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.

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5.

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 back-testing must be established for at least one year;

(b)

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

(c)

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.

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.

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.

9.

Credibility shall be assessed by competent authorities according to factors such as the following:

(a) market share of the ECAI;

(b)

revenues generated by the ECAI, and more in general financial resources of the ECAI;

(c)

whether there is any pricing on the basis of the rating; and

(d)

at least two credit institutions use the ECAI's individual credit assessment for bond issuing and/or
assessing credit risks.

2.2. Transparency and Disclosure

10. Competent authorities shall verify that individual credit assessments are accessible at equivalent terms at least to

all credit institutions having a legitimate interest in these individual credit assessments.

11.

In particular, competent authorities shall verify that individual credit assessments are available to non-domestic
parties on equivalent terms as to domestic credit institutions having a legitimate interest in these individual
credit assessments.

3.

‘MAPPING’

12.

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.

13.

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.

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14. 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.

15. 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
credit quality step in the credit quality assessment scale to the ECAI credit assessment.

16. 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 rates experienced for its credit assessment are no
longer materially and systematically higher than the benchmark, competent authorities may decide to restore
the original credit quality step in the credit quality assessment scale for the ECAI credit assessment.

PART 3

Use of ECAIs' credit assessments for the determination of risk weights

1.

TREATMENT

1.

2.

3.

4.

5.

6.

7.

A credit institution may nominate one or more eligible ECAIs to be used for the determination of risk weights
to be assigned 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.

A credit 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 assigned.

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 assigned. If the two lowest risk weights are the same, that risk weight shall be assigned.

2.

ISSUER AND ISSUE CREDIT ASSESSMENT

8. 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 to be assigned to that item.

9. 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.

10.

Points 8 and 9 are not to prevent the application of points 68 to 71 of Part 1.

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11.

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

3.

LONG-TERM AND SHORT-TERM CREDIT ASSESSMENTS

12.

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

13. 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.

14. Notwithstanding point 13, if a short-term rated facility is assigned a 150 % risk weight, then all unrated
unsecured exposures on that obligor whether short-term or long-term shall also be assigned a 150 % risk
weight.

15. Notwithstanding point 13, if a short-term rated facility is assigned a 50 % risk‑weight, no unrated short-term

exposure shall be assigned a risk weight lower than 100 %.

4.

DOMESTIC AND FOREIGN CURRENCY ITEMS

16. 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.

17. Notwithstanding point 16, when an exposure arises through a credit institution's 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 obligors' domestic currency item to be used for
risk weighting purposes.

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ANNEX VII

INTERNAL RATINGS BASED APPROACH

PART 1

Risk weighted exposure amounts and expected loss amounts

1.

CALCULATION OF RISK WEIGHTED EXPOSURE AMOUNTS FOR CREDIT RISK

1.

2.

Unless noted otherwise, the input parameters PD, LGD, and maturity value (M) shall be determined as set out
in Part 2 and 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
formulae.

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

central banks.

3.

Subject to points 5 to 9, the risk weighted exposure amounts for exposures to corporates, institutions and
central governments and central banks shall be calculated according to the following formulae:

(cid:16)

Correlation ðRÞ = 0:12 ×
(cid:17)
(cid:138)

EXPð − 50Þ

1 − EXPð − 50*PDÞ

(cid:17)

(cid:16)
=

1 − EXPð − 50Þ

(cid:17)

þ 0:24*½1 −

Looptijdfactor ðbÞ =

(cid:16)

0:11852 − 0:05478*lnðPDÞ

(cid:17)2

(cid:16)

1 − EXPð − 50*PDÞ

(cid:17)

(cid:16)
=

1 −

(cid:16)
LGD*N½ðl − RÞ − 0:5(cid:3)GðPDÞ þ

(cid:16)

R =ðl − RÞ

(cid:17)0:5

(cid:3)Gð0:999Þ(cid:138) − PD*LGD

(cid:17)
(cid:3)ð1 − 1:5*bÞ − 1(cid:3)

(cid:16)

1 þ ðM −

(cid:17)
2:5Þ*b

(cid:3)12:5(cid:3)1:06

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 variance of one is less than or equal to x). G (Z) denotes
the inverse cumulative distribution function for a standard normal random variable (i.e. the value x such that
N(x) z)

For PD = 0, RW shall be 0.

For PD = 1:

— for defaulted exposures where credit institutions apply the LGD values set out in Part 2, point 8, RW

shall be 0; and

— for defaulted exposures where credit institutions use own estimates of LGDs, RW shall be Max{0, 12.5 *

(LGD-ELBE)};

where ELBE shall be the credit institution's best estimate of expected loss for the defaulted exposure according
to point 80 of Part 4.

Risk—weighted exposure amount = RW * exposure value.

4.

The risk weighted exposure amount for each exposure which meets the requirements set out in Annex VIII,
Part 1, point 29 and Annex VIII, Part 2, point 22 may be adjusted according to the following formula:

Risk—weighted exposure amount = RW * exposure value * ((0,15 + 160*PDpp)]

where:

PDpp = PD of the protection provider.

RW shall be calculated using the relevant risk weight formula set out in point 3 for the exposure, the PD of the
obligor and the LGD of a comparable direct exposure to the protection provider. The maturity factor (b) shall
be calculated using the lower of the PD of the protection provider and the PD of the obligor.

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5.

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.

Correlation ðRÞ = 0:12 ×
(cid:17)
(cid:138) − 0:04(cid:3)

EXPð − 50Þ

(cid:16)

1 − ðS − 5Þ= 45

(cid:16)

1 − EXPð − 50*PDÞ

(cid:17)

(cid:17)

(cid:16)
=

1 − EXPð − 50Þ

(cid:17)

þ 0:24(cid:3)½1 −

(cid:16)

1 − EXPð − 50*PDÞ

(cid:16)
(cid:17)
=

1 −

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.

6.

For specialised lending exposures in respect of which 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, as follows:

Table 1

Remaining
Maturity

Category 1

Category 2

Category 3

Category 4

Category 5

Less than 2,5 years

50 %

70 %

115 %

250 %

0 %

Equal or more than
2,5 years

70 %

90 %

115 %

250 %

0 %

The competent authorities may authorise a credit institution generally to assign preferential risk weights of
50 % to exposures in category 1, and a 70 % risk weight to exposures in category 2, provided the credit
institution's underwriting characteristics and other risk characteristics are substantially strong for the relevant
category.

In assigning risk weights to specialised lending exposures credit 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, and security
package.

For their purchased corporate receivables credit institutions shall comply with the minimum requirements set
out in points 105 to 109 of Part 4. For purchased corporate receivables that comply in addition with the
conditions set out in point 14, 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, dilution 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 to 101
will 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 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
the exposures included in the
exposure amount than the risk‑weighted exposure amount of any of
aggregation.

7.

8.

9.

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1.2. Risk weighted exposure amounts for retail exposures

10.

Subject to points 12 and 13, the risk weighted exposure amounts for retail exposures shall be calculated
according to the following formulae:

1 − EXPð − 35*PDÞ

(cid:17)
=

(cid:16)

1 − EXPð − 35Þ

(cid:17)

(cid:16)
þ 0:16(cid:3)½1 − ð1 − EXP − 35*PDÞ=

1 −

(cid:16)

Correlation ðRÞ = 0:03 ×
(cid:17)
(cid:138)

EXPð − 35Þ

Risk weighted(RW)

(cid:16)
LGD*Nfð1 − RÞ − 0:5GðPDÞ þ

(cid:16)

(cid:17)0:5

R=ð1 − RÞ

Gð0:999Þg − PD*12:5*1:06

(cid:17)

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 variance of one is less than or equal to x). G (Z) denotes
the inverse cumulative distribution function for a standard normal random variable (i.e. the value x such that
N(x)= z).

For PD = 1 (defaulted exposure), RW shall be Max {0, 12.5 *(LGD-ELBE)},

where ELBE shall be the credit institution's best estimate of expected loss for the defaulted exposure according
to point 80 of Part 4.

Risk—weighted exposure amount = RW * exposure value.

11.

12.

13.

The risk weighted exposure amount for each exposure to small and medium sized entities as defined in
Article 86(4) which meets the requirements set out in Annex VIII, Part 1, point 29 and Annex VIII, Part 2,
point 22 may be calculated according to point 4.

For retail exposures secured by real estate collateral a correlation (R) of 0,15 shall replace the figure produced
by the correlation formula in point 10.

For qualifying revolving retail exposures as defined in points (a) to (e), a correlation (R) of 0,04 shall replace
the figure produced by the correlation formula in point 10.

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;

(d)

The credit institution can demonstrate that the use of the correlation of this point is limited to portfolios
that have exhibited low volatility of loss rates, relative to their average level of loss rates, especially
within the low PD bands. Competent authorities shall review the relative volatility of loss rates across the
qualifying revolving retail sub-portfolios, 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; and

(e)

The competent authority concurs that treatment as a qualifying revolving retail exposure is consistent
with the underlying risk characteristics of the sub‑portfolio.

By way of derogation from point (b), competent authorities may waive the requirement that the exposure be
unsecured in respect of collateralised credit facilities linked to a wage account. In this case amounts recovered
from the collateral shall not be taken into account in the LGD estimate.

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14.

To be eligible for the retail treatment, purchased receivables shall comply with the minimum requirements set
out in Part 4, points 105 to 109 and the following conditions:

(a)

(b)

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;

The purchased receivables shall be generated on an arm's-length basis between the seller and the obligor.
As such, inter-company 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; and

(d)

The portfolio of purchased receivables is sufficiently diversified.

15.

16.

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

17.

18.

A credit institution may employ different approaches to different portfolios where the credit institution itself
uses different approaches internally. Where a credit institution uses 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.

Notwithstanding point 17, 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.

1.3.1. Simple risk weight approach

19.

The risk weighted exposure amount 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.

20.

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 assigned to the absolute
value of each position. In the context of maturity mismatched positions, the method is that for corporate
exposures as set out in point 16 of Annex VII, Part 2.

21.

Credit institutions may recognise unfunded credit protection obtained on an equity exposure in accordance
with the methods set out in Articles 90 to 93.

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1.3.2. PD/LGD approach

22.

23.

24.

The risk weighted exposure amounts shall be calculated according to the formulas in point 3. If credit
institutions do not have sufficient information to use the definition of default set out in points 44 to 48 of
Part 4, a scaling factor of 1,5 shall be assigned 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 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

25.

The risk weighted exposure amount shall be the potential loss on the credit 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 and calculated on the basis of the PD values set out
in Part 2, point 24(a) and the corresponding LGD values set out in Part 2, points 25 and 26.

26.

Credit institutions may recognise unfunded credit protection obtained on an equity position.

1.4. Risk weighted exposure amounts for other non credit-obligation assets

27.

The risk weighted exposure amounts shall be calculated according to the formula:

Risk‑weighted exposure amount = 100 % * exposure value,

except for when the exposure is a residual value in which case it should be provisioned for each year and will
be calculated as follows:

1/t * 100 % * exposure value,

where t is the number of years of the lease contract term.

2.

CALCULATION OF RISK WEIGHTED EXPOSURE AMOUNTS FOR DILUTION RISK OF PURCHASED RECEIVABLES

28.

Risk weights for dilution risk of purchased corporate and retail receivables:

The risk weights shall be calculated according to the formula in point 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.

CALCULATION OF EXPECTED LOSS AMOUNTS

29.

30.

Unless noted otherwise, the input parameters PD and LGD shall be determined as set out in Part 2 and 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 formulae:

Expected loss (EL) = PD × LGD.

Expected loss amount = EL × exposure value.

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For defaulted exposures (PD =1) where credit institutions use own estimates of LGDs, EL shall be ELBE, the
credit institution's best estimate of expected loss for the defaulted exposure according to Part 4, point 80.

For exposures subject to the treatment set out in Part 1, point 4, EL shall be 0.

31.

The EL values for specialised lending exposures where credit institutions use the methods set out in point 6 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 %

0,4 %

2,8 %

8 %

50 %

Equal to or more
than 2,5 years

0,4 %

0,8 %

2,8 %

8 %

50 %

Where competent authorities have authorised a credit institution generally to 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 0,4 %.

32.

The expected loss amounts for equity exposures where the risk weighted exposure amounts are calculated
according to the methods set out in points 19 to 21, shall be calculated according to the following formula:

Expected loss amount = EL × exposure value

The EL values shall be the following:

Expected loss (EL) = 0,8 % for private equity exposures in sufficiently diversified portfolios

Expected loss (EL) = 0,8 % for exchange traded equity exposures

Expected loss (EL) = 2,4 % for all other equity exposures.

33.

The expected loss amounts for equity exposures where the risk weighted exposure amounts are calculated
according to the methods set out in points 22 to 24 shall be calculated according to the following formulae:

Expected loss (EL) = PD × LGD and

Expected loss amount = EL × exposure value

34.

35.

The expected loss amounts for equity exposures where the risk weighted exposure amounts are calculated
according to the methods set out in points 25 to 26 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 and

Expected loss amount = EL × exposure value

4.

TREATMENT OF EXPECTED LOSS AMOUNTS

36.

The expected loss amounts calculated in accordance with points 30, 31 and 35 shall be subtracted from the
sum of value adjustments and provisions related to these exposures. Discounts on balance sheet exposures
purchased when in default according to Part 3, point 1 shall be treated in the same manner as value
adjustments. Expected loss amounts for securitised exposures and value adjustments and provisions related to
these exposures shall not be included in this calculation.

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PART 2

PD, LGD and Maturity

1.

The input parameters PD, 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.

