S.I. No. 661/2006 - European Communities (Capital Adequacy of Credit Institutions) Regulations 2006

STATUTORY INSTRUMENTS

S.I. No. 661 of 2006

entitled

European Communities (Capital Adequacy of Credit Institutions) Regulations 2006

Made by the Minister for Finance

EUROPEAN COMMUNITIES (CAPITAL ADEQUACY OF CREDIT INSTITUTIONS) REGULATIONS 2006

Table of Contents

PART 1 PRELIMINARY

REGULATION

1.	Citation and commencement.
2.	Interpretation.

PART 2 OWN FUNDS

3.	Unconsolidated own funds of credit institutions.
4.	Waiver of Regulation 3(2)(d) to (h).
5.	Alternative to deduction of items referred to in Regulation 3(2)(g) and (h).
6.	Circumstances in which certain credit institutions need not deduct items referred to in Regulation 3(2)(d) to (h).
7.	Requirements applicable to items referred to in Regulation 3(1)(a), (b) and (c).
8.	Other items.
9.	Fixed term cumulative preferential shares and subordinated loan capital, etc.
10.	Consolidated amounts relating to items listed under Regulation 3.
11.	Limits on items referred to in Regulation 3.
12.	Compliance with this Part.

PART 3 PROVISIONS AGAINST RISKS

13.	Where compliance must be on an individual basis.
14.	Discretion of Bank to allow parent credit institutions to incorporate subsidiaries in calculation requirements under Regulation 13(1).
15.	Application of Regulations 13 and 14 to parent credit institutions in the State, etc.
16.	Application of Part 11 to EU based parent credit institutions, etc.
17.	Discretion of Bank to exclude subsidiaries from consolidation, etc.
18.	Calculation of requirements.
19.	Minimum level of own funds.

PART 4 MINIMUM OWN FUNDS REQUIREMENTS FOR CREDIT RISK

Chapter 1 Definition of “exposure” and Approaches that may be used for Calculation under Regulation 19(a)

20.	Definition of “exposure”.
21.	Calculation of risk-weighted exposure amounts for purposes of Regulation 19(a).

Chapter 2 Standardised Approach

22.	Determination of exposure values.
23.	Classification of exposures.
24.	Calculation of risk-weighted exposure amounts.
25.	Use of ECAIs.
26.	Determination of credit quality steps to be associated with eligible ECAI.
27.	Use of credit assessments.
28.	Use of treatment accorded exposures in third countries.

Chapter 3 Internal Ratings Based Approach

29.	Permission to use IRB Approach is required.
30.	Implementation of IRB Approach.
31.	Classification of exposures.
32.	Calculation of risk-weights for various exposure classes.
33.	Calculation of EL.
34.	Circumstances in which Chapter 2 may be used for individual business lines.
35.	Transitional provisions for relevant data.

Chapter 4 Credit Risk Mitigation

36.	Definition of “lending credit institution”.
37.	Recognition of credit risk mitigation.
38.	Credit protection to be legally effective, etc.
39.	Use of credit risk mitigation.

Chapter 5 Securitization

40.	Calculation of risk-weighted amounts for securitization positions.
41.	Transfer of credit risk.
42.	Calculation of risk-weights under securitization.
43.	Use of ECAI credit assessments in securitization.
44.	Determination of credit quality steps to be associated with eligible ECAI.
45.	Use of credit assessments.
46.	Securitization of revolving exposures subject to early amortisation provision.
47.	Originator credit institution shall not provide support to securitization beyond contractual obligations.

PART 5 MINIMUM OWN FUNDS REQUIREMENTS FOR OPERATIONAL RISK

48.	Use of approaches for operational risk.
49.	Basic Indicator Approach.
50.	Standardised Approach.
51.	Advanced Measurement Approach.

PART 6 LARGE EXPOSURES

52.	Interpretation of Part 6.
53.	Calculation of exposures, etc.
54.	Large exposure to client or group of connected clients.
55.	Sound administrative and accounting procedures, etc. to identify and monitor large exposures.
56.	Reporting of large exposures.
57.	Intra-group loans.
58.	Requirements applicable to recognition of funded or unfunded credit protection.
59.	Exposures exempt from the application of Regulation 57.
60.	How collateral can be taken into account in calculating credit risk in large exposure.
61.	Action to be taken by credit institution when obligations in other provisions of this Part are disapplied.

PART 7 QUALIFYING HOLDINGS OUTSIDE FINANCIAL SECTOR

62.	Limits on qualifying holdings which may be held by credit institutions.
63.	Exclusions from Regulation 62(I) and (2).
64.	Discretions of Bank.

PART 8 CREDIT INSTITUTIONS' ASSESSMENT PROCESS

65.	Strategies and processes relating to amount, etc. of internal capital required.

PART 9 SUPERVISION AND DISCLOSURES BY COMPETENT AUTHORITIES

66.	Review and evaluation by Bank of credit institutions' compliance with recast Directive (CI).
67.	Joint decisions of competent authorities.
68.	Reporting by Bank.
69.	Persons who direct business of financial holding company to be of good repute.
70.	Actions to be taken by Bank if credit institution does not meet the requirements of these Regulations.

