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

• (14) The risk-weighted exposure amounts for securitised exposures and for exposures belonging to the exposure class referred to in Regulation 31(1)(f) shall be calculated in accordance with Chapter 5.

• (15) Where exposures in the form of a collective investment undertaking (referred to in this Chapter as “CIU”) meet the criteria set out in points 77 and 78 of Part 1 of Annex VI to the recast Directive (CI) and the credit institution is aware of all of the underlying exposures of the CIU, the credit institution shall look through to those underlying exposures in order to calculate risk-weighted exposure amounts and expected loss amounts in accordance with the methods set out in this Chapter.

• (16) Where the credit institution does not meet the conditions for using methods set out in this Chapter, risk-weighted exposure amounts and expected loss amounts shall be calculated in accordance with the following approaches:

• (a) for exposure belonging to the exposure class referred to in Regulation 31(1)(e), the approach set out in points 19 to 21 of Part 1 of Annex VII to the recast Directive (CI) except that, if, for those purposes, the credit institution is unable to differentiate between private equity, exchange-traded and other equity exposures, it shall treat the exposures concerned as other equity exposures,

• (b) for all other underlying exposures, the approach set out in Chapter 2 subject to the following modifications:

• (i) the exposures are assigned to the appropriate exposure class and attributed the risk-weight of the credit quality step immediately above the credit quality step that would normally be assigned to the exposure, and

• (ii) exposures assigned to the higher credit quality steps, to which a risk-weight of 150% would normally be attributed, are assigned a risk-weight of 200%.

• (17) Where exposures in the form of a CIU do not meet the criteria set out in points 77 and 78 of Part 1 of Annex VI to the recast Directive (CI), or the credit institution is not aware of all of the underlying exposures of the CIU, the credit institution shall look through to the underlying exposures and calculate risk-weighted exposure amounts and expected loss amounts in accordance with the approach set out in points 19 to 21 of Part 1 of Annex VII to the recast Directive (CI).

• (18) Where, for the purposes of paragraph (17), the credit institution is unable to differentiate between private equity, exchange-traded and other equity exposures, it shall treat the exposures concerned as other equity exposures.

• (19) For the purposes of paragraphs (17) and (18), non equity exposures are assigned to one of the classes (private equity, exchange traded equity or other equity) set out in point 19 of Part 1 of Annex VII to the recast Directive (CI) and unknown exposures are assigned to other equity class.

• (20) Alternatively to the method described in paragraphs (17), (18) and (19), credit institutions may calculate themselves or may rely on a third party to calculate and report the average risk-weighted exposure amounts based on the CIU's underlying exposures in accordance with the following approaches, provided that the correctness of the calculation and the report is adequately ensured:

• (a) for exposures belonging to the exposure class referred to in Regulation 31(1)(e), the approach set out in points 19 to 21 of Part 1 of Annex VII to the recast Directive (CI) except that, if, for those purposes, the credit institution is unable to differentiate between private equity, exchange-traded and other equity exposures, it shall treat the exposures concerned as other equity exposures, or

• (b) for all other underlying exposures, the approach set out in Chapter 2 subject to the following modifications:

• (i) the exposures are assigned to the appropriate exposure class and attributed the risk-weight of the credit quality step immediately above the credit quality step that would normally be assigned to the exposure, and

• (ii) exposures assigned to the higher credit quality steps, to which a risk-weight of 150% would normally be attributed, are assigned a risk-weight of 200%.

Calculation of EL.

33.

• (2) The calculation of expected loss amounts in accordance with points 29 to 35 of Part 1 of Annex VII to the recast Directive (CI) shall be based on the same input figures of PD, LGD and the exposure value for each exposure as being used for the calculation of risk-weighted exposure amounts in accordance with Regulation 32.

• (3) For the defaulted exposures, where credit institutions use own estimates of LGDs, EL shall be the credit institution's best estimate of EL (that is, ELBE) for the defaulted exposure in accordance with point 80 of Part 4 of Annex VII to the recast Directive (CI).

• (4) The expected loss amounts for securitised exposures shall be calculated in accordance with Chapter 5.

• (5) The expected loss amounts for exposures belonging to the exposure class referred to in Regulation 31(1)(g) shall be zero.

• (6) The expected loss amounts for dilution risk or purchased receivables shall be calculated in accordance with the methods set out in point 35 of Part 1 of Annex VII to the recast Directive (CI).