1.

EXPOSURES TO CORPORATES, INSTITUTIONS AND CENTRAL GOVERNMENTS AND CENTRAL BANKS

1.1.

PD

2.

3.

4.

5.

6.

7.

1.2.

LGD

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 institution's 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. For dilution risk, however, competent authorities may recognise as eligible unfunded credit
protection providers other than those indicated in Annex VIII, Part 1.

Credit institutions using own LGD estimates may recognise unfunded credit protection by adjusting PDs
subject to point 10.

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. Credit institutions may recognise unfunded credit protection in the PD in accordance
with the provisions of Articles 90 to 93. Competent authorities may recognise as eligible unfunded credit
protection providers other than those indicated in Annex VIII, Part 1. If a credit institution is permitted to use
own LGD estimates for dilution risk of purchased corporate receivables, it may recognise unfunded credit
protection by adjusting PDs subject of point 10.

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
Articles 90 to 93;

(d)

Covered bonds as defined in Annex VI, Part 1, points 68 to 70 may be assigned an LGD value of 12,5 %;

(e)

(f)

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 %;

For subordinated purchased corporate receivables exposures where a credit
demonstrate that its PD estimates meet the minimum requirements set out in Part 4: 100 %; and

institution cannot

(g)

For dilution risk of purchased corporate receivables: 75 %.

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Until 31 December 2010, covered bonds as defined in Annex VI, Part 1, points 68 to 70 may be
assigned an LGD value of 11,25 % if:

— assets as set out in Annex VI, Part 1, point 68(a) to (c) collateralising the bonds all qualify for credit

quality step 1 as set out in that Annex;

— where assets set out in Annex VI, Part 1, point 68(d) and (e) are used as collateral, the respective
upper limits laid down in each of those points is 10 % of the nominal amount of the outstanding
issue;

— assets as set out in Annex VI, Part 1, point 68(f) are not used as collateral; or

— the covered bonds are the subject of a credit assessment by a nominated ECAI, and the ECAI
places them in the most favourable category of credit assessment that the ECAI could make in
respect of covered bonds.

By 31 December 2010, this derogation shall be reviewed and consequent to such review the
Commission may make proposals in accordance with the procedure referred to in Article 151(2).

9.

10.

11.

Notwithstanding point 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 point 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 and/or LGD 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.

Notwithstanding points 8 and 10, for the purposes of Part 1, point 4, the LGD of a comparable direct
exposure to the protection provider shall either be the LGD associated with an unhedged facility to the
guarantor or the unhedged facility of the obligor, depending upon whether in the event both the guarantor
and obligor default during the life of the hedged transaction, available evidence and the structure of the
guarantee indicate that the amount recovered would depend on the financial condition of the guarantor or
obligor, respectively.

1.3. Maturity

12.

13.

Subject to point 13, credit institutions shall assign to exposures arising from repurchase transactions or
securities or commodities lending or borrowing transactions a maturity value (M) of 0,5 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 point 13.

Credit institutions permitted to use own LGDs and/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 points 14 to 16. 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 = MAXf1; MINfΣ

t

t*CFt=Σ

t

CFt, 5gg

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;

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(c)

(d)

(e)

(f)

For exposures arising from fully or nearly-fully collateralised derivative instruments (listed in Annex IV)
transactions and fully or nearly-fully collateralised margin lending transactions which are subject to a
master netting agreement, M shall be the weighted average remaining maturity of the transactions where
M shall be at least 10 days. The notional amount of each transaction shall be used for weighting the
maturity;

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 90 days. 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 90 days;

For any other instrument than those mentioned in this point 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
;

for credit institutions using the Internal Model Method set out in Annex III, Part 6 to calculate the
exposure values, M shall be calculated for exposures to which they apply this method and for which the
maturity of the longest-dated contract contained in the netting set is greater than one year according to
the following formula:

EffectiveEEk

(cid:3)Δtk

(cid:3)df k þ Σ

EEk

(cid:3)Δtk

(cid:3)df k

maturity

tk>1year

tk≤1year

Σ

k = 1

EffectiveEEk

(cid:3)Δtk

(cid:3)df k

1

C
C
C
C
A

; 5

tk≤1year

Σ

k = 1

0

B
B
B
B
@

M = MIN

where:

df = the risk‑free discount factor for future time period tk and the remaining symbols are defined in
Annex III, Part 6.

Notwithstanding the first paragraph of point 13(f), a credit institution that uses an internal model to
calculate a one-sided credit valuation adjustment (CVA) may use, subject to the approval of the
competent authorities, the effective credit duration estimated by the internal model as M.

Subject to paragraph 14, for netting sets in which all contracts have an original maturity of less than one
year the formula in point (a) shall apply; and

(g)

for the purposes of Part 1, point 4, M shall be the effective maturity of the credit protection but at least 1
year.

14.

Notwithstanding point 13(a), (b), (d) and (e), M shall be at least one-day for:

— fully or nearly-fully collateralised derivative instruments listed in Annex IV;

— fully or nearly-fully collateralised margin lending transactions; and

— repurchase transactions, securities or commodities lending or borrowing transactions

provided the documentation requires daily re-margining and daily revaluation and includes provisions that
allow for the prompt liquidation or setoff of collateral in the event of default or failure to re-margin.

In addition, for other short-term exposures specified by the competent authorities which are not Part of the
credit institution's ongoing financing of the obligor, M shall be at least one-day. A careful review of the
particular circumstances shall be made in each case.

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15.

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 point 12.
Competent authorities may replace EUR 500 million total assets with EUR 1 000 million total assets for
corporates which primarily invest in real estate.

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

2.

RETAIL EXPOSURES

2.1.

PD

17.

The PD of an exposure shall be at least 0,03 %.

18.

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

19.

20.

2.2.

LGD

21.

22.

23.

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.

Unfunded credit protection may be recognised as eligible by adjusting PDs subject to point 22. For dilution
risk, where credit institutions do not use own estimates of LGDs, this shall be subject to compliance with
Articles 90 to 93; for this purpose competent authorities may recognise as eligible unfunded protection
providers other than those indicated in Annex VIII, Part 1.

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 LGD estimate may be used.

Unfunded credit protection may be recognised as eligible by adjusting PD or LGD estimates subject to
minimum requirements as specified in Part 4, points 99 to 104 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.

Notwithstanding point 22, for the purposes of Part 1, point 11 the LGD of a comparable direct exposure to
the protection provider shall either be the LGD associated with an unhedged facility to the guarantor or the
unhedged facility of the obligor, depending upon whether, in the event both the guarantor and obligor default
during the life of the hedged transaction, available evidence and the structure of the guarantee indicate that the
amount recovered would depend on the financial condition of the guarantor or obligor, respectively.

3.

EQUITY EXPOSURES SUBJECT TO PD/LGD METHOD

3.1.

PD

24.

PDs shall be determined according to the methods for corporate exposures.

The following minimum PDs shall apply:

(a)

(b)

0,09 % for exchange traded equity exposures where the investment is part of a long‑term customer
relationship;

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;

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(c)

0,40 % for exchange traded equity exposures including other short positions as set out in part 1,
point 20; and

(d)

1,25 % for all other equity exposures including other short positions as set out in Part 1, point 20.

3.2.

LGD

25.

Private equity exposures in sufficiently diversified portfolios may be assigned an LGD of 65 %.

26.

All other exposures shall be assigned an LGD of 90 %.

3.3. Maturity

27. M assigned to all exposures shall be 5 years.

PART 3

Exposure value

1.

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

1.

2.

3.

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 or securities or
commodities 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.

4.

The exposure value for leases shall be the discounted minimum lease payments.

‘Minimum lease payments’ are the payments over the lease term that the lessee is or can be required to make
and any bargain option (i.e. option the exercise of which is reasonably certain). Any guaranteed residual value
fulfilling the set of conditions in Annex VIII, Part 1, points 26 to 28 regarding the eligibility of protection
providers as well as the minimum requirements for recognising other types of guarantees provided in
Annex VIII, Part 2, points 14 to 19 should also be included in the minimum lease payments.

5.

6.

7.

In the case of any item listed in Annex IV, the exposure value shall be determined by the methods set out in
Annex III.

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

Where an exposure takes the form of securities or commodities sold, posted or lent under repurchase
transactions or securities or commodities lending or borrowing transactions, long settlement transactions and
margin lending transactions, 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. The exposure value of repurchase transactions, securities or
commodities lending or borrowing transactions, long settlement transactions and margin lending transactions
may be determined either in accordance with Annex III or Annex VIII, Part 3, points 12 to 21.

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8.

9.

Notwithstanding point 7, the exposure value of credit risk exposures outstanding, as determined by the
competent authorities, with a central counterparty shall be determined in accordance with Annex III, Part 2,
point 6, provided that the central counterparty's counterparty credit risk exposures with all participants in its
arrangements are fully collateralised on a daily basis.

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)

(b)

(c)

(d)

(e)

for credit lines which are uncommitted, that are unconditionally cancellable at any time by the credit
institution without prior notice, or
that effectively provide for automatic cancellation due to
deterioration in a borrower's credit worthiness, 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;

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;

for undrawn purchase commitments for revolving purchased receivables 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;

for other credit lines, note issuance facilities (NIFs), and revolving underwriting facilities (RUFs), a
conversion factor of 75 % shall apply; and

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 as mentioned in points (a) to (d), subject to approval of the competent authorities.

10. 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.

11.

For all off-balance sheet items other than those mentioned in points 1 to 9, the exposure value shall be the
following percentage of its value:

— 100 % if it is a full risk item,

— 50 % if it is a medium-risk item,

— 20 % if it is a medium/low-risk item, and

— 0 % if it is a low-risk item.

For the purposes of this point the off-balance sheet items shall be assigned to risk categories as indicated in
Annex II.

2.

EQUITY EXPOSURES

12.

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

(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;

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(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; and

(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.

OTHER NON CREDIT-OBLIGATION ASSETS

13.

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

PART 4

Minimum requirements for IRB Approach

1.

RATING SYSTEMS

1.

2.

3.

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
LGDrelated transaction characteristics.

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10.

11.

12.

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 LGDs 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 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, point 6 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 point 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

13.

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

14.

15.

The level of risk differentiation shall ensure that the number of exposures in a given grade or pool is sufficient
to allow for meaningful quantification and validation of the loss characteristics at the grade or pool level. The
distribution of exposures and obligors across grades or pools shall be such as to avoid excessive
concentrations.

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 its customers.

16.

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

(a) Obligor risk characteristics;

(b)

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

(c)

Delinquency, unless the credit institution demonstrates to its competent authority that delinquency is
not a material risk drivers for the exposure;

1.2. Assignment to grades or pools

17.

A credit institution shall have specific definitions, processes and criteria for assigning exposures to grades or
pools within a rating system.

(a)

(b)

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;

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; and

(c)

The criteria shall also be consistent with the credit institution's internal lending standards and its policies
for handling troubled obligors and facilities.

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18.

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.

1.3. Assignment of exposures

1.3.1. Exposures to corporates, institutions and central governments and central banks

19.

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

20.

For those credit institutions permitted to use own estimates of LGDs and/or conversion factors, each exposure
shall also be assigned to a facility grade as Part of the credit approval process.

21.

Credit institutions using the methods set out in Part 1, point 6 for assigning risk weights for specialised
lending exposures shall assign each of these exposures to a grade in accordance with point 12.

22.

23.

Each separate legal entity to which the credit institution is exposed shall be separately rated. A credit institution
shall demonstrate to its competent authority that it has acceptable policies 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; and

(c)

where consumer protection, bank secrecy or other legislation prohibit the exchange of client data.

1.3.2. Retail exposures

24.

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

1.3.3. Overrides

25.

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 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.

1.4.

Integrity of assignment process

1.4.1. Exposures to corporates, institutions and central governments and central banks

26.

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.

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27.

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.

28.

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

1.4.2. Retail exposures

29.

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.

1.5. Use of models

30.

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;

(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)

(e)

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; and

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.

1.6. Documentation of rating systems

31.

32.

institutions shall document

The credit
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 design and operational details of

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.

33.

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.

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34.

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.

35.

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 requirements for rating systems. The burden is on the
credit institution to satisfy competent authorities.

1.7. Data maintenance

36.

Credit institutions shall collect and store data on aspects of their internal ratings as required under Articles 145
to 149.

1.7.1. Exposures to corporates, institutions and central governments and central banks

37.

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; and

(g)

data on the PDs and realised default rates associated with rating grades and ratings migration;

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, point 8 and realised conversion factors to the
values as set out in Part 3, point 9.

38.

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)

(d)

the key data and methodology used to derive the facility ratings and LGD and conversion factor
estimates;

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;

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(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; and

(g)

data on the components of loss for each defaulted exposure.

1.7.2. Retail exposures

39.

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; and

(e)

data on loss rates for qualifying revolving retail exposures.

1.8.

Stress tests used in assessment of capital adequacy

40.

41.

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 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.

42.

Credit institutions using the treatment set out in Part 1, point 4 shall consider as Part of their stress testing
framework the impact of a deterioration in the credit quality of protection providers, in particular the impact
of protection providers falling outside the eligibility criteria.

2.

RISK QUANTIFICATION

43.

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);

(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.

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For overdrafts, 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 and the underlying amount
is material.

An ‘advised limit’ shall mean a limit which has been brought to the knowledge of the obligor.

Days past due for credit cards commence on the minimum payment due date.

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 point 48.

In the case of corporate exposures the competent authorities may set a number of days past due as specified in
Article 154(7).

In the case of retail exposures credit institutions may apply the definition of default at a facility level.

