Updated 23/11/2024
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CRR ToolDelegated Regulation 2024/1085
Article 52

Article 52 - Assessment of compliance with particular requirements

Article 52

Assessment of compliance with particular requirements

When assessing the internal default risk model’s compliance with the requirements laid down in Article 325bp of Regulation (EU) No 575/2013, competent authorities shall:

(a)

in relation to the modelling of the default of individual as well as multiple issuers as required by Article 325bp(1) of Regulation (EU) No 575/2013:

(i)

identify the approach that the institution uses to model the default, and verify that the two types of systematic risk factors selected by the institution capture the most relevant systematic effects;

(ii)

verify whether the granularity of the two types of systematic risk factors is sufficient to capture the characteristics of the issuers in the portfolio subject to the own funds requirement for default risk;

(iii)

verify whether for each issuer, the institution uses a separate idiosyncratic risk factor in addition to the two types of systematic risk factors referred to in Article 325bp(1) of Regulation (EU) No 575/2013;

(iv)

verify whether the mapping of issuers to the appropriate systematic risk factors is sound;

(v)

verify whether the institution analyses the explanatory power of the factor model;

(vi)

when requesting the sample for the purpose of the assessment, consider the materiality of the issuers, and ensure that the sample encompasses issuers that have been mapped to different systematic risk factors;

(b)

in relation to the requirement to reflect the economic cycle in the internal default risk model as required by Article 325bp(2) of Regulation (EU) No 575/2013, assess how the modelling of losses given defaults, including stochastic ones, is performed for such losses given defaults to reflect changes in the properties taken by the systematic risk factors;

(c)

in relation to the requirement to capture non-linearities as required by Article 325bp(3) of Regulation (EU) No 575/2013, assess:

(i)

how institutions revalue a non-linear financial instrument following the default of an issuer, including how institutions revalue a financial instrument with multiple underlying following the default of an individual issuer or of multiple issuers corresponding to the underlyings;

(ii)

whether any simplifications introduced by the institution to calculate the price of a financial instrument leads to material inaccuracies or a systematic underestimation of the risk;

(iii)

the extent to which the revaluation of a financial instrument takes into account model risk;

(d)

in relation to the requirement to have an internal default risk model that is consistent with internal risk-management as required by Article 325bp(9) of Regulation (EU) No 575/2013, verify whether the institution has documented the differences between the internal default risk model and the models that the institution uses for its internal risk management for the same scope of positions, and whether the institution is able to explain those differences.

For the purposes of point (a)(i), competent authorities shall assess the rationale provided in the institution’s internal policies for the choice of the systematic risk factors, and their economic interpretation.

For the purposes of point (a)(iii), competent authorities may, where appropriate, verify on a sample of similar issuers that the idiosyncratic risk factors differ.

For the purposes of point (a)(iv), competent authorities may, where appropriate, verify on a sample of issuers, that the mapping is correct.

For the purposes of point (a)(v), competent authorities may, where appropriate and where the analyses performed by the institution do not seem sufficient for the portfolio subject to default risk as it stands, require the institution on a sample of issuers to assess the power of the systematic risk factors chosen by the institution in explaining the drivers of the default of each issuer’s asset.

For the purposes of point (b), competent authorities may, where appropriate, perform statistical analyses on a sample of issuers, including hypothesis testing, to test the dependency of losses given defaults on the systematic risk factors.