PART 10 DISCLOSURES BY COMPETENT AUTHORITIES

71.	Disclosures by competent authorities.

PART 11 DISCLOSURES BY CREDIT INSTITUTIONS

72.	Disclosures by credit institutions.
73.	Exemptions to disclosures required under Regulation 72.
74.	Publication of disclosures.
75.	Where disclosures are published.
76.	Powers of Bank relating to disclosures.

PART 12 AMENDMENTS TO EUROPEAN COMUNITIES (LICENSING AND SUPERVISION OF CREDIT INSTITUTIONS)REGULATIONS 1992

77.	Definition of “Principal Regulations”.
78.	Amendment of Regulation 3 of Principal Regulations.
79.	Amendment of Regulation 16 of Principal Regulations.
80.	Amendment of Regulation 20 of Principal Regulations.
81.	Amendment of Regulation 23 of Principal Regulations.

PART 13 TRANSITIONAL PROVISIONS

82.	Transitional provisions - general.
83.	Transitional provisions - calculation of risk-weighted exposure amounts for certain exposures, etc.
84.	Transitional provisions - discretions of Bank.

I, ____, Minister for Finance, in exercise of the powers conferred on me by section 3 of the European Communities Act 1972 (No. 27 of 1972), as amended by the European Communities (Amendment) Act 1993 (No. 25 of 1993), and for the purpose of giving effect to 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)¹ , hereby make the following Regulations:

PART 1 Preliminary

Citation and commencement.

1.

• (2) Subject to Part 13 and paragraph (3), these Regulations shall come into operation on 1 January 2007.

• (3) Regulations 32 and 51 shall come into operation on 1 January 2008.

Interpretation.

2.

“Bank” means the Central Bank and Financial Services Authority of Ireland within the meaning of the Central Bank Act 1942 (No.22 of 1942) as amended by the Central Bank and Financial Services Authority of Ireland Act 2003 (No. 12 of 2003);

“competent authority” -

• (a) in relation to the State, means the Bank, and

• (b) in relation to any other Member State, means the body or bodies charged by law in the Member State with the supervision of credit institutions;

“CRD Regulations (IF)” means the European Communities (Capital Adequacy of Investment Firms) Regulations 2006 (S.I.[] of 2006);

“recast Directive (CI)” means 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).

• (2) A word or expression that is used in these Regulations and is also used in the recast Directive (CI) shall have in these Regulations the same meaning as it has in the recast Directive (CI) unless the contrary intention appears.

PART 2 Own Funds

Unconsolidated own funds of credit institutions.

3.

• (a) capital within the meaning of Article 22 of Directive 86/635/EEC of the European Parliament and of the Council of 8 December 1986 on the annual accounts and consolidated accounts of banks and other financial institutions² , in so far as it has been paid up, plus share premium accounts but excluding cumulative preferential shares,

• (b) subject to paragraphs (3) and (4), 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,

• (c) revaluation reserves within the meaning of Article 33 of Directive 78/660/EEC of the European Parliament of the Council of 25 July 1978 on the annual accounts of certain types of companies³ ,

• (d) other items within the meaning of Regulation 8, and

• (e) fixed-term cumulative preferential shares and subordinated loan capital as referred to in Regulation 9(1).

• (2) The following items shall be deducted from the unconsolidated own funds of a credit institution in accordance with Regulation 11:

• (a) own shares at book value held by a credit institution,

• (b) intangible assets within the meaning of Article 4(9) (“Assets”) of Directive 86/635/EEC,

• (c) material losses of the current financial year,

• (d) holdings in other credit and financial institutions amounting to more than 10% of their capital,

• (e) subordinated claims and instruments referred to in Regulations 8 and 9(1) which the credit institution holds in respect of credit and financial institutions in which it has holdings exceeding 10% of the capital in each case,

• (f) holdings in other credit and financial institutions of up to 10% of their capital, the subordinated claims and the instruments referred to in Regulations 8 and 9(1) which the credit institution holds in respect of credit and financial institutions other than those referred to in subparagraphs (d) and (e) in respect of the amount of the total of such holdings, subordinated claims and instruments which exceed 10% of the credit institution's own funds calculated before the deduction of items referred to in subparagraphs (d) to (h),

• (g) participations within the meaning of Article 4(10) of the recast Directive (CI) which the credit institution holds in -

• (i) insurance undertakings within the meaning of Article 6 of 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 a life assurance⁴ , Article 4 of Directive 2002/83/EC of the European Parliament and of the Council of 5 November 2002 concerning life assurance⁵ or Article 1(b) of 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 group⁶ ,

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

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

• (h) each of the following items which the credit institution holds in respect of the entities defined in subparagraph (g) 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,

• (i) for credit institutions calculating risk-weighted exposure amounts under Chapter 3 of Part 4, negative amounts resulting from the calculation in point 36 of Part 1 of Annex VII to the recast Directive (CI) and expected loss amounts calculated in accordance with points 32 and 33 of Part 1 of Annex VII to the recast Directive (CI),

• (j) the exposure amount of securitisation positions which receive a risk-weight of 1250% under Part 4 of Annex IX to the recast Directive(CI), calculated in the manner therein specified, and

• (k) any further reductions required by the Bank.