In all cases, the exposure past due shall be above a threshold defined by the competent authorities and which
reflects a reasonable level of risk.

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)

(e)

(f)

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,

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, and

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.

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.

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 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.

For retail and PSE exposures, the competent authorities of each Member State 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 point 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.

46.

47.

48.

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2.2. Overall requirements for estimation

49.

50.

51.

52.

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 points 66, 71, 82, 86, 93 and 95 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 are 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.

53.

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 which is provided by the seller.

54.

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.

55.

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

56.

If credit institutions can demonstrate to their 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 is representative of the portfolio for which the pooled data is used; and

(c)

the pooled data is used consistently over time by the credit institution for its 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.

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2.2.1. Requirements specific to PD estimation

Exposures to corporates, institutions and central governments and central banks

59.

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

60.

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

61.

62.

63.

64.

65.

66.

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 point 73.

Credit institutions shall use PD estimation techniques only with supporting analysis. Credit institutions shall
recognise the importance of judgmental considerations in 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 institution's analysis shall include a comparison of the default
definitions used, subject to the requirements in points 44 to 48. The credit institution shall document the basis
for the mapping.

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 point 30.

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 point also applies to the PD/LGD Approach to
equity. Member States may allow credit institutions which are not permitted to use own estimates of LGDs or
conversion factors to have, when they implement the IRB Approach, relevant data covering a period of
two years. The period to be covered shall increase by one year each year until relevant data cover a period of
five years.

Retail exposures

67.

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

68.

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

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69.

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; and

(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.

70.

71.

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 point 73.

Irrespective of whether a credit institution is using external, internal or 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. Member States may allow credit institutions to have, when they implement the IRB
Approach, relevant data covering a period of two years. The period to be covered shall increase by one year
each year until relevant data cover a period of five years.

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.

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).

74.

75.

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 realised LGDs at a
constant level 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.

76.

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

77.

78.

79.

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 LGD estimates take into account the existence of collateral, credit institutions must establish
internal requirements for collateral management, legal certainty and risk management that are generally
consistent with those set out in Annex VIII, Part 2.

To the extent that a credit institution recognises collateral for determining the exposure value for counterparty
credit risk according to Annex III, Part 5 or 6, any amount expected to be recovered from the collateral shall
not be taken into account in the LGD estimates.

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80.

For the specific case of exposures already in default, the credit institution shall use the sum of its best estimate
of expected loss for each exposure given current economic circumstances and exposure status and the
possibility of additional unexpected losses during the recovery period.

81.

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

82.

Estimates of LGD shall be based on data over a minimum of five years, increasing by one year each year after
implementation until a minimum of seven years is reached, 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

83.

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

84.

Notwithstanding point 89, credit institutions may reflect future drawings either in their conversion factors or
in their LGD estimates.

85.

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

86.

Estimates of LGD shall be based on data over a minimum of five years. Notwithstanding point 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. Member States may allow credit institutions to have,
when they implement the IRB Approach, relevant data covering a period of two years. The period to be
covered shall increase by one year each year until relevant data cover a period of five years.

2.2.3. Requirements specific to own-conversion factor estimates

87.

88.

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
realised conversion factors at a constant level 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.

89.

Credit institutions' estimates of conversion factors 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.

90.

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.

91.

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.

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92.

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

93.

Estimates of conversion factors shall be based on data over a minimum of five years, increasing by one year
each year after implementation until a minimum of seven years is reached, 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

94.

95.

Notwithstanding point 89, 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
point 87, 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. Member States may allow
credit institutions to have, when they implement the IRB Approach, relevant data covering a period of two
years. The period to be covered shall increase by one year each year until relevant data cover a period of five
years.

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

96.

The requirements in points 97 to 104 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.

97.

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

98.

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

99.

For recognised guarantors the same rules as for obligors as set out in points 17 to 29 shall apply.

100. 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

101. 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 exposure amounts. These criteria shall
comply with the minimum requirements set out in points 17 to 29.

102. 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.

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Credit derivatives

103. 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, point 21 shall apply. For retail exposures and eligible purchased receivables, this
point applies to the process of allocating exposures to grades or pools.

104. 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

105. 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 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

106. The credit institution shall monitor both the quality of the purchased receivables and the financial condition of

the seller and servicer. In particular:

(a)

(b)

(c)

(d)

(e)

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 any contingencies,
including the assignment of an
internal risk rating for each seller and servicer;

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;

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;

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; and

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

107. 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.

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

108. 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, including the advancing rates, eligible collateral, necessary documentation,
concentration limits, and the way cash receipts are to be handled. These elements shall take appropriate
account of all relevant and material factors,
including the seller 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

109. 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

110. 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.

111. 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 and/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.

112. 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.

113. 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.

114. 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 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

115.

For the purpose of calculating capital requirements credit institutions shall meet 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

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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)

(c)

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;

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;

(e)

(f)

credit institutions shall demonstrate through empirical analyses the appropriateness of risk factors,
including their ability to cover both general and specific risk;

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

(g)

a rigorous and comprehensive stress-testing programme shall be in place;

4.2. Risk management process and controls

116. 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)

(b)

(c)

(d)

full integration of the internal model into the overall management information systems of the credit
institution and in the management of the non-trading book equity portfolio. Internal models shall be
fully integrated into the credit institution's risk management infrastructure if they are particularly used
inmeasuring 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;

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;

adequate systems and procedures for monitoring investment limits and the risk exposures of equity
exposures;

the units responsible for the design and application of the model shall be functionally independent from
the units responsible for managing individual investments; and

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(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

117. 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.

118. Credit institutions shall use the internal validation process to assess the performance of its internal models and

processes in a consistent and meaningful way.

119. 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.

120. 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 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.

121. 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.

122. 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.

123. 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

124. All material aspects of the rating and estimation processes shall be approved by the credit institution's
management body described in Article 11 or a designated committee thereof and senior management. These
parties shall possess a general understanding of
institution's rating systems and detailed
comprehension of its associated management reports.

the credit

125. Senior management shall provide notice to the management body described in Article 11 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.

126. 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.

127.

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 to the
extent that own estimates are used of realised LGDs and realised 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.

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5.2. Credit risk control

128. The credit risk control unit shall be independent from the personnel and management functions responsible
for originating or renewing exposures and report 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.

129. 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)

(f)

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;

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; and

(h)

ongoing review and alterations to models used in the rating process.

130. Notwithstanding point 129, credit institutions using pooled data according to points 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; and

(e)

production of information relevant to ongoing review and alterations to models used in the rating
process.

Credit institutions making use of this point 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 extent as
within the credit institution.

5.3.

Internal Audit

131.

Internal audit or another comparable independent auditing unit 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.

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ANNEX VIII

CREDIT RISK MITIGATION

PART 1

Eligibility

1.

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

2.

For the purposes of this Annex:

‘Secured lending transaction’ shall mean 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.

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

4. Without prejudice to point 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 , 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 to Directive 2006/49/EC 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 points 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 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;

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(b)

(c)

(d)

(e)

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;

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;

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;

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; and

(g)

gold.

For the purposes of point (b), ‘debt securities issued by central governments or central banks’ shall 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 Articles 78 to 83;

(ii)

debt securities issued by public sector entities which are treated as exposures to central governments in
accordance with point 15 of Part 1 of Annex VI;

(iii)

debt securities issued by multilateral development banks to which a 0 % risk weight is assigned under
Articles 78 to 83; and

(iv)

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

For the purposes of point (c), ‘debt securities issued by institutions’ include:

(i)

debt 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; and

(iii)

debt securities issued by multilateral development banks other than those to which a 0 % risk weight is
assigned under Articles 78 to 83.

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;

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(c)

all other rated issues by the issuing institution of the same seniority 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;

(d)

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

(e)

the credit institution can demonstrate to the competent authorities that the market liquidity of the
instrument is sufficient for these purposes.

9.

Units in collective investment undertakings may be recognised as eligible collateral if the following conditions
are satisfied:

(a)

they have a daily public price quote; and

(b)

the collective investment undertaking is limited to investing in instruments that are eligible for
recognition under points 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 point 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.

1.3.2. Additional eligibility under the Financial Collateral Comprehensive Method

11.

In addition to the collateral set out in points 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; and

(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 point 7 and 8 and the items mentioned in point (a) of this point.

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 under Articles 84 to 89

12.

In addition to the collateral set out above the provisions of points 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:

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(a)

Real estate collateral

13. Residential real estate property which is or will be occupied or let by the owner, or the beneficial owner in the
investment companies, and commercial real estate property, that is, offices and other

case of personal
commercial premises, may be recognised as eligible collateral where the following conditions are met:

(a)

(b)

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; and

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.

16.

17.

The competent authorities may also authorise their credit institutions to recognise as eligible collateral shares in
Finnish housing companies operating in accordance with 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 point 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 credit institutions to
comply with the condition in point 13(b) 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 property satisfy
the following conditions:

(a)

losses stemming from loans collateralised by commercial real estate property up to 50 % of the market
value (or where applicable and if lower 60 % of the mortgage-lending-value) do not exceed 0,3 % of the
outstanding loans collateralised by commercial real estate property in any given year; and

(b)

overall losses stemming from loans collateralised by commercial real estate property do not exceed 0,5 %
of the outstanding loans collateralised by commercial real estate property in any given year.

18.

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.

19.

The competent authorities of a Member State may recognise as eligible collateral commercial real estate
property recognised as eligible collateral in another Member State by virtue of the waiver provided for in
point 17.

(b)

Receivables

20. 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.

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(c) Other physical collateral

21.

The competent authorities may recognise as eligible collateral physical items of a type other than those types
indicated in points 13 to 19 if satisfied as to the following:

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

the existence of well-established publicly available market prices for the collateral. The credit 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.

(a)

(b)

(d)

Leasing

22.

Subject to the provisions of Part 3, point 72, where the requirements set out in Part 2, point 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 credit protection:

(a)

central governments and central banks;

(b)

regional governments or local authorities;

(c) multilateral development banks;

(d)

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

(e)

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

(f)

institutions; and

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(g)

other corporate entities,
institution, that:

including parent, subsidiary and affiliate corporate entities of the credit

(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; and

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 PD 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 corporate under Articles 78 to 83.

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

28. By way of derogation from point 26, the Member States may also recognise as eligible providers of unfunded
credit 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.

2.2 Eligibility of protection providers under the IRB Approach which qualify for the treatment set out in

Annex VII, Part 1, point 4.

29.

Institutions, insurance and reinsurance undertakings and export credit agencies which fulfil the following
conditions may be recognised as eligible providers of unfunded credit protection which qualify for the
treatment set out in Annex VII, Part 1, point 4:

— the protection provider has sufficient expertise in providing unfunded credit protection;

— the protection provider is regulated in a manner equivalent to the rules laid down in this Directive, or
had, at the time the credit protection was provided, a credit assessment by a recognised ECAI which had
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 corporate under Articles 78 to 83;

— the protection provider had, at the time the credit protection was provided, or for any period of time
thereafter, an internal rating with a PD equivalent to or lower than that associated with credit quality step
2 or above under the rules for the risk weighting of exposures to corporates under Articles 78 to 83; and

— the provider has an internal rating with a PD equivalent to or lower than that associated with credit
quality step 3 or above under the rules for the risk weighting of exposures to corporates under
Articles 78 to 83.

For the purpose of this point, credit protection provided by export credit agencies shall not benefit from any
explicit central government counter‑guarantee.

3.

TYPES OF CREDIT DERIVATIVES

30. 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; and

(c)

credit linked notes to the extent of their cash funding.

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31. 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 as eligible.

3.1.

Internal hedges

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

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 point only, be deemed to be the net amount of the exposure.

1.

FUNDED CREDIT PROTECTION

1.1. 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).

3.

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)

they must be legally effective and enforceable in all relevant jurisdictions, 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 on-balance sheet netting agreement;

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

(d)

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 commodities 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)

be legally effective and enforceable in all relevant jurisdictions, 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; and

(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 point 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. This notwithstanding, the
obligor's own issues of covered bonds falling within the terms of Annex VI, Part 1, points 68 to 70 may
be recognised as eligible when they are posted as collateral for repurchase transactions, provided that the
first paragraph of this point is complied with.
Legal certainty

(b)

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 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 point 6, 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.

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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 enforceable in all jurisdictions which are relevant at the time of the
conclusion of the credit agreement, 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 for
commercial real estate and once every three years for residential real estate. 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 valuation shall be reviewed 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 valuation shall be reviewed
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.
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.
Insurance

The credit institution shall have procedures to monitor that the property taken as protection is
adequately insured against damage.

(c)

(d)

1.5. Minimum requirements for the recognition of receivables as collateral

9.

For the recognition of receivables as collateral the following conditions shall be met:

(a)

Legal certainty

(i)

(ii)

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;

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; and

(iv)

The collateral arrangements must be properly documented, with a clear and robust procedure for
the timely collection of collateral. Credit institution's procedures shall ensure that any legal
conditions required for declaring the default of the borrower 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.

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(b)

Risk management

(i)

(ii)

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;

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.
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;

(iv) Receivables from affiliates of the borrower (including subsidiaries and employees) shall not be

recognised as risk mitigants; and

(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 effective and enforceable in all relevant jurisdictions 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 point 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)

(f)

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;

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 or a proxy of 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;

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(h)

(i)

the credit institution must have the right to physically inspect the property. It shall have policies and
procedures addressing its exercise of the right to physical inspection; and

the credit institution must have procedures to monitor that the property taken as protection is adequately
insured against damage.