• (7) The expected loss amounts for exposures referred to in Regulation 32(15) to (20) shall be calculated in accordance with the methods set out in points 29 to 35 of Part 1 of Annex VII to the recast Directive (CI).

Circumstances in which Chapter 2 may be used for individual business lines.

34.

• (a) the exposure class referred to in Regulation 31(1)(a) where the number of material counterparties is limited and it would be unduly burdensome for the credit institution to implement a rating system for those counterparties,

• (b) the exposure class referred to in Regulation 31(1)(b) where the number of material counterparties is limited and it would be unduly burdensome for the credit institution to implement a rating system for those counterparties,

• (c) exposures in non-significant business units and exposure classes that are immaterial in terms of size and perceived risk profile,

• (d) exposures to the State including local authorities and administrative bodies, provided that -

• (i) there is no difference in risk between the exposures to the central government and those other exposures because of specific public arrangements, and

• (ii) exposures to the central government are associated with a 0% risk-weight under Chapter 2,

• (e) exposures of a credit institution to a counterparty which is its parent undertaking, its subsidiary or a subsidiary of its parent undertaking provided that the counterparty is an institution or a financial holding company, financial institution, asset management company or ancillary services undertaking linked by a relationship within the meaning of Article 12(1) of Directive 83/349/EEC and exposures between credit institutions which meet the requirements set out in Regulation 24(9),

• (f) equity exposures to entities whose credit obligations qualify for a zero risk-weight under Chapter 2 (including those publicly sponsored entities where a zero risk-weight can be applied),

• (g) equity exposure incurred under legislated programmes to promote specified sectors of the economy that provide significant subsidies for the investment to the credit institution and involve some form of government oversight and restrictions on the equity investments provided that this exclusion is limited to an aggregate of 10% of original own funds plus additional own funds,

• (h) the exposures identified in point 40 of Part 1 of Annex VI to the recast Directive (CI) meeting the conditions specified therein, and

• (i) State and State-reinsured guarantees pursuant to point 19 of Part 2 of Annex VIII to the recast Directive (CI).

• (2) Paragraph (1) shall not prevent the Bank to allow the application of Chapter 2 for equity exposures which have been allowed for this treatment in other Member States.

• (3) Subject to paragraph (4), the equity exposure class of a credit institution shall be considered material if the aggregate value of the equity exposures, excluding equity exposures incurred under legislative programmes referred to in paragraph (1)(g), exceeds, on average over the preceding year, 10% of the credit institution's own funds.

• (4) If the number of equity exposures referred to in subparagraph (3) is less than 10 individual holdings, then the threshold referred to in that paragraph shall be 5% of the credit institution's own funds.

Transitional provisions for relevant data.

35.

• (2) For the purpose of point 71 of Part 4 of Annex VII to the recast Directive (CI), credit institutions, when they implement the retail IRB approach, may have relevant data covering a period of two years but thereafter that period shall increase by one year each year until relevant date are covering a period of five years.

• (3) For the purposes of point 86 of Part 4 of Annex VII to the recast Directive (CI), credit institutions, when they implement the IRB approach, may have relevant LGD data covering a period of two years but thereafter that period shall increase by one year until relevant data are covering a period of five years.

• (4) For the purposes of point 95 of Part 4 of Annex VII to the recast Directive (CI), credit institutions, when they implement the IRB approach, may have relevant conversion factor data covering a period of two years but thereafter that period shall increase by one year each year until relevant data are covering a period of five years.

Chapter 4 Credit Risk Mitigation

Definition of “lending credit institution”.

36.

Recognition of credit risk mitigation.

37.

• (a) the calculation referred to in Regulation 3(2)(i), and

• (b) Regulation 8(4) and (5).

Credit protection to be legally effective, etc.

38.

• (2) The lending credit institutions shall take all appropriate steps to ensure the effectiveness of the credit protection arrangement and to address related risks.

• (3) In the case of funded credit protection, to be eligible for recognition the assets relied upon must be -

• (a) assets set out in Part 1 of Annex VIII to the recast Directive (CI), and

• (b) sufficiently liquid and their value over time sufficiently stable to provide appropriate certainty as to the credit protection achieved having regard to the approach used to calculate risk-weighted exposure amounts and to the degree of recognition allowed.