• (3) For the purposes of paragraph (1)(b), interim profits may be included before a formal decision has been taken if those profits have been verified by persons responsible for the auditing of the accounts and if it is proved to the satisfaction of the Bank 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.

• (4) 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 paragraph (1)(b).

Waiver of Regulation 3(2)(d) to (h).

4.

Alternative to deduction of items referred to in Regulation 3(2)(g) and (h).

5.

• (2) A credit institution shall not use method 1 referred to in paragraph (1) as an alternative unless the Bank gives the institution notice that the Bank is confident about the level of integrated management and internal control regarding the entities which would be included in the scope of consolidation.

• (3) A credit institution which uses a method referred to in paragraph (1) as an alternative shall apply the method in a consistent manner over time.

Circumstances in which certain credit institutions need not deduct items referred to in Regulation 3(2)(d) to (h).

6.

Requirements applicable to items referred to in Regulation 3(1)(a), (b) and (c).

7.

• (a) available to a credit institution for unrestricted and immediate use to cover risks or losses as soon as they occur, and

• (b) either -

• (i) net of any foreseeable tax charge at the moment of their calculation, or

• (ii) suitability adjusted in so far as such tax charge reduces the amount to which those items may be applied to cover risks or losses.

Other items.

8.

• (a) they are freely available to the credit institution to cover normal banking risks where revenue or capital losses have not yet been identified,

• (b) their existence is disclosed in internal accounting records, and

• (c) their amount is determined by the management of the credit institutions, verified by independent auditors, made known to the Bank and placed under the supervision of the latter.

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

• (a) they may not be reimbursed on the bearer's initiative or without the prior agreement of the Bank,

• (b) the debt agreement provides for the credit institution to have the option of deferring the payment of interest on the debt,

• (c) the lender's claims on the credit institution is wholly subordinated to those of all non-subordinated creditors,

• (d) the documents governing the issue of the securities provides 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 are taken into account.

• (3) Cumulative preferential shares (except those referred to in Regulation 3(1)(e)) may be included in the securities which fall within paragraph (2).

• (4) For credit institutions calculating risk-weighted exposure amounts under Chapter 3 of Part 4 -

• (a) positive amounts resulting from the calculation in point 36 of Part 1 of Annex VII to the recast Directive (CI) may, up to 0.6% of risk-weighted exposure amounts calculated under Chapter 3 of Part 4, be accepted as other items,

• (b) value adjustments and provisions included in the calculation referred to in point 36 of Part 1 of Annex VII to the recast Directive (CI) shall not be included in own funds other than in accordance with this paragraph and paragraph (5).

• (5) For the purposes of paragraph (4), risk-weighted exposure amounts shall not include those calculated in respect of securitization positions which have a risk-weight of 1250%.

Fixed-term cumulative preferential shares and subordinated loan capital, etc.

9.

• (2) Subordinated loan capital shall fulfil the following additional criteria:

• (a) only fully paid-up funds may be taken into account,

• (b) the loans involved have an original maturity of at least five years, after which they may be repaid,

• (c) the extent to which they may rank as own funds must be gradually reduced during at least the last five years before the repayment date, and

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

• (3) For the purposes of paragraph (2)(b), if the maturity of the debt is not fixed, the loans 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 Bank is specifically required for early repayment.

• (4) The Bank may give the consent referred to in paragraph (3) 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.

• (5) 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.

Consolidated amounts relating to items listed under Regulation 3.

10.

• (2) The following may, when they are credit items, be regarded as consolidated reserves for the calculation of own funds:

• (a) any minority interests within the meaning of Article 21 of Seventh Council Directive 83/349/EEC of 13 June 1983 on consolidated accounts⁸ where the global integration method is used,

• (b) the first consolidation difference within the meaning of Articles 19, 30 and 31 of Directive 83/349/EEC,

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

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

• (3) Where the items referred to in subparagraphs (a) to (d) of paragraph (2) are debit items, they shall be deducted in the calculation of consolidated own funds.

Limits on items referred to in Regulation 3.

11.

• (a) the total of those items shall not exceed a maximum of 100% of the total of the items referred to in subparagraphs (a) and (b) of Regulation 3(1) minus the total of the items referred to in subparagraphs (a), (b) and (c) of Regulation 3(2), and

• (b) the items referred to in subparagraph (e) of Regulation 3(1) shall not exceed a maximum of 50% of the total of the items referred to in subparagraphs (a) and (b) of Regulation 3(1) minus the total of the items referred to in subparagraphs (a), (b) and (c) of Regulation 3(2).