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)

(b)

the conditions set out in points 8 or 10 as appropriate for the recognition as collateral of the type of
property leased shall be met;

there shall be robust risk management on the part of the lessor with respect to the use to which the
leased asset is put, its age and the planned duration of its use, including appropriate monitoring of the
value of the security;

(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) where this has not already been ascertained in calculating the LGD level, the difference between the value
of the unamortised amount and the market value of the security 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, point 79, the protection referred to in Part 1, point 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 and such pledge or assignment is legally effective and enforceable in all relevant jurisdictions;

(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; and

(d)

the pledge or assignment is unconditional and irrevocable.

1.8.2. Life insurance policies pledged to the lending credit institution.

13.

For life insurance policies pledged to the lending credit institution to be recognised the following conditions
shall be met:

(a)

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

(b)

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

(c)

the company providing the life insurance is notified of the pledge or assignment and as a result may not
pay amounts payable under the contract without the consent of the lending credit institution;

(d)

the declared surrender value of the policy is non-reducible;

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(e)

the lending credit institution must have the right to cancel the policy and receive the surrender value in a
timely way in the event of the default of the borrower;

(f)

the lending credit institution is 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. Where this is not possible because
the insurance relationship ends before the loan relationship expires, the credit institution must ensure
that the amount deriving from the insurance contract serves the credit institution as security until the end
of the duration of the credit agreement; and

(h)

the pledge or assignment must be legally effective and enforceable in all jurisdictions which are relevant
at the time of the conclusion of the credit agreement.

2.

UNFUNDED CREDIT PROTECTION AND CREDIT LINKED NOTES

2.1. Requirements common to guarantees and credit derivatives

14.

Subject to point 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; and

(d)

it must be legally effective and enforceable in all jurisdictions which are relevant at the time of the
conclusion of the credit agreement.

2.1.1. Operational requirements

15.

The credit institution shall satisfy the competent authority that it has systems in place to manage potential
concentration of risk arising from the credit institution's use of guarantees and 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.

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, a public sector entity, claims on which are treated as claims on
the central government in whose jurisdiction they are established under Articles 78 to 83, a multi-lateral
development bank to which a 0 % risk weight is assigned 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;

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(b)

both the original guarantee and the counter‑guarantee meet the requirements for guarantees set out in
points 14, 15 and 18, except that the counter‑guarantee need not be direct; and

(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.

17.

The treatment set out in point 16 also applies to an exposure which is not counter‑guaranteed by an entity
listed in that point if that exposure's counter‑guarantee is in turn directly guaranteed by one of the listed entities
and the conditions listed in that point are satisfied.

2.3. Additional requirements for guarantees

18.

For a guarantee to be recognised the following conditions shall also be met:

(a)

on the qualifying default of and/or non-payment by 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 obligor.

In the case of unfunded credit protection covering residential mortgage loans, the requirements in
point 14(c)(iii) and in the first subparagraph of this point have only to be satisfied within 24 months;

(b)

the guarantee shall be an explicitly documented obligation assumed by the guarantor; and

(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.

19.

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 point 16, the
requirements in point 18(a) shall be considered to be satisfied where either of the following conditions are met:

(a)

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;
or

(b)

the lending credit institution can demonstrate that the loss-protecting effects of the guarantee, including
losses resulting from the non-payment of interest and other types of payments which the borrower is
obliged to make, justify such treatment.

2.4. Additional requirements for credit derivatives

20.

For a credit derivative to be recognised the following conditions shall also be met:

(a)

subject to point (b), the credit events specified under the credit derivative shall at a minimum include:

(i)

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);

(ii)

the bankruptcy, insolvency or inability of the obligor to pay its debts, or its failure or admission in
writing of its inability generally to pay its debts as they become due, and analogous events; and

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(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 point (a)(iii), the credit protection may nonetheless be recognised
subject to a reduction in the recognised value as specified in point 83 of Part 3;

(c)

(d)

(e)

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; and

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 provider. The protection
buyer shall have the right/ability to inform the protection provider of the occurrence of a credit event.

21. 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:

(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; and

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.

2.5. Requirements to qualify for the treatment set out in Annex VII, Part 1, point 4

22. To be eligible for the treatment set out in Annex VII, Part 1, point 4, credit protection deriving from a guarantee

or credit derivative shall meet the following conditions:

(a)

the underlying obligation shall be to:

— a corporate exposure as defined in Article 86, excluding insurance and reinsurance undertakings;

— an exposure to a regional government, local authority or Public Sector Entity which is not treated

as an exposure to a central government or a central bank according to Article 86; or

— an exposure to a small or medium sized entity, classified as a retail exposure according to

Article 86(4);

(b)

the underlying obligors shall not be members of the same group as the protection provider;

(c)

the exposure shall be hedged by one of the following instruments:

— single-name unfunded credit derivatives or single-name guarantees,

— first-to-default basket products — the treatment shall be applied to the asset within the basket with

the lowest risk‑weighted exposure amount, or

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— nth-to-default basket products — the protection obtained is only eligible for consideration under
this framework if eligible (n-1)th default protection has also be obtained or where (n-1) of the
assets within the basket has/have already defaulted. Where this is the case the treatment shall be
applied to the asset within the basket with the lowest risk‑weighted exposure amount;

(d)

the credit protection meets the requirements set out in points 14, 15, 18, 20 and 21;

(e)

(f)

(g)

(h)

(i)

(j)

the risk weight that is associated with the exposure prior to the application of the treatment in
Annex VII, Part 1, point 4, does not already factor in any aspect of the credit protection;

a credit institution shall have the right and expectation to receive payment from the protection provider
without having to take legal action in order to pursue the counterparty for payment. To the extent
possible, a credit institution shall take steps to satisfy itself that the protection provider is willing to pay
promptly should a credit event occur;

the purchased credit protection shall absorb all credit losses incurred on the hedged portion of an
exposure that arise due to the occurrence of credit events outlined in the contract;

if the payout structure provides for physical settlement, then there shall be legal certainty with respect to
the deliverability of a loan, bond, or contingent liability. If a credit institution intends to deliver an
obligation other than the underlying exposure, it shall ensure that the deliverable obligation is sufficiently
liquid so that the credit institution would have the ability to purchase it for delivery in accordance with
the contract;

the terms and conditions of credit protection arrangements shall be legally confirmed in writing by both
the protection provider and the credit institution;

institutions

credit
in place to detect excessive correlation between the
creditworthiness of a protection provider and the obligor of the underlying exposure due to their
performance being dependent on common factors beyond the systematic risk factor; and

shall have a process

(k)

in the case of protection against dilution risk, the seller of purchased receivables shall not be a member of
the same group as the protection provider.

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 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 PROTECTION

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.

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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)

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

5.

6.

7.

8.

Subject to points 12 to 21, 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 transactions, the volatility adjustments to be applied
shall be calculated either using the Supervisory Volatility Adjustments Approach or the Own Estimates
Volatility Adjustments Approach as set out in points 30 to 61 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

The net position in each ‘type of security’ or commodity shall be calculated by subtracting from the total value
of the securities or commodities of that type lent, sold or provided under the master netting agreement, the
total value of securities or commodities of that type borrowed, purchased or received under the agreement.

For the purposes of point 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 same terms and conditions and are subject to the
same liquidation periods as indicated in points 34 to 59.

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.

9.

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

10.

The foreign exchange risk (fx) volatility adjustment shall be applied to the net positive or negative position in
each currency other than the settlement currency of the master netting agreement.

11.

E* shall be calculated according to the following formula:

E* = maxf0,½ðΣðEÞ—ΣðCÞÞ þ Σðjnettopositie in elk effectj × HsecÞ þ ðΣjEfxj × HfxÞ(cid:138)g

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.

S(E) is the sum of all Es under the agreement.

S(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 point 8.

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Hsec is the volatility adjustment appropriate to a particular type of security.

Hfx is the foreign exchange volatility adjustment.

E* is the fully adjusted exposure value.

(b) Using the Internal Models approach

12. As an alternative to using the 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 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 (ΣE — ΣC). Subject to the approval of the competent authorities,
credit institutions may also use their internal models for margin lending transactions, if the transactions are
covered under a bilateral master netting agreement that meets the requirements set out in Annex III, Part 7.

13. A credit institution may choose to use an internal models approach independently of the choice it has made
between Articles 78 to 83 and Articles 84 to 89 for the calculation of risk‑weighted exposure amounts.
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 points 5 to 11.

14.

The internal models approach is available to credit institutions that have received recognition for an internal
risk‑management model under Annex V to Directive 2006/49/EC.

15. Credit

institutions which have not received supervisory recognition for use of such a model under
Directive 2006/49/EC, may apply to the competent authorities for recognition of an internal risk‑measurement
model for the purposes of points 12 to 21.

16. Recognition shall only be given if

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:

the competent authority is satisfied that

the credit

(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 staff skilled in the use of sophisticated models in the risk control unit;

(e)

the credit institution has established procedures for monitoring and ensuring compliance with a
documented set of
the
risk‑measurement system;

internal policies and controls concerning the overall operation of

(f)

the credit institution's models have a proven track record of reasonable accuracy in measuring risks
demonstrated through the back-testing of its output using at least one year of data;

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(g)

(h)

(i)

(j)

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;

at least once a year, the credit institution must conduct a review of its risk‑management system; and

the internal model shall meet the requirements set out in Annex III, Part 6, points 40 to 42.

17.

The calculation of the potential change in value shall be subject to the following minimum standards:

(a)

at least daily calculation of the potential change in value;

(b)

a 99th percentile, one-tailed confidence interval;

(c)

a 5-day equivalent liquidation period, except in the case of transactions other than securities repurchase
transactions or securities lending or borrowing transactions where a 10-day equivalent liquidation period
shall be used;

(d)

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; and

(e)

three-monthly data set updates.

18.

19.

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 credit institution's system for measuring correlations is sound
and implemented with integrity.

20. The fully adjusted exposure value (E*) for credit institutions using the Internal models approach shall be

calculated according to the following formula:

E* = maxf0,½ðΣE —ΣCÞ þ ðuitkomst van het interne modelÞ(cid:138)g

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 borrowed, purchased or received or the cash borrowed or received in respect of
each such exposure.

Σ(E) is the sum of all Es under the agreement.

Σ(C) is the sum of all Cs under the agreement.

21.

In calculating risk‑weighted exposure amounts 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

22.

E* as calculated under points 5 to 21 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.

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IRB Approach

23.

E* as calculated under points 5 to 21 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

24.

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

25. Under this method, recognised financial collateral is assigned a value equal to its market value as determined in

accordance with Part 2, point 6.

Calculating risk‑weighted exposure amounts

26. The risk weight that would be assigned under Articles 78 to 83 if the lender had a direct exposure to the
collateral instrument shall be assigned to those portions of claims collateralised by the market value of
recognised collateral. The risk weight of the collateralised portion shall be a minimum of 20 % except as
specified in points 27 to 29. The remainder of the exposure shall receive the risk weight that would be assigned
to an unsecured exposure to the counterparty under Articles 78 to 83.

Repurchase transactions and securities lending or borrowing transactions

27. A risk weight of 0 % shall be assigned to the collateralised portion of the exposure arising from transactions
which fulfil the criteria enumerated in points 58 and 59. If the counterparty to the transaction is not a core
market participant a risk weight of 10 % shall be assigned.

OTC derivative transactions subject to daily mark-to-market

28. A risk weight of 0 % shall, to the extent of the collateralisation, be assigned 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 be assigned 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 are assigned a 0 % risk
weight under Articles 78 to 83.

For the purposes of this point debt securities issued by central governments or central banks shall include: –

(a)

(b)

(c)

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;

debt securities issued by multilateral development banks to which a 0 % risk weight is assigned under or
by virtue of Articles 78 to 83; and

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

Other transactions

29. A 0 % risk weight may be assigned 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

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(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 point ‘debt securities issued by central governments or central banks’ shall to
include those indicated under point 28.

1.4.2. Financial Collateral Comprehensive Method

30.

31.

32.

‘volatility
In valuing financial collateral for the purposes of the Financial Collateral Comprehensive Method,
adjustments’ shall be applied to the market value of collateral, as set out in points 34 to 59 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
point 32, 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 points 34 to 59.

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

(a)

Calculating adjusted values

33. 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 points 5 to 23 are 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. For this purpose, for credit institutions calculating risk‑weighted exposure
amounts under Articles 78 to 83, the exposure value of off-balance sheet items listed in Annex II shall be
100 % of its value rather than the percentages indicated in Article 78(1), and for credit institutions calculating
risk‑weighted exposure amounts under Articles 84 to 89, the exposure value of the items listed in Annex VII,
Part 3, points 9 to 11 shall be calculated using a conversion factor of 100 % rather than the conversion factors
or percentages indicated in those points.

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 points 34 to 59.

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HC is the volatility adjustment appropriate to the collateral, as calculated under points 34 to 59.

HFX is the volatility adjustment appropriate to currency mismatch, as calculated under points 34 to 59.

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

(b)

Calculation of volatility adjustments to be applied

34. 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).

35. 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 adjustment shall be H = Σ
where ai is the proportion of an item to the collateral as a whole and Hi is the volatility adjustment applicable to
that item.

αiHi,

i

(i)

Supervisory volatility adjustments

36. The volatility adjustments to be applied under the Supervisory volatility adjustments approach (assuming daily

revaluation) shall be those set out in Tables 1 to 4.

