EC Rule Sets Out IRB Assessment Methodology Under CRR
The European Commission (EC) published the Delegated Regulation 2022/439, which sets out regulatory technical standards for specification of the assessment methodology competent authorities are to follow when assessing the compliance of credit institutions and investment firms with the requirements to use the internal ratings-based (IRB) approach.
Regulation 2022/439, which supplements the Capital Requirements Regulation, or CRR (575/2013), shall enter into force on the twentieth day following that of its publication in the Official Journal of the European Union—that is, on April 07, 2022. Regulation 2022/439 sets out provisions on the assessment methodologies for sequential implementation plans and permanent partial use of the standardized approach, function of validation of internal estimates and of the internal governance and oversight of an institution, use test and experience test, assignment of exposures to grades or pools, identification of defaults, and rating systems design, operational details, and documentation. Regulation 2022/439 also sets out provisions related to assessment methodologies for: risk quantification, assignment of exposures to exposure classes, stress test used in assessment of capital adequacy, calculation of own funds requirements, data maintenance, internal models for equity exposures, and management of changes to rating systems. The requirement in CRR that competent authorities assess the compliance of an institution with the requirements to use the IRB approach relates to all of the requirements for the use of the IRB approach, irrespective of their degree of materiality, and concerns compliance with the requirements at all times. Competent authorities shall apply Regulation 2022/439 for the assessment of the compliance of an institution with the requirements to use the IRB approach for the purpose of assessing:
- initial applications for permission to use the IRB Approach as provided for in Article 144 of CRR, competent authorities shall apply all provisions of Regulation 2022/439.
- applications for permission to extend the IRB Approach in accordance with the approved sequential implementation plan as provided for in Article 148 of CRR, competent authorities shall apply Chapters 4, 5, 7, and 8 and any other part of Regulation 2022/439 that is relevant to that request. Chapter 4 sets out assessment methodology for use test and experience test, Chapter 5 sets out assessment methodology for assignment of exposures to grades or pools, Chapter 7 provides assessment methodology for rating systems design, operational details and documentation, and Chapter 8 details assessment methodology for risk quantification.
- applications for prior permission to carry out changes as referred to in Article 143(3) of CRR, competent authorities shall apply all parts of Regulation 2022/439 that are relevant to those changes.
- changes to rating systems and internal models approaches to equity exposures which have been notified in accordance with Article 143(4) of CRR, competent authorities shall apply all parts of Regulation 2022/439 that are relevant to those changes.
- use of the IRB Approach pursuant to Article 101 of Capital Requirements Directive or CRD IV (2013/36/EU), competent authorities shall apply all parts of Regulation 2022/439 that are relevant to that review.
- applications for permission to revert to the use of less sophisticated approaches in accordance with Article 149 of CRR, competent authorities shall apply Articles 6 to 8 of Regulation 2022/439. Articles 6 to 8 provides provisions related to assessment methodology for sequential implementation plans and permanent partial use of the standardized approach.
Related Link: Regulation 2022/439
Keywords: Europe, EU, Banking, IRB Approach, CRR, Basel, CRD IV, Assessment Methodology, Credit Risk, EC, Subheadline
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