• (2) The total of the items referred to in subparagraphs (d) to (k) of Regulation 3(2) shall be deducted as follows:

• (a) half from the total of the items referred to in subparagraphs (a) and (b) of Regulation 3(1) minus the total of the items referred to in subparagraphs (a), (b) and (c) of Regulation 3(2), and

• (b) half from the total of the items referred to in subparagraphs (c), (d) and (e) of Regulation 3(1),

after the application of the limits set out in paragraph (1).

• (3) To the extent that half of the total of the items referred to in subparagraphs (d) to (k) of Regulation 3(2) exceeds the total of the items referred to in subparagraphs (c), (d) and (e) of Regulation 3(1), the excess shall be deducted from the total of the items referred to in subparagraphs (a) and (b) of Regulation 3(1) minus the total of the items referred to in subparagraphs (a), (b) and (c) of Regulation 3(2).

• (4) The item referred to in subparagraph (j) of Regulation 3(2) shall not be deducted if it has already been included in the calculation of risk-weighted exposure amounts for the purposes of Regulation 19 as specified in Part 4 of Annex IX to the recast Directive (CI).

• (5) For the purposes of Parts 6 and 7, this Regulation shall be read without taking into account the items referred to in subparagraphs (i) and (j) of Regulation 3(2) and Regulation 8(4) and (5).

• (6) The Bank may authorise credit institutions to exceed the limits set out in paragraph (1) in temporary and exceptional circumstances.

Compliance with this Part.

12.

PART 3 PROVISIONS AGAINST RISKS

Where compliance must be on an individual basis.

13.

• (a) under Regulation 16(3) and (4) (as inserted by Regulation 79) of the European Communities (Licensing and Supervision of Credit Institutions) Regulations 1992 (S.I. 395 of 1992), and

• (b) set out in Part 6,

on an individual basis.

• (2) Every credit institution -

• (a) which is neither a subsidiary in the Member State where it is authorised and supervised nor a parent undertaking, or

• (b) which is not included in the consolidation pursuant to Regulation 17,

shall comply with the obligations set out in Regulations 62 and 65 on an individual basis.

• (3) Every credit institution -

• (a) which is neither a parent undertaking nor a subsidiary, or

• (b) which is not included in the consolidation pursuant to Regulation 17,

shall comply with the obligations set out in Part 11 on an individual basis.

Discretion of Bank to allow parent credit institutions to incorporate subsidiaries in calculation of requirement under Regulation 13(1).

14.

• (a) which meet the conditions set out in points (c) and (d) of Article 69(1) of the recast Directive(CI), and

• (b) the material exposures or material liabilities of which are to the parent credit institution concerned.

• (2) The treatment referred to in paragraph (1) shall be allowed only where the parent credit institution demonstrates fully to the Bank the circumstances and arrangements, including legal arrangements, by virtue of which there are no material practical or legal impediments, 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 the Bank exercises its discretion in accordance with 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 that paragraph and of the circumstances and arrangements referred to in paragraph (2).

• (4) Where the subsidiary is in a third country, the Bank shall provide the information referred to in paragraph (3) to the competent authorities of that third country on the same basis.

• (5) Without prejudice to the generality of Regulation 71, the Bank shall publicly disclose, in the manner indicated in that Regulation -

• (a) 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,

• (b) the number of parent credit institutions which make use of paragraph (1) and the number of those which incorporate subsidiaries in a third country,

• (c) on an aggregate basis for the State:

• (i) the total amount of own funds of parent credit institutions which make use of paragraph (1) which are held in subsidiaries in a third country,

• (ii) the percentage of total own funds of parent credit institutions which make use of 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 Regulation 19 of parent credit institutions which make use of paragraph (1) represented by own funds which are held in subsidiaries in a third country.

Application of Regulations 13 and 14 to parent credit institutions in the State, etc.

15.

• (2) Without prejudice to Regulations 13 and 14, credit institutions controlled by a parent financial holding company in the State shall comply, to the extent and in the manner prescribed in Article 133 of the recast Directive (CI), with the obligations set out in Regulations 19, 62 and 65 and Part 6 on the basis of the consolidated financial situation of that financial holding company.

• (3) Where more than one credit institution is controlled by a parent financial holding company in the State, paragraph (1) shall apply only to the credit institution to which supervision on a consolidated basis applies in accordance with Articles 125 and 126 of the recast Directive (CI).

Application of Part 11 to EU based parent credit institutions, etc.

16.

• (2) Significant subsidiaries of EU based parent credit institutions shall disclose the information specified in point 5 of Part 1 of Annex XII to the recast Directive (CI) on an individual or sub-consolidated basis.

• (3) Credit institutions controlled by an EU based parent financial holding company shall comply with the obligations set out in Part 11 on the basis of the consolidated financial situation of that financial holding company.