VOLATILITY ADJUSTMENTS

Table 1

Credit quality step
with which the
credit assessment
of the debt secur-
ity is associated

Residual
Maturity

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

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

20-day
liquidation
period ( %)

10-day
liquidation
period ( %)

5-day
liquidation
period ( %)

20-day
liquidation
period ( %)

10-day
liquidation
period ( %)

5-day liqui-
dation per-
iod ( %)

1

≤ 1 year

0,707

0,5

0,354

1,414

>1 ≤ 5
years

2,828

> 5 years

5,657

2-3

≤ 1 year

1,414

>1 ≤
5 years

4,243

2

4

1

3

1,414

5,657

2,828

11,314

0,707

2,828

2,121

8,485

1

4

8

2

6

0,707

2,828

5,657

1,414

4,243

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Credit quality step
with which the
credit assessment
of the debt secur-
ity is associated

Residual
Maturity

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

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

20-day
liquidation
period ( %)

10-day
liquidation
period ( %)

5-day
liquidation
period ( %)

20-day
liquidation
period ( %)

10-day
liquidation
period ( %)

5-day liqui-
dation per-
iod ( %)

> 5 years

8,485

4

≤ 1 year

21,213

>1 ≤ 5
years

21,213

6

15

15

4,243

16,971

12

8,485

10,607

N/A

10,607

N/A

N/A

N/A

N/A

N/A

> 5 years

21,213

15

10,607

N/A

N/A

N/A

Table 2

Volatility adjustments for debt securities issued by
entities described in Part 1, point 7(b) with short-
term credit assessments

Volatility adjustments for debt securities issued by
entities described in Part 1, point 7(c) and (d) with
short-term credit assessments

Credit quality
step with which
the credit
assessment of a
short term debt
security is asso-
ciated

20-day liqui-
dation period
( %)

10-day liqui-
dation period
( %)

5-day liquida-
tion period
( %)

20-day liqui-
dation period
( %)

10-day liqui-
dation period
( %)

5-day liquida-
tion period ( %)

1

2-3

0,707

1,414

0,5

1

0,354

1,414

0,707

2,828

1

2

0,707

1,414

Table 3

Other collateral or exposure types

20-day liquidation period
( %)

10-day liquidation period
( %)

5-day liquidation period ( %)

Main Index Equities, Main
Index Convertible Bonds

Other Equities or Con-
vertible Bonds listed on a
recognised exchange

Cash

Gold

21,213

35,355

0

21,213

15

25

0

15

10,607

17,678

0

10,607

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Table 4

Volatility adjustment for currency mismatch

20‑day liquidation period ( %)

10‑day liquidation period ( %)

5‑day liquidation period)

11,314

8

5,657

37.

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.

38.

In Tables 1 to 4 and in points 39 to 41, the credit quality step with which a credit assessment of the debt
security is associated is the credit quality step with which the credit assessment is determined by the competent
authorities to be associated under Articles 78 to 83. For the purpose of this point, Part 1, point 10 also applies.

39.

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

40.

For eligible units in collective investment undertakings the volatility adjustment is the weighted average
volatility adjustments that would apply, having regard to the liquidation period of the transaction as specified in
point 37, to the assets in which the fund has invested. If the assets in which the fund has invested are not known
to the credit institution, the volatility adjustment is the highest volatility adjustment that would apply to any of
the assets in which the fund has the right to invest.

41.

For unrated debt securities issued by institutions and satisfying the eligibility criteria in Part 1, point 8 the
volatility adjustments shall be the same as for securities issued by institutions or corporates with an external
credit assessment associated with credit quality steps 2 or 3.

(ii) Own estimates of volatility adjustments

42. The competent authorities shall permit credit institutions complying with the requirements set out in points 47
to 56 to use their own volatility estimates for calculating the volatility adjustments to be applied to collateral
and exposures.

43. 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.

44.

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.

45.

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.

46. 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

47.

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

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48. 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.

49. 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 point 48 for the type of transaction in question,
using the square root of time formula:

HM = HN

p

ﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃ
TM=TN

where TM is the relevant liquidation period;

HM is the volatility adjustment under TM and

HN is the volatility adjustment based on the liquidation period TN.

50. 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.

51.

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.

52. Credit institutions shall update their data sets at least 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.

Qualitative Criteria

53. 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.

54.

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 point 49.

55. 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.

56. 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)

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

(c)

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; and

(d)

the accuracy and appropriateness of the volatility assumptions.

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(iii)

Scaling up of volatility adjustments

57.

The volatility adjustments set out in points 36 to 41 are the volatility adjustments to be applied where there is
daily revaluation. Similarly, where a credit institution uses its own estimates of the volatility adjustments in
accordance with points 42 to 56, 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:

H = HM

r

ﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃ
NR þ ðTM − 1Þ
TM

where:

H is the volatility adjustment to be applied

HM is the volatility adjustment where there is daily revaluation

NR is the actual number of business days between revaluations

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

(iv) Conditions for applying a 0 % volatility adjustment

58.

In relation to repurchase transactions and securities 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, credit institutions may, instead of applying the volatility
adjustments calculated under points 34 to 57, apply a 0 % volatility adjustment. This option is not available in
respect of credit institutions using the internal models approach set out in points 12 to 21:

(a)

Both the exposure and the collateral are cash or debt securities issued by central governments or central
banks within the meaning of Part 1, point 7(b) and eligible for a 0 % risk weight under Articles 78 to 83,

(b)

Both the exposure and the collateral are denominated in the same currency,

(c)

(d)

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,

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)

(g)

The documentation covering the agreement
transactions or securities lending or borrowing transactions in the securities concerned,

is standard market documentation for

repurchase

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, and

(h)

The counterparty is considered a ‘core market participant’ by the competent authorities. Core market
participants shall include the following entities:

— the entities mentioned in point 7(b) of Part 1 exposures to which are assigned a 0 % risk weight

under Articles 78 to 83;

— institutions;

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— other financial companies (including insurance companies) exposures to which are assigned a 20 %
in the case of credit institutions calculating
risk weight under Articles 78 to 83 or which,
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 PD 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.

59. Where a competent authority permits the treatment set out in point 58 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

60.

E* as calculated under point 33 shall be taken as the exposure value for the purposes of Article 80. In the case
of off-balance sheet items listed in Annex II, E* shall be taken as the value at which the percentages indicated in
Article 78(1) shall be applied to arrive at the exposure value.

IRB Approach

61.

LGD* (the effective LGD)calculated as set out in this point shall be taken as the LGD for the purposes of
Annex VII.

LGD* = LGD x (E*/E)

where:

LGD is the LGD that would apply to the exposure under Articles 84 to 89 if the exposure was not
collateralised;

E is the exposure value as described under point 33;

E* is as calculated under point 33.

1.5. Other eligible collateral for Articles 84 to 89

1.5.1. Valuation

(a)

Real estate collateral

62. 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.

63.

64.

‘Market value’ means the estimated amount for which the property should exchange on the date of valuation
between a willing buyer and a willing seller in an arm's-length transaction after proper 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.

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65. 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, point 8 and to take account of the any prior claims on the
property.

(b)

Receivables

66. The value of receivables shall be the amount receivable.

(c) Other physical collateral

67.

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)

General treatment

68.

LGD* calculated as set out in points 69 to 72 shall be taken as the LGD for the purposes of Annex VII.

69. 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 5, LGD* shall be the LGD laid
down in Annex VII for uncollateralised exposures to the counterparty.

70. 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 5, LGD* shall
be that prescribed in Table 5.

71. 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.

72.

Table 5 sets out the applicable LGD* and required collateralisation levels for the secured parts of exposures.

Table 5

Minimum LGD for secured parts of exposures

LGD* for senior
claims or contingent
claims

LGD* for
subordinated claims
or contingent claims

Required minimum
collateralisation level
of the exposure (C*)

Required minimum
collateralisation level
of the exposure (C**)

Receivables

35 %

65 %

0 %

125 %

Residential real
estate/commercial
real estate

35 %

65 %

30 %

140 %

Other collateral

40 %

70 %

30 %

140 %

By way of derogation, until 31 December 2012 the competent authorities may, subject to the levels of
collateralisation indicated in Table 5:

(a)

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

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(b)

allow credit institutions to assign a 35 % LGD for senior exposures in the form of equipment leasing; and

(c)

allow credit institutions to assign a 30 % LGD for senior exposures secured by residential or commercial
real estate.

At the end of this period, this derogation shall be reviewed.

(b) Alternative treatment for real estate collateral

73.

Subject to the requirements of this point and point 74 and as an alternative to the treatment in points 68 to 72,
the competent authorities of a Member State may authorise credit institutions to assign a 50 % risk weight 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)

(b)

losses stemming from lending collateralised by residential real estate property or commercial real estate
property respectively up to 50 % of the market value (or where applicable and if lower 60 % of the
mortgage-lending-value) do not exceed 0,3 % of the outstanding loans collateralised by that form of real
estate property in any given year; and

overall losses stemming from lending collateralised by residential real estate property or commercial real
estate property respectively do not exceed 0,5 % of the outstanding loans collateralised by that form of
real estate property in any given year.

74.

If either of the conditions in point 73 is not satisfied in a given year, the eligibility to use this treatment shall
cease until the conditions are satisfied in a subsequent year.

75.

The competent authorities, which do not authorise the treatment in point 73, may authorise credit institutions
to assign 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.

1.6. Calculating risk‑weighted exposure amounts and expected loss amounts in the case of mixed pools of

collateral

76. 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*, to be taken as the
LGD for the purposes of Annex VII, shall be calculated as follows.

77.

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 point 33) into parts each covered by only one type
of collateral. That is, the credit institution must divide the exposure into the part 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 part covered by other eligible collateral, and the unsecured
portion, as relevant.

78.

LGD* for each part 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

79. Where the conditions set out in Part 2, point 12 are satisfied, credit protection falling within the terms of

Part 1, point 23 may be treated as a guarantee by the third party institution.

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1.7.2. Life insurance policies pledged to the lending credit institution

80. Where the conditions set out in Part 2, point 13 are satisfied, credit protection falling within the terms of
Part 1, point 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

81.

Instruments eligible under Part 1, point 25 may be treated as a guarantee by the issuing institution.

82. 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, point 8.

2.

UNFUNDED CREDIT PROTECTION

2.1. Valuation

83. 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),

(a)

where the amount that the protection provider has undertaken to pay is not higher than the exposure
value, the value of the credit protection calculated under the first sentence of this point shall be reduced
by 40 %; or

(b) where the amount that the protection provider has undertaken to pay is higher than the exposure value,

the value of the credit protection shall be no higher than 60 % of the exposure value.

84. 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

85. The volatility adjustments for any currency mismatch may be calculated based on the Supervisory volatility

adjustments approach or the Own estimates approach as set out in points 34 to 57.

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2.2. Calculating risk‑weighted exposure amounts and expected loss amounts

2.2.1. Partial protection — tranching

86. Where the credit institution transfers a part 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)

Full protection

87.

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 point 84 further adjusted for any maturity mismatch as laid down in
Part 4.

(b)

Partial protection — equal seniority

88. Where the protected amount is less than the exposure value and the protected and unprotected parts are of
equal seniority — i.e. 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 point 84 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; and

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

(c)

Sovereign guarantees

89. The competent authorities may extend the treatment provided for in Annex VI, Part 1, points 4 and 5 to
exposures or parts of exposures guaranteed by the central 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 Approach

Full protection/Partial protection — equal seniority

90.

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.

91.

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.

92. GA is the value of G* as calculated under point 84 further adjusted for any maturity mismatch as laid down in

Part 4.

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PART 4

Maturity Mismatches

1.

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.

2. 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,
point 14.

1.

DEFINITION OF MATURITY

3.

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 point 4, the maturity of the
credit protection shall be the time to the earliest date at which the protection may terminate or be terminated.

4. Where there is an option to terminate the 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.

5. 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. Transactions subject to funded credit protection — Financial Collateral Simple Method

6. Where there is a mismatch between the maturity of the exposure and the maturity of the protection, the

collateral shall not be recognised.

2.2. Transactions subject to funded credit protection — Financial Collateral Comprehensive Method

7.

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, point 33 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
points 3 to 5, or the value of T, whichever is the lower;

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T is the number of years remaining to the maturity date of the exposure calculated in accordance with points 3
to 5, or 5 years, whichever is the lower; and

t* is 0,25.

CVAM shall be taken as CVA further adjusted 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, point 33.

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
points 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 points 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, points 83 to 92.

PART 5

Combinations of credit risk mitigation in the Standardised Approach

1.

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 parts covered by each type of credit risk mitigation tool (e.g. a part 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.

2. When credit protection provided by a single protection provider has differing maturities, a similar approach to

that described in point 1 shall be applied.

PART 6

Basket CRM techniques

1.

FIRST-TO-DEFAULT CREDIT DERIVATIVES

1. 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.

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2.

N NTH-TO-DEFAULT CREDIT DERIVATIVES

2. 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 point 1 for
first-to-default derivatives appropriately modified for nth-to-default products.

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ANNEX IX

SECURITISATION

PART 1

Definitions for the purposes of Annex IX

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 cash flows 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, points 46 to 51;

— ‘Supervisory formula method’ means the method of calculating risk‑weighted exposure amounts for

securitisation positions in accordance with Part 4, points 52 to 54;

— ‘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; and

— ‘Asset-backed commercial paper (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.

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.

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

1.

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;

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(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; and

(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 including but not limited to altering the
underlying credit exposures or 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.

2.

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

2.