• (4) In the case of funded credit protection, the lending credit institution shall have the right to liquidate or retain, in a timely manner, the assets from which the protection derives in the event of the default, insolvency or bankruptcy of the obligor (or other credit event set out in the transaction documentation) and, where applicable, of the custodian holding the collateral.

• (5) The degree of correlation between the value of the assets relied upon for protection and the credit quality of the obligor shall not be undue.

• (6) In the case of unfunded credit protection, to be eligible for recognition -

• (a) the protection providers and types of protection agreement shall be as set out in Part 1 of Annex VIII to the recast Directive (CI), and

• (b) the party giving the undertaking shall be sufficiently reliable, and the protection agreement legally effective and enforceable in the relevant jurisdictions, to provide appropriate certainty as to the credit protection achieved having regard to the approach used to calculate risk-weighted exposure amounts and to the degree of recognition allowed.

• (7) The minimum requirements set out in Part 2 of Annex VIII to the recast Directive (CI) shall be complied with.

Use of credit risk mitigation.

39.

• (2) No exposure in respect of which credit risk mitigation is obtained shall produce a higher risk-weighted exposure amount or expected loss amount than an otherwise identical exposure in respect of which there is no credit risk mitigation.

• (3) Where the risk-weighted exposure amount already takes account of credit protection under Chapter 2 or 3, as relevant, the calculation of the credit protection shall not be further recognised under this Chapter.

Chapter 5 Securitisation

Calculation of risk-weighted amounts for securitisation positions.

40.

• (2) In any case which does not fall within paragraph (1), a credit institution shall calculate the risk-weighted exposure amount for a securitisation position in accordance with points 1 to 5 and 37 to 76 of Part 4 of Annex IX to the recast Directive (CI).

Transfer of credit risk.

41.

• (a) in the case of a traditional securitisation, exclude from its calculation of risk-weighted exposure amounts and, as relevant, expected loss amounts, the exposures which it has securitised, and

• (b) in the case of a synthetic securitisation, calculate risk-weighted exposure amounts and, as relevant, expected loss amounts, in respect of the securitised exposures in accordance with Part 2 of Annex IX to the recast Directive (CI).

• (2) Where paragraph (1) applies, the originator credit institution shall calculate the risk-weighted exposure amounts prescribed in Annex IX to the recast Directive (CI) for the positions that it may hold in the securitisation.

• (3) Where the originator credit institution fails to transfer significant credit risk in accordance with paragraph (1), it need not calculate risk-weighted exposure amounts for any positions it may have in the securitisation in question.

Calculation of risk-weights under securitisation.

42.

• (2) Where there is an exposure to different tranches in a securitisation, the exposure to each tranche shall be considered a separate securitisation position.

• (3) The providers of credit protection to securitisation positions shall be considered to hold positions in the securitisation.

• (4) Securitisation positions shall include exposures to a securitisation arising from interest rate or currency derivative contracts.

• (5) Where a securitisation position is subject to funded or unfunded credit protection, the risk-weight to be applied to that position may be modified in accordance with Chapter 4 as read in conjunction with Annex IX to the recast Directive (CI).

• (6) Subject to Regulations 3(2)(j) and 11(2), (3) and (4), the risk-weighted exposure amount shall be included in the credit institution's total of risk-weighted exposure amounts for the purposes of Regulation 19(a).

Use of ECAI credit assessments in securitisation.

43.

• (2) The Bank shall recognise an ECAI as eligible for the purpose referred to in of paragraph (1) only if it is satisfied as to the ECAI's compliance with the requirements set out in Regulation 25 taking into account the technical criteria set out in Part 2 of Annex VI to the recast Directive (CI), and that it has a demonstrated ability in the area of securitisation, which may be evidenced by a strong market acceptance.

• (3) Where an ECAI has been recognised as eligible by the competent authorities of a Member State under a provision equivalent to paragraph (1), the Bank may recognise that ECAI as eligible for the purpose referred to in that paragraph without carrying out its evaluation process.

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

• (5) To be used for the purpose referred to in paragraph (1), a credit assessment of an eligible ECAI shall comply with the principles of credibility and transparency set out in Part 3 of Annex IX to the recast Directive (CI).

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

44.

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

Use of credit assessments.

45.

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

Securitisation of revolving exposures subject to early amortisation provision.

46.

• (2) In this Regulation -

• (a) a revolving exposure is an exposure whereby customers' outstanding balances are permitted to fluctuate based on their decisions to borrow and repay, up to an agreed limit, and

• (b) an early amortisation provision is a contractual clause which requires, on the occurrence of defined events, investors' positions to be redeemed before the originally stated maturity of the securities issued.