• (4) Significant subsidiaries of EU based parent financial holding companies shall disclose the information specified in point 5 of Part 1 of Annex XII to the recast Directive (CI) on an individual or sub-consolidated basis.

• (5) The Bank, in respect of the institutions which it is responsible for exercising supervision on a consolidated basis pursuant to Articles 125 and 126 of the recast Directive (CI), may decide not to apply in full or in part paragraphs (1) to (4) to the credit institutions which are included within comparable disclosures provided on a consolidated basis by a parent undertaking established in a third country.

Discretion of Bank to exclude subsidiaries from consolidation, etc.

17.

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

• (b) where, in the opinion of the Bank, 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:

• (i) EUR 10 million, or

• (ii) 1% of the balance-sheet total of the parent undertaking or the undertaking that holds the participation, or

• (c) where, in the opinion of the Bank, the consolidation of the financial situation of the undertaking concerned would be inappropriate or misleading as far as the objectives of the supervision of credit institutions are concerned.

• (2) Where, in the cases referred to in paragraph (1)(b), several undertakings meet the criteria set out in that paragraph, they must nevertheless be included in the consolidation where collectively they are of non-negligible interest with respect to the specified objectives.

• (3) The Bank shall require subsidiary credit institutions to apply the requirements set out in Regulations 19, 62 and 65 and Part 6 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.

• (4) The Bank shall require the parent undertakings and subsidiaries subject to these Regulations to meet the obligations under in Regulation 16(3) and (4) (as inserted by Regulation 79) of the European Communities (Licensing and Supervision of Credit Institutions) Regulations 1992 on a consolidated or sub-consolidated basis, to ensure that their arrangements, processes and mechanisms are consistent and well-integrated and that any data and information relevant to the purpose of supervision can be produced.

Calculation of requirements.

18.

• (2) Notwithstanding the requirements set out in Regulations 13 to 16, the calculations to verify the compliance of credit institutions with the obligations set out in Regulation 19 shall be carried out not less than twice in each year.

• (3) The credit institutions shall communicate the results and any component data required to the Bank.

Minimum level of own funds.

19.

• (a) 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 Regulation 11 of the CRD Regulations (IF), 8% of the total of their risk-weighted exposure amounts calculated in accordance with Part 4,

• (b) in respect of their trading-book business, for position risk, settlement and counter-party risk and, in so far as the limits set out in Regulations 57 to 60 are authorised to be exceeded, for large exposures exceeding such limits, the capital requirements determined in accordance with Regulation 16 of the CRD Regulations (IF) and Chapter 4 of Part 5 of the CRD Regulations (IF),

• (c) in respect of all of their business activities, for foreign-exchange risk and for commodities risk, the capital requirements determined in accordance with Regulation 16 of the CRD Regulations (IF), and

• (d) in respect of all of their business activities, for operational risk, the capital requirements determined in accordance with Part 5.

PART 4 MINIMUM OWN FUNDS REQUIREMENTS FOR CREDIT RISK

Chapter 1 Definition of “exposure” and Approaches that may be used for Calculation under Regulation 19(a)

Definition of “exposure”.

20.

Calculation of risk-weighted exposure amounts for purposes of Regulation 19(a).

21.

Chapter 2 Standardised Approach

Determination of exposure values.

22.

• (a) the exposure value of an asset item shall be its balance-sheet value, and

• (b) the exposure value of an off-balance sheet item listed in Annex II of the recast Directive (CI) shall be the following percentage of its value:

• (i) 100% if it is a full-risk item,

• (ii) 50% if it is a medium-risk item,

• (iii) 20% if it is a medium/low-risk item,

• (iv) 0% if it is a low-risk item.

• (2) The off-balance-sheet items referred to in paragraph (1)(b) shall be assigned to risk categories as indicated in Annex II of the recast Directive (CI).

• (3) In the case of a credit institution using the Financial Collateral Comprehensive Method under Part 3 of Annex VIII to the recast Directive (CI), 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 points 34 to 59 of Part 3 of Annex VIII to the recast Directive (CI).

• (4) The exposure value of a derivative instrument listed in Annex IV to the recast Directive (CI) shall be determined in accordance with Annex III to the recast Directive (CI) with the effects of contracts of novation and other netting agreements taken into account for the purposes of those methods in accordance with Annex III to the recast Directive (CI).

• (5) 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 VIII to the recast Directive (CI).

• (6) Where an exposure is subject to funded credit protection, the exposure value applicable to that item may be modified in accordance with Chapter 4.

• (7) Notwithstanding paragraphs (4) and (5), the exposure value of credit risk exposures outstanding, as determined by the Bank, with a central counterparty shall be determined in accordance with point 6 of Part 2 of Annex III to the recast Directive (CI), provided that the central counterparty's counterparty credit risk exposures with all participants in its arrangements are fully collateralised on a daily basis.

Classification of exposures.

23.