An originator credit institution of a synthetic securitisation may calculate risk‑weighted exposure amounts,
and, as relevant, expected loss amounts, for the securitised exposures in accordance with points 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 the purposes of
this point, 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)

(ii)

impose significant materiality thresholds below which credit protection is deemed not to be
triggered if a credit event occurs;

allow for the termination of the protection due to deterioration of the credit quality of the
underlying exposures;

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(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; and

(d)

An opinion is obtained from qualified legal counsel confirming the enforceability of the credit
protection in all relevant jurisdictions.

3.

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

3.

4.

In calculating risk‑weighted exposure amounts for the securitised exposures, where the conditions in point 2
are met, the originator credit institution of a synthetic securitisation shall, subject to points 5 to 7, 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 under Articles 84 to 89,
the expected loss amount in respect of such exposures shall be zero.

For clarity, point 3 refers to the entire pool of exposures included in the securitisation. Subject to points 5 to 7,
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 4 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 point 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 points 6 to 7.

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 credit protection shall be determined in accordance
with Annex VIII .

An originator credit institution shall ignore any maturity mismatch in calculating risk‑weighted exposure
amounts for tranches appearing pursuant to Part 4 with a risk weighting of 1 250 %. For all other tranches,
the maturity mismatch treatment set out in Annex VIII shall be applied in accordance with the following
formula:

RW*is½RWðSPÞ×ðt − t*Þ=ðT − t*Þ(cid:138) þ ½RWðAssÞ×ðT − tÞ=ðT − t*Þ(cid:138)

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 point 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; and

t* is 0,25.

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PART 3

External credit assessments

1.

REQUIREMENTS TO BE MET BY THE CREDIT ASSESSMENTS OF ECAIS

1.

To be used for the purposes of calculating risk‑weighted exposure amounts under Part 4, a credit assessment
of an eligible ECAI shall comply with the following conditions.

(a)

(b)

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; and

The credit assessments shall be available publicly to the market. Credit assessments are considered to be
publicly available only if they have been published in a publicly accessible forum and they are included
in the ECAI's transition matrix. Credit assessments that are made available only to a limited number of
entities shall not be considered to be publicly available.

2.

USE OF CREDIT ASSESSMENTS

2.

3.

4.

5.

6.

7.

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

Subject to points 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.

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

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.

3.

MAPPING

8.

9.

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.

CALCULATION OF RISK-WEIGHTED EXPOSURE AMOUNTS

1.

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 point 3:

(a)

(b)

(c)

where a credit institution calculates risk-weighted exposure amounts under points 6 to 36, the exposure
value of an on-balance sheet securitisation position shall be its balance sheet value;

where a credit institution calculates risk-weighted exposure amounts under points 37 to 76, the
exposure value of an on-balance sheet securitisation position shall be measured gross of value
adjustments; and

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.

3.

4.

5.

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 the purpose of this point
‘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.

2.

CALCULATION OF RISK-WEIGHTED EXPOSURE AMOUNTS UNDER THE STANDARDISED APPROACH

6.

Subject to point 8, 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 Tables 1 and 2.

Positions other than ones with short-term credit assessments

Table 1

Credit quality step

Risk weight

1

20 %

3

4

5 and below

100 %

350 %

1 250 %

2

50 %

Table 2

Positions with short-term credit assessments

Credit quality step

Risk weight

1

20 %

2

50 %

3

All other credit assessments

100 %

1 250 %

7.

Subject to points 10 to 15, the risk-weighted exposure amount of an unrated securitisation position shall be
calculated by applying a risk weight of 1 250 %.

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2.1. Originator and sponsor credit institutions

8.

For an originator credit institution or sponsor 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

9.

10.

Credit institutions having an unrated securitisation position may apply the treatment set out in point 10 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 under 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 1 250 % 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 applied to the securitised exposures under Articles 78 to 83, it shall apply a risk
weight of 1 250 % to the position.

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

11.

Subject to the availability of a more favourable treatment by virtue of the provisions concerning liquidity
facilities in points 13 to 15, a credit institution may apply to securitisation positions meeting the conditions set
out in point 12 a risk weight that is the greater of 100 % or 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.

12.

For the treatment set out in point 11 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 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

13. 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)

(b)

The liquidity facility documentation shall clearly identify and limit the circumstances under which the
facility may be drawn;

It shall not be possible for the facility 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;

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(d)

(e)

(f)

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;

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; and

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

14.

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 or of the credit quality of the securitised exposures),
provided that the conditions set out in point 13 are satisfied.

2.4.3. Cash advance facilities

15.

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 point 13 are satisfied
and that repayment of draws on the facility are senior to any other claims on the cash flows arising from the
securitised exposures.

2.5. Additional capital requirements for securitisations of revolving exposures with early amortisation

provisions

16.

17.

18.

19.

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 points 17 to 33 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 in point 19 to 31 to that portion of the
underlying pool containing revolving exposures.

For the purposes of point 16 to 31, ‘originator's interest’ means the exposure value 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 cash flows generated by principal and
interest collections and other 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 exposure value of the remaining notional Part of the pool of drawn amounts.

20.

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.

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2.5.1. Exemptions from early amortisation treatment

21.

Originators of the following types of securitisation are exempt from the capital requirement in point 16:

(a)

(b)

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, and

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

22.

For an originator credit institution subject to the capital requirement in point 16 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 point 16 shall be no greater than the greater of:

(a)

the risk-weighted exposure amounts calculated in respect of its positions in the investors' interest; and

(b)

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.

23.

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 point 22.

2.5.3. Calculation of risk-weighted exposure amounts

24.

The risk-weighted exposure amount to be calculated in accordance with point 16 shall be determined by
multiplying the amount of the investors' interest by the product of the appropriate conversion figure as
indicated in points 26 to 33 and the weighted average risk weight that would apply to the securitised
exposures if the exposures had not been securitised.

25.

An early amortisation provision shall be considered to be ‘controlled’ where the following conditions are met:

(a)

(b)

(c)

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;

throughout the duration of the transaction there is pro-rata sharing between the originator's interest
and the investor's interest of payments of interest and principal, expenses, losses and recoveries based
on the balance of receivables outstanding at one or more reference points during each month;

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; and

(d)

the speed of repayment is no more rapid than would be achieved by straight-line amortisation over the
period set out in point (c).

26.

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.

27. 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.

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28.

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

Level C

Level D

Level E

Securitisations subject to a controlled
early amortisation provision

Securitisations subject to a non-controlled
early amortisation provision

Conversion figure

Conversion figure

0 %

1 %

2 %

10 %

20 %

40 %

0 %

5 %

15 %

50 %

100 %

100 %

29.

30.

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.

In the case of securitisations subject to an early amortisation provision of retail exposures which are
uncommitted and unconditionally cancellable without prior notice and where the early amortisation is
triggered by a quantitative value in respect of something other than the three months average excess spread,
the competent authorities may apply a treatment which approximates closely to that prescribed in points 26
to 29 for determining the conversion figure indicated.

31. Where a competent authority intends to apply a treatment in accordance with point 30 in respect of a
particular securitisation, it shall first inform the relevant competent authorities of all the other Member States.
Before the application of such a treatment becomes Part of the general policy approach of the competent
authority to securitisations containing early amortisation clauses of the type in question, the competent
authority shall consult the relevant competent authorities of all the other Member States and take into
consideration the views expressed. The views expressed in such consultation and the treatment applied shall be
publicly disclosed by the competent authority in question.

32.

33.

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

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

2.6. Recognition of credit risk mitigation on securitisation positions

34. Where credit protection is obtained on a securitisation position, the calculation of risk-weighted exposure

amounts may be modified in accordance with Annex VIII.

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2.7. Reduction in risk-weighted exposure amounts

35.

As provided in Article 66(2), in respect of a securitisation position in respect of which a 1 250 % risk weight is
assigned, 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 credit protection in a manner consistent with
point 34.

36. Where a credit institution makes use of the alternative indicated in point 35, 12,5 times the amount deducted
in accordance with that point shall, for the purposes of point 8, be subtracted from the amount specified in
point 8 as the maximum risk-weighted exposure amount to be calculated by the credit institutions there
indicated.

3.

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

3.1. Hierarchy of methods

37.

For the purposes of Article 96, the risk-weighted exposure amount of a securitisation positions shall be
calculated in accordance with points 38 to 76.

38.

For a rated position or a position in respect of which an inferred rating may be used, the Ratings Based Method
set out in points 46 to 51 shall be used to calculate the risk-weighted exposure amount.

39.

For an unrated position the Supervisory Formula Method set out in points 52 to 54 shall be used except where
the Internal Assessment Approach is permitted to be used as set out in points 43 and 44.

40.

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.

41.

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 1 250 % shall be assigned
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

42. When the following minimum operational requirements are satisfied, an 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 securitisationposition;

(b)

(c)

the maturity of the reference positions must be equal to or longer than that of the unrated position in
question; and

on an ongoing basis, any inferred rating must be updated to reflect any changes in the credit assessment
of the reference positions.

3.1.2. The ‘Internal Assessment Approach’ for positions in ABCP programmes

43.

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 ABCP programme a derived rating as laid down in
point 44:

(a)

positions in the commercial paper issued from the ABCP programme shall be rated positions;

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(b)

(c)

(d)

(e)

(f)

(g)

(h)

(i)

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;

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 ABCP
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;

in developing its internal assessment methodology the credit institution shall take into consideration
relevant published ratings methodologies of the eligible ECAIs that rate the commercial paper of the
ABCP programme. This consideration shall be documented by the credit institution and updated
regularly, as outlined in point (g);

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;

the internal assessment methodology shall be used in the credit institution's internal risk management
processes, including its decision making, management information and capital allocation processes;

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;

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;

the ABCP programme shall incorporate underwriting standards in the form of credit and investment
guidelines. In deciding on an asset purchase, the ABCP 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 shall
include analysis of past and expected future financial
performance, current market position, expected future competitiveness, leverage, cash flow, 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)

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

(ii)

limit excess concentration to individual obligor or geographic area; and

(iii)

limits the tenor of the assets to be purchased;

(k)

the ABCP programme shall have collections policies and processes that take into account the
operational capability and credit quality of the servicer. The ABCP programme shall mitigate seller/
servicer risk through various methods, such as triggers based on current credit quality that would
preclude commingling of funds;

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(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 only on 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; and

(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.

44.

The unrated position shall be assigned by the credit institution to one of the rating grades described in
point 43. The position shall be attributed a derived rating the same as the credit assessments corresponding to
that rating grade as laid down in point 43. 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

45.

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 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

46.

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, multiplied by 1,06.

Table 4

Positions other than ones with short-term credit assessments

Credit Quality Step
(CQS)

Risk weight

CQS 1

CQS 2

CQS 3

CQS 4

CQS 5

CQS 6

CQS 7

CQS 8

A

7 %

8 %

10 %

12 %

20 %

35 %

60 %

B

12 %

15 %

18 %

20 %

35 %

50 %

75 %

C

20 %

25 %

35 %

35 %

35 %

50 %

75 %

100 %

100 %

100 %

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Credit Quality Step
(CQS)

CQS 9

CQS 10

CQS 11

A

250 %

425 %

650 %

Risk weight

B

250 %

425 %

650 %

C

250 %

425 %

650 %

Below CQS 11

1 250 %

1 250 %

1 250 %

Table 5

Positions with short term credit assessments

Credit Quality Step
(CQS)

CQS 1

CQS 2

CQS 3

Risk weight

B

12 %

20 %

75 %

C

20 %

35 %

75 %

A

7 %

12 %

60 %

All other credit assessments

1 250 %

1 250 %

1 250 %

47.

48.

Subject to points 48 and 49, 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, it is not
required to take into consideration amounts due under interest rate or currency derivative contracts, fees due,
or other similar payments.

A risk weight of 6 % may be applied to a position in the most senior tranche of a securitisation where that
tranche is senior in all respects to another tranche of the securitisation positions which would receive a risk
weight of 7 % under point 46, provided that:

(a)

(b)

the competent authority is satisfied that this is justified due to the loss absorption qualities of
subordinate tranches in the securitisation; and

either the position has an external credit assessment which has been determined to be associated with
credit quality step 1 in Table 4 or 5 or, if it is unrated, requirements (a) to (c) in point 42 are satisfied
where ‘reference positions’ are taken to mean positions in the subordinate tranche which would receive
a risk weight of 7 % under point 46.

49.

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 =

EADiÞ2
ðΣ
Σ
EADi2

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.

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50.

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

51.

Credit risk mitigation on securitisation positions may be recognised in accordance with points 60 to 62.

3.4.

Supervisory Formula Method

52.

Subject to points 58 and 59, 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 point 53.

53.

Subject to points 58 and 59, the risk weight to be applied to the exposure amount shall be:

12,5 ×ðS½L þ T(cid:138) − S½L(cid:138)Þ=T

where:

where:

h = ð1 − Kirbr=ELGDÞN

c = Kirbr=ð1 − hÞ

ν =

ðELGD − KirbrÞKirbr þ 0:25ð1 − ELGDÞKirbr
N

f =

ν þ Kirbr2
1 − h

!

− c2

þ

ð1 − KiribrÞKirbr − ν
ð1 − hÞτ

g =

ð1 − cÞc
f

− 1

a = g·c

b = g·ð1 − cÞ

d = 1 − ð1 − hÞ·ð1 − Beta½Kirbr;a,b(cid:138)Þ

(cid:16)

(cid:17)

K½x(cid:138) = ð1 − hÞ·

ð1 − Beta½x;a,b(cid:138)Þx þ Beta½x;a þ 1,b(cid:138)c

τ = 1 000, 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
the purposes of calculating T 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).

 
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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 point 49.

