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CRR ToolDelegated Regulation 2024/1085
Article 49

Article 49 - Assessment of losses given defaults

Article 49

Assessment of losses given defaults

1.   When assessing an institution’s compliance with Article 325bi(1), point (e), of Regulation (EU) No 575/2013 in relation to the requirements on the estimation of the losses given default, competent authorities shall verify whether the internal documentation covers all aspects referred to in Article 5 of Delegated Regulation (EU) 2023/1578, and whether the institution’s internal policies require the production of an up-to-date inventory specifying:

(a)

the methods that the institution uses to estimate the losses given default, including the materiality, in terms of size of positions and contribution to the default risk own fund requirement, of each different method;

(b)

for each position, the loss given default value, whether the position is a subordinated debt, a senior unsecured debt, a covered bond, or any other type of position, and whether:

(i)

the loss given default is available under the IRB approach for a non-trading book exposure, and whether it is used for the trading book exposure as required by Article 325bp(6), point (c), of Regulation (EU) No 575/2013;

(ii)

the loss given default is not available under the IRB approach for a non-trading book exposure, and whether the institution employs the IRB approach to obtain the position’s loss given default as required by Article 325bp(6), point (c), of Regulation (EU) No 575/2013;

(iii)

the loss given default is not available under the IRB approach for a non-trading book exposure, and whether the institution uses an internal methodology fulfilling the requirements of the IRB approach laid down in Article 3(1) of Delegated Regulation (EU) 2023/1578 to obtain it;

(iv)

the loss given default is not available under the IRB approach for a non-trading book exposure, and whether the institution uses an internal methodology fulfilling the requirements laid down in Article 3(3) or (4), of Delegated Regulation (EU) 2023/1578 to obtain it;

(v)

the loss given default is not available under the IRB approach for a non-trading book exposure, and whether the institution uses external sources as referred to in Article 4 of Delegated Regulation (EU) 2023/1578 to obtain it;

(c)

for all positions, the exposure class referred to in Article 147 of Regulation (EU) No 575/2013 to which they belong.

2.   When assessing whether an institution’s internal model is implemented with integrity as required by Article 325bi(1) of Regulation (EU) No 575/2013 in relation to requirements on the estimation of loss given default, competent authorities shall:

(a)

verify whether the granularity of the losses given default provides a meaningful differentiation of risk and, among others, whether that granularity allows to appropriately reflect the seniority of the position as referred to in Article 325bp(6), point (b), of Regulation (EU) No 575/2013, and its collateralisation;

(b)

verify whether loss given default estimates as well as the data inputs used to derive them are updated at a frequency that ensures that the own funds requirements for default risk are risk-sensitive, and whether any new relevant information is reflected timely, as required by Article 325bp(4) of Regulation (EU) No 575/2013;

(c)

for losses given default that are obtained in accordance with paragraph 1, point (b)(i), verify whether any additional layer applied to the losses given default under the IRB approach to obtain more conservative estimates is applied when the institution calculates the own funds requirements for default risk;

(d)

for losses given default that are obtained in accordance with paragraph 1, point (b)(ii):

(i)

verify whether the institution has followed the process to estimate the loss given default under the IRB approach in accordance with the institution IRB’s internal policies;

(ii)

on a sample of positions, verify whether the loss given default that the institution uses is identical to the estimate that would be produced by the IT systems used under the IRB approach;

(iii)

assess the variables used in the IRB approach, and verify on a sample of positions whether the data inputs exist and are sufficiently reliable to determine an appropriate loss given default;

(e)

for losses given default that are obtained in accordance with paragraph 1, point (b)(iii), of this Article review the reports produced by the internal validation, and the internal audit regarding the compliance of the internal methodology used to obtain the losses given default with Part Three, Title II, Chapter 3, of Regulation (EU) No 575/2013;

(f)

for losses given default that are obtained in accordance with paragraph 1, point (b)(iv):

(i)

verify whether the internal documentation supporting the compliance of the institution with the conditions referred to in Article 3(2) of Delegated Regulation (EU) 2023/1578 is complete;

(ii)

on a sample of positions, assess the rationale for estimating the loss given default by using neither the internal methodology referred to in Article 3(1) of Delegated Regulation (EU) 2023/1578, nor the external sources referred to in Article 4 of that Delegated Regulation;

(iii)

on a sample of positions for which the rationale referred to in point (ii) of this paragraph relates to the lack of input data as referred to in Article 3(2), point (b)(i), of Delegated Regulation (EU) 2023/1578, verify whether the institution substantiates the fact that the input data are missing;

(iv)

verify whether, the institution, as part of its internal policies, specified the holding period referred to in Article 3(2), point (b)(ii), of Delegated Regulation (EU) 2023/1578, below which the institution deems acceptable not to use the internal methodology meeting the requirements set out for the IRB approach, and assess whether such holding period fits with the institution’s portfolio, in terms of size, complexity and trading strategy;

(v)

review the value of ‘m’ calculated in accordance with Article 3(5) of Delegated Regulation (EU) 2023/1578 and, where applicable, require the institution to explain the source of any significant changes in its value over the previous quarters;

(vi)

review the process that the institution has followed to investigate whether any additional external sources are available as required by Article 3(2), point (c)(ii), of Delegated Regulation (EU) 2023/1578;

(vii)

by using the inventory referred to in paragraph 1 of this Article, assess whether the determination of the loss given default as referred to in Article 3(3) and (4), of Delegated Regulation (EU) 2023/1578 is performed correctly;

(g)

for losses given default that are obtained in accordance with paragraph 1, point (b):

(i)

on a sample of positions, verify whether the data used to estimate the loss given default are representative for the position;

(ii)

verify whether the hierarchy of external sources referred to in Article 4(2) of Delegated Regulation (EU) 2023/1578 is well specified in the institution’s internal documentation and verify, on a sample of positions, that that hierarchy of external sources is implemented correctly;

(iii)

verify whether the estimates of losses given default distinguish between positions that are defaulted and positions that are not.

For the purpose of point (b), competent authorities may, where appropriate, identify positions for which the estimated losses given default has not changed for an extensive period, assess whether they are up-to-date and verify that the institution can explain the reasons behind the unchanged values.

For the purposes of point (c), competent authorities shall, on a sample of positions, verify whether the loss given default estimate used in the IRB approach does not differ from the loss given default estimate used in the calculation of the default risk requirement.

For the purposes of point (g)(i), competent authorities shall verify whether the data used are reflective of the seniority of the position as referred to in Article 325bp(6), point (b), of Regulation (EU) No 575/2013, and the region or sector.

For the purposes of point (g)(iii), competent authorities may verify whether the estimates of losses given default distinguish between positions that are defaulted and positions that are not by assessing the estimate assigned by the institution to positions to the same issuer that are defaulted and that are not defaulted included in the scope of the additional own funds requirements for default risk.

3.   For the purposes of paragraph 2, competent authorities may, where appropriate, require the institution to estimate losses given default with another method among the methods laid out in Delegated Regulation (EU) 2023/1578, and explain the differences in the results obtained.