Originator credit institutions shall not provide support to securitisation beyond contractual obligations.

47.

• (2) Where an originator credit institution or a sponsor credit institution fails to comply with paragraph (1) in respect of a securitisation -

• (a) the Bank shall require it, at a minimum, to hold capital against all of the securitised exposures as if they had not been securitised, and

• (b) the credit institution shall disclose publicly that it has provided non-contractual support and the regulatory capital impact of having done so.

PART 5 MINIMUM OWN FUNDS REQUIREMENTS FOR OPERATIONAL RISK

Use of approaches for operational risk.

48.

• (2) Without prejudice to paragraph (4), credit institutions that use the approach set out in Regulation 50 shall not revert to the use of the approach set out in Regulation 49 except for demonstrated good cause and subject to approval by the Bank.

• (3) Without prejudice to paragraph (4), credit institutions that use the approach set out in Regulation 51 shall not revert to the use of the approaches set out in Regulation 49 or 50 except for demonstrated good cause and subject to approval by the Bank.

• (4) The Bank may allow credit institutions to use a combination of approaches in accordance with Part 4 of Annex X to the recast Directive (CI).

Basic Indicator Approach.

49.

Standardised Approach.

50.

• (2) For each business line, credit institutions shall calculate a capital requirement for operational risk as a certain percentage of a relevant indicator, in accordance with the parameters set out in Part 2 of Annex X to the recast Directive (CI).

• (3) The capital requirement for operational risk under the Standardised Approach shall be the sum of the capital requirements for operational risk across all individual business lines.

• (4) The parameters for the Standardised Approach shall be as set out in Part 2 of Annex X to the recast Directive (CI).

• (5) To qualify for use of the Standardised Approach, credit institutions shall meet the criteria set out in Part 2 of Annex X to the recast Directive (CI).

Advanced Measurement Approach.

51.

• (2) Credit institutions shall satisfy the Bank that they meet the qualifying criteria set out in Part 3 of Annex X to the recast Directive (CI).

• (3) Where an Advanced Measurement Approach is intended to be used by an EU parent credit institution and its subsidiaries or by the subsidiaries of an EU parent credit financial holding company, the Bank shall cooperate closely, as provided for in Regulations 67, 68 and 69, with other competent authorities.

• (4) The application shall include the elements listed in Part 3 of Annex X to the recast Directive (CI).

• (5) Where an EU parent credit institution and its subsidiaries or the subsidiaries of an EU parent financial holding company use an Advanced Measurement Approach on a unified basis, the Bank may allow the qualifying criteria set out in Part 3 of Annex X to the recast Directive (CI) to be met by the parent and its subsidiaries considered together.

PART 6 LARGE EXPOSURES

Interpretation of Part 6.

52.

“credit institution” means -

• (a) a credit institution within the meaning of Article 4(1) of the recast Directive (CI), including its branches in third countries, and

• (b) any private or public undertaking, including its branches, which meets the definition of “credit institution” in Article 4(1) of the recast Directive (CI) and has been authorised in a third country;

“exposure” -

• (a) subject to paragraph (b), means any asset or off-balance item referred to in Chapter 2 of Part 4 without application of the risk-weights or degrees of risk therein provided for,

• (b) does not include -

• (i) in the case of foreign exchange transactions, an exposure incurred in the ordinary course of settlement during the 48 hours following payment, and

• (ii) in the case of transactions for the purchase or sale of securities, an exposure incurred in the ordinary course of settlement during the five working days following payment or delivery of the securities, whichever is the earlier;

“guarantee”, in relation to Regulations 59 and 60, includes credit derivatives recognised under Chapter 4 of Part 4 other than credit linked notes.

Calculation of exposures, etc.

53.

• (2) For the purposes of this Part, point 2 of Part 2 of Annex III to the recast Directive (CI) shall also apply.

• (3) All elements entirely covered by own funds may, with the agreement of the Bank, be excluded from the determination of exposures, provided that such own funds are not included in the credit institution's own funds for the purposes of Regulation 19 or in the calculation of other monitoring ratios provided for in this Directive and in other Community acts.

Large exposure to client or group of connected clients.

54.

Sound administrative and accounting procedures, etc. to identify and monitor large exposures.

55.