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

ELGD =

LGDi·EADi

∑
i

EADi

∑
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 manner within a securitisation (e.g. a single reserve or over-collateralisation is available to cover
losses from either source), the LGDi 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:

(cid:18)

(cid:18)

N = C1Cm þ

Cm − C1
m − 1

(cid:19)

(cid:19) − 1

maxf1 − mC1, 0g

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.

54.

Credit risk mitigation on securitisation positions may be recognised in accordance with points 60, 61 and 63
to 67.

3.5.

Liquidity Facilities

55.

The provisions in points 56 to 59 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

56.

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 point 13.

3.5.2. Cash advance facilities

57.

A conversion figure of 0 % may be applied to the nominal amount of a liquidity facility that meets the
conditions set out in point 15.

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3.5.3. Exceptional treatment where Kirb cannot be calculated.

58. 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 method set out in
point 59 for the calculation of risk-weighted exposure amounts for an unrated securitisation position in the
form of a liquidity facility that meets the conditions to be an ‘eligible liquidity facility’ set out in point 13 or
that falls within the terms of point 56.

59.

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 point 56 a conversion figure of 20 % may be applied. In other cases a
conversion factor of 100 % shall be applied.

3.6. Recognition of credit risk mitigation in respect of securitisation positions

3.6.1. Funded credit protection

60.

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 credit protection

61.

Eligible unfunded credit 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

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 credit protection

63. 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 position by the exposure value of the position and multiplying the result by
100.

64.

65.

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 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

66.

If the credit risk mitigation covers the ‘first loss’ or losses on a proportional basis on the securitisation
position, the credit institution may apply points 63 to 65.

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67.

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 points 52 to 54 shall apply subject to
the modifications that ‘T’ shall be adjusted to e* in the case of funded credit protection; and to T-g in the case
of unfunded credit 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’.

3.7. Additional capital requirements for securitisations of revolving exposures with early amortisation

provisions

68.

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 points 16 to 33 when it sells revolving exposures into a securitisation that contains an
early amortisation provision.

69.

For the purposes of point 68, points 70 and 71 shall replace points 19 and 20.

70.

For the purposes of these provisions, ‘originators interest’ shall be the sum of:

(a)

(b)

the exposure value 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 cash flows generated by principal and interest collections and other associated
amounts which are not available to make payments to those having securitisation positions in the
securitisation; plus

the exposure value 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 exposure value described in point (a) to the
exposure value 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 exposure value of the notional part of the pool of drawn amounts not falling
within point (a) plus the exposure value of that part of the pool of undrawn amounts of credit lines, the drawn
amounts of which have been sold into the securitisation, not falling within point (b).

71.

The exposure of the originator credit institution associated with its rights in respect of that Part of the
originator's interest described in point 70(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 point 70(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 point 70(b).

3.8. Reduction in risk-weighted exposure amounts

72.

The risk-weighted exposure amount of a securitisation position to which a 1 250 % risk weight is assigned
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, point 36.

73.

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.

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74.

As provided in Article 66(2), in respect of a securitisation position in respect of which a 1 250 % 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.

75.

For the purposes of point 74:

(a)

(b)

(c)

the exposure value of the position may be derived from the risk-weighted exposure amounts taking
into account any reductions made in accordance with points 72 and 73;

the calculation of the exposure value may reflect eligible funded protection in a manner consistent with
the methodology prescribed in points 60 to 67; and

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.

76. Where a credit institution makes use of the alternative indicated in point 74, 12,5 times the amount deducted
in accordance with that point shall, for the purposes of point 45, be subtracted from the amount specified in
point 45 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.

CAPITAL REQUIREMENT

1.

Under the Basic Indicator Approach, the capital requirement for operational risk is equal to 15 % of the
relevant indicator defined in points 2 to 9.

2.

RELEVANT INDICATOR

2.

3.

4.

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 three twelve-monthly observations 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.

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.

6.

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

Table 1

Interest receivable and similar income

Interest payable and similar charges

Income from shares and other variable/fixed-yield securities

Commissions/fees receivable

Commissions/fees payable

Net profit or net loss on financial operations

Other operating income

1

2

3

4

5

6

7

2.1.1. Qualifications

7.

The indicator shall be calculated before the deduction of any provisions and operating expenses. Operating
expenses shall include fees paid for outsourcing services rendered by third parties which are not a parent or
subsidiary of the credit institution or a subsidiary of a parent which is also the parent of the credit institution.
Expenditure on the outsourcing of services rendered by third parties may reduce the relevant indicator if the
expenditure is incurred from an undertaking subject to supervision under, or equivalent to, this Directive.

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8.

The following elements shall not be used in the calculation of the relevant 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/EEC, they should calculate the relevant indicator on the basis of data that best reflect the
definition set out in points 2 to 8.

PART 2

Standardised Approach

1.

CAPITAL REQUIREMENT

1.

2.

Under the Standardised Approach, the capital requirement for operational risk is the average over three years
of the risk-weighted relevant indicators calculated each year across the business lines referred to in Table 2. In
each year, a negative capital requirement in one business line, resulting from a negative relevant indicator
may be imputed to the whole. However, where the aggregate capital charge across all business lines within a
given year is negative, then the input to the average for that year shall be zero.

The three-year average is calculated on the basis of the last three twelve-monthly observations at the end of
the financial year. When audited figures are not available, business estimates may be used.

Table 2

Business line

List of activities

Percentage

Corporate finance

Trading and sales

18 %

18 %

Underwriting of financial instruments and/or placing
of financial instruments on a firm commitment basis
Services related to underwriting
Investment advice
Advice to undertakings on capital structure, industrial
strategy and related matters and advice and services
relating to the mergers and the purchase of under-
takings
Investment research and financial analysis and other
forms of general recommendation relating to trans-
actions in financial instruments

Dealing on own account
Money broking
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

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Business line

List of activities

Percentage

Retail brokerage
(Activities with a individual
physical persons or with small
and medium sized entities
meeting the criteria set out in
Article 79 for the retail expo-
sure class)

Reception and transmission of orders in relation to
one or more financial instruments
Execution of orders on behalf of clients
Placing of financial instruments without a firm
commitment basis

Commercial banking

Acceptance of deposits and other repayable funds
Lending
Financial leasing
Guarantees and commitments

Retail banking
(Activities with a individual
physical persons or with small
and medium sized entities
meeting the criteria set out in
Article 79 for the retail expo-
sure class)

Acceptance of deposits and other repayable funds
Lending
Financial leasing
Guarantees and commitments

Payment and settlement

Money transmission services,
Issuing and administering means of payment

Agency services

Safekeeping and administration of financial instru-
ments for the account of clients, including custo-
dianship and related services such as cash/collateral
management

Asset management

Portfolio management
Managing of UCITS
Other forms of asset management

12 %

15 %

12 %

18 %

15 %

12 %

3.

Competent authorities may authorise a credit institution to calculate its capital requirement for operational
risk using an alternative standardised approach, as set out in points 5 to 11.

2.

PRINCIPLES FOR BUSINESS LINE MAPPING

4.

Credit institutions must develop and document specific policies and criteria for mapping the relevant
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)

(b)

all activities must be mapped into the business lines in a mutually exclusive and jointly exhaustive
manner;

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
supported through the ancillary activity, an
If more than one business
supports.
objective‑mapping criterion must be used;

line is

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(c)

(d)

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;

credit institutions may use internal pricing methods to allocate the relevant 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; and

(g)

the mapping process to business lines must be subject to independent review.

3.

ALTERNATIVE INDICATORS FOR CERTAIN BUSINESS LINES

3.1. Modalities

5.

6.

7.

The competent authorities may authorise the credit institution to use an alternative relevant 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 and/or commercial banking business lines, the loans and advances shall consist of the total
drawn amounts in the corresponding credit portfolios. For the commercial banking business line, securities
held in the non trading book shall also be included.

3.2.

Conditions

8.

The authorisation to use alternative relevant indicators shall be subject to the conditions in points 9 to 11.

3.2.1. General condition

9.

The credit institution meets the qualifying criteria set out in point 12.

3.2.2. Conditions specific to retail banking and commercial banking

10.

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

11.

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 PD, and that the alternative
standardised approach provides an improved basis for assessing the operational risk.

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4.

QUALIFYING CRITERIA

12.

Credit institutions must meet the qualifying criteria listed below, in addition to the general risk management
standards set out in Article 22 and Annex V. Satisfaction of these criteria shall be determined having regard
to the size and scale of activities of the credit institution and to the principle of proportionality.

(a)

(b)

(c)

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.

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.

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.

PART 3

Advanced Measurement Approaches

1.

QUALIFYING CRITERIA

1.

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.

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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 in point 8. 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
points 13 to 24. A credit institution needs to have a well documented approach for weighting the use of
these four elements in its overall operational risk measurement system.

10.

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

11.

Correlations in operational risk losses across individual 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.

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. Appropriate minimum loss thresholds for internal loss data
collection must be defined.

16.

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.

17.

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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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.

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 and relevant external data.

2.

IMPACT OF INSURANCE AND OTHER RISK TRANSFER MECHANISMS

25.

26.

Credit institutions shall be able to recognise the impact of insurance subject to the conditions set out in
points 26 to 29 and other risk transfer mechanisms where the credit institution can demonstrate to the
satisfaction of the competent authorities that a noticeable risk mitigating effect is achieved.

The provider is authorised to provide insurance or re-insurance and the provider has a minimum claims
paying ability rating 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.

27.

The insurance and the credit institutions' insurance framework shall meet the following conditions:

(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;

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(c)

(d)

(e)

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;

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;

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; and

(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 an insurance policy, where less than one year, as noted above;

(b)

a policy's cancellation terms, where less than one year; and

(c)

the uncertainty of payment as well as mismatches in coverage of insurance policies.

29.

The capital alleviation arising from the recognition of insurance shall not exceed 20 % of the capital
requirement for operational risk before the recognition of risk‑mitigation techniques.

3.

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

30. When an Advanced Measurement Approach is intended to be used by the EU parent credit institution and its
subsidiaries, or by 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.

31.

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

PART 4

Combined use of different methodologies

1.

USE OF AN ADVANCED MEASUREMENT APPROACH IN COMBINATION WITH OTHER APPROACHES

1.

A credit institution may use an Advanced Measurement Approach in combination with either the Basic
Indicator Approach or the Standardised Approach, subject to the following conditions:

(a)

all operational risks of the credit institution are captured. The competent authority shall be satisfied
with the methodology used to cover different activities, geographical locations, legal structures or
other relevant divisions determined on an internal basis; and

(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.

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2.

On a case-by case basis, the competent authority may impose the following additional conditions:

(a)

(b)

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; and

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.

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

3.

4.

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.

PART 5

Loss event type classification

Table 3

Definition

Losses due to acts of a type intended to defraud, misappropriate property or
circumvent regulations, the law or company policy, excluding diversity/discrimi-
nation events, which involves at least one internal party

Event-Type Category

Internal fraud

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 Work-
place 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 Prac-
tices

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 to Physical Assets

Losses arising from loss or damage to physical assets from natural disaster or other
events

Business disruption and system fail-
ures

Losses arising from disruption of business or system failures

Execution, Delivery & Process Man-
agement

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

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ANNEX XI

TECHNICAL CRITERIA ON REVIEW AND EVALUATION BY THE COMPETENT AUTHORITIES

1.

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

(a)

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

(b)

(c)

(d)

the exposure to and management of 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;

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;

(e)

the exposure to and management of liquidity risk by the credit institutions;

(f)

the impact of diversification effects and how such effects are factored into the risk measurement system; and

(g)

the results of stress tests carried out by institutions using an internal model to calculate market risk capital
requirements under Annex V to Directive 2006/49/EC.

2.

3.

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 securitisation
thus failing to achieve a significant transfer of risk.

For the purposes of the determination to be made under Article 124(3), competent authorities shall consider whether
the value adjustments and provisions taken for positions/portfolios in the trading book, as set out in Part B of
Annex VII to Directive 2006/49/EC, enable the credit institution to sell or hedge out its positions within a short
period without incurring material losses under normal market conditions.

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ANNEX XII

TECHNICAL CRITERIA ON DISCLOSURE

PART 1

General criteria

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,
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, points 3(b)
and 3(e) and 4(b) to 4(e), and information on risk exposure and other items prone to rapid change.

involvement

in different

1.

2.

3.

4.

5.

The disclosure requirement in Part 2, points 3 and 4 shall be provided pursuant to Article 72(1) and (2).

PART 2

General requirements

1.

The risk management objectives and policies of the credit institution shall be disclosed for each separate category of
risk, including the risks referred to under points 1 to 14. 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; and

(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:

(a)

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

(b)

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

(i)

fully consolidated;

(ii)

proportionally consolidated;

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(iii)

deducted from own funds; or

(iv)

neither consolidated nor deducted;

(c)

(d)

any current or foreseen material practical or legal
repayment of liabilities among the parent undertaking and its subsidiaries;

impediment to the prompt transfer of own funds or

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; and

(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)

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

(b)

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

(c)

the total amount of additional own funds, and own funds as defined in Chapter IV of Directive 2006/49/EC,

(d)

deductions from original and additional own funds pursuant to Article 66(2), with separate disclosure of items
referred to in Article 57(q); and

(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)

(c)

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;

for credit institutions calculating risk‑weighted exposure amounts 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, points 10 to 13 correspond. For the equity exposure class, this requirement applies to:

(i)

each of the approaches provided in Annex VII, Part 1, points 17 to 26;

(ii)

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

(iii)

exposures subject to supervisory transition regarding capital requirements; and

(iv)

exposures subject to grandfathering provisions regarding capital requirements;

(d) minimum capital requirements calculated in accordance with Article 75, points (b) and (c); and

(e) minimum capital requirements calculated in accordance with Articles 103 to 105, and disclosed separately.

