Updated 23/11/2024
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Guide to internal models
Published: 14/06/2023
Art. 70
Guide to internal models
Published: 04/03/2024
Art. 70
Guide to internal models
Published: 01/10/2019
Art. 70
Guide to internal models
Published: 16/02/2024
Art. 70
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CRR ToolDelegated Regulation 2022/439
Article 70

Article 70 - Correctness of the implementation of the methodology and procedures for different exposure classes

Article 70

Correctness of the implementation of the methodology and procedures for different exposure classes

When assessing the correctness of the implementation of the methodology and procedures for the calculation of own funds requirements referred to in Article 144(1)(g) of Regulation (EU) No 575/2013 for different exposure classes, competent authorities shall verify that:

(a)

the risk weight formula is implemented correctly in accordance with Articles 153 and 154 of Regulation (EU) No 575/2013, taking into account the assignment of exposures to exposure classes;

(b)

the calculation of the correlation coefficient is done based on the characteristics of the exposures, in particular that the total sales parameter is applied on the basis of consolidated financial information;

(c)

where the risk-weighted exposure amount is adjusted in accordance with Article 153(3) of Regulation (EU) No 575/2013, the adjustment is based on all of the following considerations:

(i)

the information on the PD of the protection provider is applied correctly;

(ii)

the PD of the protection provider is estimated with the use of the rating system that has been approved by the competent authorities under the IRB Approach;

(d)

the calculation of the maturity parameter is correct, and in particular:

(i)

that the expiry date of the facility is used for the purpose of calculation of the maturity parameter in accordance with Article 162(2)(f) of Regulation (EU) No 575/2013;

(ii)

that in cases where the maturity parameter is lower than one year this is adequately justified and documented for the purpose of Article 162(1), (2) and (3) of Regulation (EU) No 575/2013;

(e)

the floors for the exposure-weighted average LGD for retail exposures secured by residential property and commercial real estate, which are not benefiting from guarantees of central governments laid down in Article 164(4) and (5) of Regulation (EU) No 575/2013, are calculated at the aggregated level of all retail exposures secured by residential property and commercial real estate respectively, and that, where the exposure-weighted average LGD at the aggregated level is below the respective floors, relevant adjustments are applied consistently over time by the institution;

(f)

the application of different approaches for different equity portfolios where the institution itself uses different approaches for internal risk management in accordance with Article 155 of Regulation (EU) No 575/2013, is correct, in particular that the choice of the approach:

(i)

does not lead to underestimation of own funds requirements;

(ii)

is made consistently, including over time;

(iii)

is justified by internal risk management practices;

(g)

where the simple risk weight approach is used in accordance with Article 155(2) of Regulation (EU) No 575/2013, the application of risk weights is correct, in particular that the risk weight of 190 % is used only for sufficiently diversified portfolios, where the institution has proved that significant reduction of risk has been achieved as a result of the diversification of the portfolio in comparison to the risk of individual exposures in the portfolio;

(h)

the calculation of the difference between expected loss amounts and credit risk adjustments, additional value adjustments and other own funds reductions in accordance with Article 159 of Regulation (EU) No 575/2013 is correct, and in particular:

(i)

that the calculation is performed separately for the portfolio of defaulted exposures and the portfolio of exposures that are not in default;

(ii)

where the calculation performed for the defaulted portfolio results in a negative amount, that this amount is not used to offset the positive amounts resulting from the calculation performed for the portfolio of exposures that are not in default;

(iii)

that the calculation is performed gross of tax effects;

(i)

the various approaches for the treatment of exposures in the form of units or shares in CIUs are applied correctly, and in particular:

(i)

that the institution correctly distinguishes between exposures in CIUs subject to the look-through approach as set out in Article 152(1) and (2) of Regulation (EU) No 575/2013 and other exposures in CIUs;

(ii)

that the exposures in CIUs treated in accordance with Article 152(1) or (2) of Regulation (EU) No 575/2013 meet the eligibility criteria of Article 132(3) of that Regulation;

(iii)

where the institution uses the approach laid down in Article 152(4) of Regulation (EU) No 575/2013 for the calculation of the average risk-weighted exposure amounts, that:

—

the correctness of the calculation is confirmed by an external auditor,

—

the multiplication factors laid down in Article 152(2)(b)(i) and (ii) of Regulation (EU) No 575/2013 are applied correctly,

—

where the institution relies on a third party for the calculation of the risk- weighted exposure amounts, that the third party meets the requirements of Article 152(4)(a) and (b) of Regulation (EU) No 575/2013.