• (a) identifying and recording all large exposures and subsequent changes to them, in accordance with these Regulations, and

• (b) monitoring those exposures in the light of each credit institution's own exposure policies.

Reporting of large exposures.

56.

• (2) The Bank shall provide that reporting is to be carried out, at its discretion, in accordance with one of the following two methods:

• (a) reporting of all large exposures at least once a year, combined with reporting during the year of all new large exposures and any increases in existing large exposures of at least 20% with respect to the previous communication, or

• (b) reporting of all large exposures at least four times a year.

• (3) Except in the case of credit institutions relying on Regulation 60 for the recognition of collateral in calculating the value of exposures for the purposes of Regulation 57(1) to (5), exposures exempted under Regulation 59(a), (b), (c), (d), (f), (g) and (h) need not be reported as set out in paragraphs (1) and (2) and the reporting frequency laid down in paragraph (2)(b) may be reduced to twice a year for the exposures referred to in Regulation 59(e) and (i).

• (4) Where a credit institution invokes paragraph (3), it shall keep a record of the grounds advanced for at least one year after the event giving rise to the dispensation, so that the Bank may establish whether it is justified.

• (5) The Bank may require credit institutions to analyse their exposures to collateral issuers for possible concentrations and where appropriate take action or report any significant findings to the Bank.

Intra-group loans.

57.

• (2) Where a client or group of connected clients is the parent undertaking or subsidiary of the credit institution or one or more subsidiaries of that parent undertaking, or both, the percentage set out in paragraph (1) shall be reduced to 20%.

• (3) A credit institution shall not incur large exposures which in total exceed 800% of its own funds.

• (4) A credit institution shall at all times comply with the limits set out in paragraphs (1), (2) and (3) in respect of its exposures.

• (5) Where in an exceptional case exposures exceed limits set out in paragraphs (1), (2) and (3), that fact shall be reported without delay to the Bank which may, where the circumstances warrant it, allow the credit institution a limited period of time in which to comply with the limits.

Requirements applicable to recognition of funded or unfunded credit protection.

58.

• (2) Where a credit institution relies upon Regulation 60(3) to (6), the recognition of funded credit protection shall be subject to the relevant requirements under Chapter 3 of Part 4.

Exposures exempt from the application of Regulation 57.

59.

• (a) asset items constituting claims on central governments or central banks which unsecured would be assigned a 0% risk-weight under Chapter 2 of Part 4,

• (b) asset items constituting claims on international organisations or multilateral development banks which unsecured would be assigned a 0% risk-weight under Chapter 2 of Part 4,

• (c) asset items constituting claims carrying the explicit guarantees of central governments, central banks, international organisations, multilateral development banks or public sector entities, where unsecured claims on the entity providing the guarantee would be assigned a 0% risk-weight under Chapter 2 of Part 4,

• (d) other exposures attributable to, or guaranteed by, central governments, central banks, international organisations, multilateral development banks or public sector entities, where unsecured claims on the entity to which the exposure is attributable or by which it is guaranteed would be assigned a 0% risk-weight under Chapter 2 of Part 4,

• (e) asset items constituting claims on and other exposures to central governments or central banks not mentioned in subparagraph (a) which are denominated and, where applicable, funded in the national currencies of the borrowers,

• (f) asset items and other exposures secured, to the satisfaction of the Bank, by collateral in the form of debt securities issued by central governments or central banks, international organisations, multilateral development banks, Member States' regional governments, local authorities or public sector entities, which securities constitute claims on their issuer which would be assigned a 0% risk-weighting under Chapter 2 of Part 4,

• (g) asset items and other exposures secured, to the satisfaction of the Bank, by collateral in the form of cash deposits placed with the lending credit institution or with a credit institution which is the parent undertaking or a subsidiary of the lending institution,

• (h) asset items and other exposures secured, to the satisfaction of the Bank, by collateral in the form of certificates of deposit issued by the lending credit institution or by a credit institution which is the parent undertaking or a subsidiary of the lending credit institution and lodged with either of them,

• (i) asset items constituting claims on and other exposures to institutions, with a maturity of one year or less, but not constituting such institutions' own funds,

• (j) asset items constituting claims on and other exposures to those institutions which are not credit institutions but which fulfil the conditions referred to in point 85 of Part 1 of Annex VI to the recast Directive (CI), with a maturity of one year or less, and secured in accordance with that point,

• (k) bills of trade and other similar bills, with a maturity of one year or less, bearing the signatures of other credit institutions,