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5.

The following information shall be disclosed regarding the credit institution's exposure to counterparty credit risk as
defined in Annex III, Part 1:

(a)

a discussion of the methodology used to assign internal capital and credit limits for counterparty credit
exposures;

(b)

a discussion of policies for securing collateral and establishing credit reserves;

(c)

a discussion of policies with respect to wrong-way risk exposures;

(d)

(e)

a discussion of the impact of the amount of collateral the credit institution would have to provide given a
downgrade in its credit rating;

gross positive fair value of contracts, netting benefits, netted current credit exposure, collateral held and net
derivatives credit exposure. Net derivatives credit exposure is the credit exposure on derivatives transactions
after considering both the benefits from legally enforceable netting agreements and collateral arrangements;

(f) measures for exposure value under the methods set out in Parts 3 to 6 of Annex III, whichever method is

applicable;

(g)

(h)

the notional value of credit derivative hedges, and the distribution of current credit exposure by types of credit
exposure;

credit derivative transactions (notional), segregated between use for the credit institution's own credit portfolio,
as well as in its intermediation activities, including the distribution of the credit derivatives products used,
broken down further by protection bought and sold within each product group; and

(i)

the estimate of α if the credit institution has received the approval of the competent authorities to estimate α.

6.

The following information shall be disclosed regarding the credit institution's exposure to credit risk and dilution risk:

(a)

the definitions for accounting purposes of ‘past due’ and ‘impaired’;

(b)

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

(c)

(d)

(e)

(f)

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; and

(iii)

charges for value adjustments and provisions during the period;

(h)

the amount of the impaired exposures and past due exposures, provided separately, broken down by significant
geographical areas including, if practical, the amounts of value adjustments and provisions related to each
geographical area;

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(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; and

(v)

the closing balances.

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

7.

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 issuer 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; and

(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.

8.

9.

The credit institutions calculating the risk‑weighted exposure amounts in accordance with Annex VII, Part 1, points 6
or 19 to 21 shall disclose the exposures assigned to each category in Table 1 in point 6 of Annex VII, Part 1, or to each
risk weight mentioned in points 19 to 21 of Annex VII, Part 1.

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.

10.

The following information shall be disclosed by each credit institution which calculates its capital requirements in
accordance with Annex V to Directive 2006/49/EC:

(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 approaches used for back-testing and validating the accuracy and consistency of the
internal models and modelling processes;

(b)

the scope of acceptance by the competent authority; and

(c)

a description of the extent and methodologies for compliance with the requirements set out in Annex VII, Part B
to Directive 2006/49/EC.

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11.

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; and

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.

12.

The following information shall be disclosed regarding the exposures in equities not included in the trading book:

(a)

(b)

(c)

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;

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;

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

(d)

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

(e)

the total unrealised gains or losses, the total latent revaluation gains or losses, and any of these amounts
included in the original or additional own funds.

13.

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 of measurement of the interest rate risk; and

the variation in earnings, economic value or other relevant measure used by the management for upward and
downward rate shocks according to management's method for measuring the interest rate risk, broken down by
currency.

14.

The credit institutions calculating risk weighted exposure amounts in accordance with Articles 94 to 101 shall disclose
the following information:

(a)

a description of the credit institution's objectives in relation to securitisation activity;

(b)

the roles played by the credit institution in the securitisation process;

(c)

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

(d)

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

(e)

a summary of the credit institution's accounting policies for securitisation activities, including:

(i)

whether the transactions are treated as sales or financings;

(ii)

the recognition of gains on sales;

(iii)

the key assumptions for valuing retained interests; and

(iv)

the treatment of synthetic securitisations if this is not covered by other accounting policies;

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(f)

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

(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 1 250 % or deducted shall be disclosed
separately;

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

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.

PART 3

Qualifying requirements for the use of particular instruments or methodologies

1.

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; and

(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;

(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,
points 10 to 13 correspond; and

(v)

equities;

(d)

the exposure values for each of the exposure classes specified in Article 86. Exposures to central governments
and central banks,
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;

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(e)

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:

(i)

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);

(ii)

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

(iii)

the exposure-weighted average risk weight; and

(iv)

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;

(f)

for the retail exposure class and for each of the categories as defined under point (c)(iv), 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);

(g)

the actual value adjustments in the preceding period for each exposure class (for retail, for each of the categories
as defined under point (c)(iv) and how they differ from past experience;

(h)

(i)

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); and

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 point (c)(iv) 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 point (c)(iv). 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 point (c), 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, points 44 to 48, including the broad segments affected by such deviations.

2.

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)

the main types of guarantor and credit derivative counterparty and their creditworthiness;

(e)

information about market or credit risk concentrations within the credit mitigation taken;

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(f)

(g)

for credit institutions calculating risk‑weighted exposure amounts in accordance with Articles 78 to 83 or 84 to
89, but not providing own estimates of LGDs or conversion factors in respect of the exposure class, separately
for each exposure class, the total exposure value (after, where applicable, on- or off-balance sheet netting) that is
covered — after the application of volatility adjustments — by eligible financial collateral, and other eligible
collateral; and

for credit institutions calculating risk‑weighted exposure amounts in accordance with Articles 78 to 83 or 84 to
89, separately for each exposure class, the total exposure (after, where applicable, on- or off-balance sheet
netting) that is covered by guarantees or credit derivatives. For the equity exposure class, this requirement
applies to each of the approaches provided in Annex VII, Part 1, points 17 to 26.

3.

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.

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ANNEX XIII

PART A

Repealed Directives Together With Their Successive Amendments (referred To In Article 158)

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

Directive 2000/28/EC of the European Parliament and of the Council of 18 September 2000 amending Directive 2000/12/
EC relating to the taking up and pursuit of the business of credit institutions

Directive 2002/87/EC of the European Parliament and of the Council of 16 December 2002 on the supplementary
supervision of credit institutions, insurance undertakings and investment firms in a financial conglomerate and amending
Council Directives 73/239/EEC, 79/267/EEC, 92/49/EEC, 92/96/EEC, 93/6/EEC and 93/22/EEC, and Directives 98/78/EC
and 2000/12/EC of the European Parliament and of the Council

Only Art. 29.1(a)(b), Art. 29.2, Art. 29.4(a)(b), Art. 29.5, Art. 29.6, Art. 29.7, Art. 29.8, Art. 29.9, Art. 29.10, Art.
29.11

Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments
amending Council Directives 85/611/EEC and 93/6/EEC and Directive 2000/12/EC of the European Parliament and of the
Council and repealing Council Directive 93/22/EEC

Only Art. 68

Commission Directive 2004/69/EC of 27 April 2004 amending Directive 2000/12/EC of the European Parliament and of
the Council as regards the definition of ‘multilateral development banks’

Directive 2005/1/EC of the European Parliament and of the Council of 9 March 2005 amending Council Directives 73/239/
EEC, 85/611/EEC, 91/675/EEC, 92/49/EEC and 93/6/EEC and Directives 94/19/EC, 98/78/EC, 2000/12/EC, 2001/34/EC,
2002/83/EC and 2002/87/EC in order to establish a new organisational structure for financial services committees

Only Article 3

NON-REPEALED MODIFICATIONS

Act of Accession 2003

PART B

deadlines for transposition (referred to in Article 158)

Directive

Deadline for transposition

Directive 2000/12/EC

Directive 2000/28/EC

Directive 2002/87/EC

Directive 2004/39/EC

Directive 2004/69/EC

Directive 2005/1/EC

- - - - -

27.4.2002

11.8.2004

30.04.2006/31.1.2007

30.6.2004

13.5.2005

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ANΝΕΧ XIV

CORRELATION TABLE

This Directive

Directive
2000/12/EC

Directive
2000/28/EC

Directive
2002/87/EC

Directive
2004/39/EC

Directive
2005/1/EC

Article 3(2)

Article 1

Article 2

Article 2(1) and
(2)

Article 2(3)
Act of Accession

Article 2

Article 2(4)

Article 3

Article 2(5) and
(6)

Article 3(1), third
subparagraph

Article 4(1)

Article 1(1)

Article 4(2) to (5)

Article 1(2) to (5)

Article 4(7) to (9)

Article 1(6) to (8)

Article 4(10)

Article 29(1)(a)

Article 4(11)
to (14)

Article 1(10), (12)
and (13)

Article 4(21)
and 22)

Article 29(1)(b)

Article 4(23)

Article 1(23)

Article 4(45)
to (47)

Article 1(25) to
(27)

Article 5

Article 6

Article 4

Article 7

Article 8

Article 8

Article 9

Article 9(1)

Article 5(1) and 1
(11)

Article 9(2)

Article 5(2)

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This Directive

Directive
2000/12/EC

Directive
2000/28/EC

Directive
2002/87/EC

Directive
2004/39/EC

Directive
2005/1/EC

Article 10

Article 5(3) to (7)

Article 11

Article 6

Article 12

Article 7

Article 13

Article 10

Article 14

Article 11

Article 15(1)

Article 12

Article 15(2)
and (3)

Article 16

Article 13

Article 17

Article 14

Article 18

Article 15

Article 19(1)

Article 16(1)

Article 29(2)

Article 19(2)

Article 29(3)

Article 20

Article 16(3)

Article 21

Article 16(4) to (6)

Article 22

Article 17

Article 23

Article 18

Article 24(1)

Article 19(1) to (3)

Article 24(2)

Article 19(6)

Article 24(3)

Article 19(4)

Article 25(1) to (3) Article 20(1) to
(3), first and sec-
ond subpara-
graphs

Article 25(3)

Article 19(5)

Article 25(4)

Article 20(3) third
subparagraph

Article 26

Article 20(4) to
(7)

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This Directive

Directive
2000/12/EC

Directive
2000/28/EC

Directive
2002/87/EC

Directive
2004/39/EC

Directive
2005/1/EC

Article 27

Article 1(3), sec-
ond sentence

Article 28

Article 21

Article 29

Article 22

Article 30

Article 22(2) to
(4)

Article 31

Article 22(5)

Article 32

Article 22(6)

Article 33

Article 22(7)

Article 34

Article 22(8)

Article 35

Article 22(9)

Article 36

Article 22(10)

Article 37

Article 22(11)

Article 38

Article 24

Article 25

Article 39(1)
and (2)

Article 39(3)

Article 40

Article 26

Article 41

Article 27

Article 42

Article 28

Article 43

Article 29

Article 44

Article 30(1) to
(3)

Article 45

Article 30(4)

Article 46

Article 30(3)

Article 47

Article 30(5)

Article 48

Article 30(6) and
(7)

Article 49

Article 30(8)

Article 3(8)

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This Directive

Directive
2000/12/EC

Directive
2000/28/EC

Directive
2002/87/EC

Directive
2004/39/EC

Directive
2005/1/EC

Article 29(4)(a)

Article 29(4)(b)

Article 29(4)(b)

Article 29(4)(b)

Article 50

Article 51

Article 30(9), first
and second sub-
paragraphs

Article 30(9),
third subpara-
graph

Article 52

Article 30(10)

Article 53

Article 31

Article 54

Article 32

Article 55

Article 33

Article 56

Article 34(1)

Article 57

Article 58

Article 59

Article 60

Article 61

Article 34(2), first
subparagraph; and

Article 34(2),
point 2, second
sentence

Article 34(3) and
(4)

Article 63

Article 35

Article 64

Article 36

Article 65

Article 37

Article 66(1)
and (2)

Article 38(1) and
(2)

Article 67

Article 39

Article 73

Article 52(3)

Article 106

Article 1(24)

Article 107

Article 1(1),
third subparagraph

Article 108

Article 48(1)

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This Directive

Directive
2000/12/EC

Directive
2000/28/EC

Directive
2002/87/EC

Directive
2004/39/EC

Directive
2005/1/EC

Article 109

Article 48(4),
first subparagraph

Article 110

Article 48(2) to
(4), second sub-
paragraph

Article 111

Article 49(1) to
(5)

Article 113

Article 49(4), (6)
and (7)

Article 115

Article 49(8) and
(9)

Article 116

Article 49(10)

Article 117

Article 49(11)

Article 118

Article 50

Article 120

Article 51(1), (2)
and (5)

Article 121

Article 51(4)

Article 122(1) and
(2)

Article 51(6)

Article 125

Article 53(1) and
(2)

Article 126

Article 53(3)

Article 128

Article 53(5)

Article 29(5)

Article 133(1)

Article 54(1)

Article 29(7)(a)

Article 133(2)
and (3)

Article 54(2) and
(3)

Article 134(1)

Article 54(4),
first subparagraph

Article 134(2)

Article 54(4),
secondsubparagra-
ph

Article 135

Article 29(8)

Article 137

Article 55

Article 138

Article 29(9)

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This Directive

Directive
2000/12/EC

Directive
2000/28/EC

Directive
2002/87/EC

Directive
2004/39/EC

Directive
2005/1/EC

Article 139

Article 140

Article 56(1) to
(3)

Article 56(4) to
(6)

Article 141

Article 56(7)

Article 29(10)

Article 142

Article 56(8)

Article 143

Article 29(11)

Article 3(10)

Article 150

Article 60(1)

Article 151

Article 60(2)

Article 3(10)

Article 158

Article 67

Article 159

Article 68

Article 160

Article 69

Annex I, points 1
to 14, excluding
the final paragraph

Annex I

Annex I,
final paragraph

Annex II

Annex II

Annex III

Annex III

Annex IV

Annex IV

Article 68