• (a) claims or contingent claims on central governments or central banks,

• (b) claims or contingent claims on regional governments or local authorities,

• (c) claims or contingent claims on administrative bodies and non-commercial undertakings,

• (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) subject to paragraphs (2) to (5), 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 corporates,

• (o) claims in the form of collective investment undertakings (referred to in this Part as “CIU”), or

• (p) other items.

• (2) An exposure shall meet the following conditions to be eligible for the retail exposure class referred to in paragraph (1)(h):

• (a) the exposure is either to an individual person or persons, or to a small or medium sized entity,

• (b) the exposure is one of a significant number of exposures with similar characteristics such that the risks associated with such lending are substantially reduced, and

• (c) 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 on residential real estate collateral, does not, to the knowledge of the credit institution, exceed EUR 1 million.

• (3) A credit institution shall take reasonable steps to acquire the knowledge referred to in paragraph (2)(c).

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

• (5) Securities are not eligible for the retail exposure class.

Calculation of risk-weighted exposure amounts.

24.

• (2) The application of risk-weights shall be based on the exposure class to which the exposure is assigned and, to the extent specified in Part 1 of Annex VI to the recast Directive (CI), its credit quality .

• (3) Credit quality may be determined by reference to the credit assessments of External Credit Assessment Institutions (referred to in this Part as “ECAIs”) in accordance with Regulations 25, 26 and 27 or the credit assessments of Export Credit Agencies as described in Part 1 of Annex VI to the recast Directive (CI).

• (4) For the purposes of applying a risk-weight, as referred to in paragraphs (1), (2) and (3), the exposure value shall be multiplied by the risk-weight specified or determined in accordance with this Chapter.

• (5) For the purposes of calculating risk-weighted exposure amounts for exposures to institutions, the exposure value shall be the method based on the credit quality of the counterparty institution in accordance with Annex VI to the recast Directive (CI).

• (6) Notwithstanding paragraphs (1), (2) and (3), where an exposure is subject to credit protection, the risk-weight applicable to that exposure may be modified in accordance with Chapter 4.

• (7) Risk-weighted exposure amounts for securitised exposures shall be calculated in accordance with Chapter 5.

• (8) Exposures the calculation of risk-weighted exposure amounts for which is not otherwise provided for under this Chapter shall be assigned a risk-weight of 100%.

• (9) With the exception of exposures giving rise to liabilities in the form of the items referred to in Regulation 3(1)(a) to (e), the Bank may exempt from the requirements of paragraphs (1), (2) and (3) the exposures of a credit institution to a counterparty which is its parent undertaking, its subsidiary or a subsidiary of its parent undertaking or an undertaking linked by a relationship with the meaning of Article 12(1) of Directive 83/349/EEC, provided that the following conditions are met:

• (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,

• (b) the counterparty is included in the same consolidation as the credit institution on a full basis,

• (c) the counterparty is subject to the same risk evaluation, measurement and control procedures as the credit institution,

• (d) the counterparty is established in the same Member State as the credit institution, and

• (e) there is no current or foreseen material or legal impediment to the prompt transfer of own funds or repayment of liabilities from the counterparty to the credit institution.

• (10) A risk-weight of 0% shall be assigned to an exposure exempted under paragraph (9).

• (11) With the exception of exposures giving rise to liabilities in the form of the items referred to in Regulation 3(1)(a) to (e), the Bank may exempt from the requirements of paragraphs (1), (2) and (3) 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) the requirements set out in paragraph 9(a), (d) and (e),

• (b) 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 in this Part as “institutional protection scheme”),

• (c) the arrangements ensure that the institutional protection scheme will be able to grant support necessary under its commitment from funds readily available to it,

• (d) the institutional protection scheme disposes of suitable and uniformly stipulated systems for the monitoring and 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 corresponding possibilities to take influence; those systems shall suitably monitor defaulted exposures in accordance with point 44 of Part 4 of Annex VII to the recast Directive (CI)

• (e) the institutional protection scheme conducts its own risk review which is communicated to the individual members,

• (f) the institutional protection scheme draws up and publishes once in a year either -

• (i) 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

• (ii) a report comprising the aggregated balance sheet, the aggregated profit and loss account, the situation report and the risk report, concerning the institutional protection scheme as a whole,

• (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,

• (h) the multiple use of elements eligible for the calculation of own funds (in this Part referred to as “multiple gearing”) as well as any inappropriate creation of own funds between the members of the institutional protection scheme is eliminated,

• (i) the institutional protection scheme is based on a broad membership of credit institutions of a predominantly homogeneous business profile, and

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

• (12) A risk-weight of 0% shall be assigned to an exposure exempted under paragraph (11).

Use of ECAIs.

25.

• (2) The Bank shall recognise an ECAI as eligible for the purposes of Regulation 24 only if it is 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.

• (3) The Bank shall, for the purposes of paragraph (2), take into account the technical criteria set out in Part 2 of Annex VI to the recast Directive (CI).

• (4) Where an ECAI has been recognised as eligible by the competent authorities of a Member State, the Bank may recognise that ECAI as eligible without carrying out its evaluation process.

• (5) The Bank shall make publicly available an explanation of the recognition process, and a list of eligible ECAIs.

Determination of credit quality steps to be associated with eligible ECAI.

26.

• (2) Where the competent authorities of a Member State have made a determination under any equivalent of paragraph (1), the Bank may recognise that determination without carrying out its determination process.

Use of credit assessments.

27.

• (2) Credit assessments shall not be used selectively.

• (3) Credit institutions shall use solicited credit assessments except that, with the permission of the Bank, they may use unsolicited credit assessments.

Use of treatment accorded exposures in third countries.

28.

• (2) For purposes of point 11 of Part 1 of Annex VI to the recast Directive (CI), where the competent authority of a third country which applies supervisory and regulatory arrangements at least equivalent to those applied in the Community treats exposures to regional governments and local authorities as exposures to their central government, credit institutions may apply risk-weights to exposures to such regional governments and local authorities in the same manner.

• (3) For the purposes of point 17 of Part 1 of Annex VI to the recast Directive (CI), where the competent authority of a third country which applies supervisory and regulatory arrangements at least equivalent to those applied in the Community treats exposures to public sector entities as exposures to institutions, credit institutions may apply risk-weights to exposures to such regional governments and local authorities in the same manner.

Chapter 3 Internal Ratings Based Approach

Permission to use IRB Approach is required.

29.

• (2) Explicit permission to use the IRB Approach shall be required in the case of each credit institution.

• (3) Permission shall be given only if the Bank 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 Part 4 of Annex VII to the recast Directive (CI):

• (a) the credit institution's rating systems provide for a meaningful assessment of obligor and transaction characteristics, a meaningful differentiation of risk and accurate and consistent quantitative estimates of risk,

• (b) 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 capital allocation and corporate governance functions of the credit institution,

• (c) the credit institution has a credit risk control unit responsible for its rating systems that is appropriately independent and free from undue influence,

• (d) 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, the rationale for their design and validates its rating systems.

• (4) 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 Bank may allow the minimum requirements of Part 4 of Annex VII to the recast Directive (CI) to be met by the parent and its subsidiaries considered together.

• (5) A credit institution applying to use the IRB Approach shall demonstrate that it has been using for the IRB exposure classes in question rating systems that were broadly in line with the minimum requirements set out in Part 4 of Annex VII to the recast Directive (CI) for internal risk measurement and management purposes for at least three years prior to its qualification to use the IRB Approach.

• (6) A credit institution applying for the use of own estimates of LGDs or conversion factors, or both, shall demonstrate that it has been estimating and employing own estimates of LGDs or conversion factors, or both, as may be appropriate, in a manner that was broadly consistent with the minimum requirements for use of own estimates of those parameters set out in Part 4 of Annex VII to the recast Directive (CI) for at least three years prior to qualification to use own estimates of LGDs or conversion factors, or both.

• (7) Where a credit institution ceases to comply with the requirements set out in this Chapter, it shall either present to the Bank a plan for a timely return to compliance or demonstrate that the effect of non-compliance is immaterial.

• (8) Where 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 Bank shall co-operate closely with the competent authorities of the different legal entities as provided for in Regulations 67, 68 and 69 and in Articles 129 to 132 of the recast Directive (CI).

Implementation of IRB Approach.

30.

• (2) Subject to the approval of the Bank, implementation may be carried out sequentially across the different exposure classes referred to in Regulation 31, 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.

• (3) In the case of the retail exposure class referred to Regulation 31, implementation may be carried out sequentially across the categories of exposures to which the different correlations in points 10 to 13 of Part 1 of Annex VII to the recast Directive (CI) correspond.

• (4) Implementation as referred to in paragraphs (1), (2) and (3) shall be carried out -

• (a) within a reasonable period of time to be agreed with the Bank, and

• (b) subject to strict conditions determined by the Bank.

• (5) The conditions referred to in paragraph (4)(b) shall be designed to ensure that the flexibility under paragraphs (1), (2) and (3) 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 or conversion factors, or both.

• (6) Credit institutions using the IRB Approach for any exposure class shall at the same time use the IRB Approach for the equity exposure class.

• (7) Subject to paragraphs (1) to (6) and Regulation 34, credit institutions which have obtained permission under Regulation 29 to use the IRB Approach shall not revert to the use of Chapter 2 for the calculation of risk-weighted exposure amounts except for demonstrated good cause and subject to the approval of the Bank.

• (8) Subject to paragraphs (1) to (5) and Regulation 34, credit institutions which have obtained permission under Regulation 32(13) to use own estimates of LGDs and conversion factors shall not revert to the use of LGD values and conversion factors referred to in Regulation 32(11) except for demonstrated good cause and subject to the approval of the Bank.

Classification of exposures.

31.

• (a) claims or contingent claims on central governments and central banks,

• (b) claims or contingent claims on institutions,

• (c) claims or contingent claims on corporates,

• (d) retail claims or contingent retail claims,

• (e) equity claims,

• (f) securitisation positions, or

• (g) other non credit-obligation assets.

• (2) The following exposures shall be treated as exposures to central governments and central banks:

• (a) exposures to regional governments, local authorities or public sector entities which are treated as exposures to central governments under Chapter 2, and

• (b) exposures to Multilateral Development Banks and International Organisations which attract a risk-weight of 0% under Chapter 2,

• (3) The following exposures shall be treated as exposures to institutions:

• (a) exposures to regional governments and local authorities which are not treated as exposures to central governments under Chapter 2,

• (b) exposures to Public Sector Entities which are treated as exposures to institutions under Chapter 2, and

• (c) exposures to Multilerateral Development Banks which do not attract a 0% risk-weight under Chapter 2.

• (4) To be eligible for the retail exposure class referred to in paragraph (1)(d), 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 on residential real estate collateral, must not, to the knowledge of the credit institution, which must have taken reasonable steps to confirm the situation, exceed EUR 1 million,

• (b) they are treated by the credit institution in its risk management consistently over time and in a similar manner,

• (c) they are not managed just as individually as exposures in the corporate exposure class, and

• (d) they each represent one of a significant number of similarly managed exposures.

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

• (6) The following exposures shall be classed as equity exposures:

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

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

• (7) Within the corporate exposure class, credit institutions shall separately identify as specialised lending exposures, exposures which possess the following characteristics:

• (a) the exposure is to an entity which was created specifically to finance physical assets, or operate physical assets, or both,

• (b) the contractual arrangements give the lender a substantial degree of control over the assets and the income that they generate, and

• (c) the primary source of repayment of the obligation is the income generated by the assets being financed, rather than the independent capacity of a broader commercial enterprise.

• (8) Any credit obligation not assigned to the exposure classes referred to in paragraph (1) (a), (b), (d), (e) and (f) shall be assigned to the exposure class referred to in paragraph (1)(c).

• (9) The exposure class referred to in paragraph (1)(g) shall include the residual value of leased properties if not included in the lease exposure as defined in point 4 of Part 3 of Annex VII to the recast Directive (CI).

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

Calculation of risk-weights for various exposure classes.

32.

• (2) The risk-weighted exposure amounts for dilution risk for purchased receivables shall be calculated in accordance with point 28 of Part 1 of Annex VII to the recast Directive (CI).

• (3) 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 this Regulation and Regulation 33 in relation to purchased receivables need not be applied and the exposure may instead be treated as a collateralised exposure.

• (4) 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 and such parameters shall include probability of default (PD), loss given default (LGD), maturity (M) and the exposure value of the exposure.

• (5) PD and LGD may be considered separately or jointly, in accordance with Part 2 of Annex VII to the recast Directive (CI).

• (6) Notwithstanding paragraphs (4) and (5), the calculation of risk-weighted exposure amounts for credit risk for all exposures belonging to the exposure class referred to in Regulation 31(1)(e) shall be calculated in accordance with points 17 to 26 of Part 1 of Annex VII to the recast Directive (CI) subject to the approval of the Bank.

• (7) The Bank shall only allow a credit institution to use the approach set out in points 25 and 26 of Part 1 of Annex VII to the recast Directive (CI) if the credit institution meets the minimum requirements of points 115 to 123 of Part 4 of Annex VII to the recast Directive (CI).

• (8) Notwithstanding paragraphs (4) and (5), the calculation of risk-weighted exposure amounts for credit risk for specialised lending exposures may be calculated in accordance with point 6 of Part 1 of Annex VII to the recast Directive (CI).

• (9) The Bank shall publish guidance on how credit institutions should assign risk-weights to specialised lending exposures under point 6 of Part 1 of Annex VII to the recast Directive (CI) and shall approve institutions' assignment methodologies.

• (10) For exposures belonging to the exposure classes referred to in Regulation 31(1)(a) to (d), credit institutions shall provide their own estimates of PDs in accordance with Regulation 29 and Part 4 of Annex VII to the recast Directive (CI).

• (11) For exposures belonging to the exposure class referred to in Regulation 31(1)(d), credit institutions shall provide own estimates of LGDs and conversion factors in accordance with Regulation 29 and Part 4 of Annex VII to the recast Directive (CI).

• (12) For exposures belonging to the exposure classes referred to in Regulation 31(1)(a), (b) and (c), credit institutions shall apply the LGD values set out in point 8 of Part 2 of Annex VII to the recast Directive (CI), and the conversion factors set out in point 9(a) to (d) of Part 3 of Annex VII to the recast Directive (CI).

• (13) Notwithstanding paragraph (12), for all exposures belonging to the exposure classes referred to in Regulation 31(1)(a), (b) and (c), the Bank may permit credit institutions to use own estimates of LGDs and conversion factors in accordance with Regulation 29 and Part 4 of Annex VII to the recast Directive (CI).