• (l) covered bonds falling within the terms of points 68 to 70 of Part 1 of Annex VI to the recast Directive (CI),

• (m) pending subsequent coordination, holdings in the insurance companies referred to in Regulation 64(1) up to 40% of the own funds of the credit institution acquiring such a holding,

• (n) asset items constituting claims on regional or central credit institutions with which the lending credit institution is associated in a network in accordance with legal or statutory provisions and which are responsible, under those provisions, for cash-clearing operations within the network,

• (o) exposures secured, to the satisfaction of the Bank, by collateral in the form of securities other than those referred to in subparagraph (f),

• (p) loans secured, to the satisfaction of the Bank, by mortgages on residential property or by shares in Finnish residential housing companies, operating in accordance with the Finnish Housing Company Act of 1991 or subsequent equivalent legislation and leasing transactions under which the lessor retains full ownership of the residential property leased for as long as the lessee has not exercised his option to purchase, in all cases up to 50% of the value of the residential property concerned,

• (q) exposures in the form of commercial real estate where the competent authority of another Member State has availed of the discretion to risk-weight such exposures at 50% provided that this exemption applies only up to 50% of the value of the property concerned,

• (r) 50% of the medium/low-risk off-balance-sheet items referred to in Annex II to the recast Directive (CI),

• (s) subject to the Bank's agreement, guarantees other than loan guarantees which have a legal or regulatory basis and are given for their members by mutual guarantee schemes possessing the status of credit institutions, subject to a weighting of 20% of their amount, and

• (t) the low-risk off-balance-sheet items referred to in Annex II to the recast Directive (CI), to the extent that an agreement has been concluded with the client or group of connected clients under which the exposure may be incurred only if it has been ascertained that it will not cause the limits applicable under Regulation 57(1) to (5) to be exceeded.

• (2) Cash received under a credit linked note issued by the credit institution and loans and deposits of a counterparty to or with the credit institution which are subject to an on-balance sheet netting agreement recognised under Chapter 4 of Part 4 shall be deemed to fall within paragraph (1)(g).

• (3) For the purposes of paragraph (1)(o) -

• (a) the securities used as collateral shall be valued at market price, have a value that exceeds the exposures guaranteed and be either traded on a stock exchange or effectively negotiable and regularly quoted on a market operated under the auspices of recognised professional operators and allowing, to the satisfaction of the competent authorities of the Member State of origin of the credit institution, for the establishment of an objective price such that the excess value of the securities may be verified at any time,

• (b) the excess value referred to in subparagraph (a) shall be -

• (i) subject to sub-subparagraphs (ii), (iii) and (iv), 100%,

• (ii) 150% in the case of shares issued by institutions, Member State regional governments or local authorities, other than those referred to in paragraph (1)(f),

• (iii) 50% in the case of debt securities issued by institutions, Member State regional governments or local authorities, other than those referred to in paragraph (1)(f),

• (iv) 50% in the case of debt securities issued by multilateral development banks other than those receiving a 0% risk-weighting under Chapter 2 of Part 4,

• (c) there shall not be a mismatch, in the securities used as collateral, between the maturity of the exposure and the maturity of the credit protection, and

• (d) securities used as collateral may not constitute credit institutions' own funds.

• (4) For the purposes of paragraph (1)(p) -

• (a) the value of the property shall be calculated, to the satisfaction of the Bank, on the basis of strict valuation standards laid down by law, regulation or administrative provisions,

• (b) valuation shall be carried out at least once a year, and

• (c) residential property shall mean a residence to be occupied or let by the borrower.

How collateral can be taken into account in the calculating credit risk in large exposure.

60.

• (2) Where paragraph (1) is applied to a credit institution, Regulation 59 (1)(f), (g), (h) and (o) shall not apply to the credit institution.

• (3) Subject to paragraphs (7) to (11), a credit institution permitted to use own estimates of LGDs and conversion factors for an exposure class under Chapter 3 of Part 4 may be permitted, where it is able to the satisfaction of the Bank to estimate the effects of financial collateral on its exposures separately from other LGD-relevant aspects, to recognise such effects in calculating the value of exposures for the purposes of Regulation 57 (1) to (5).

• (4) The Bank shall be satisfied as to the suitability of the estimates produced by the credit institution for use for the reduction of the exposure value for the purposes of compliance with Regulation 57.

• (5) Where a credit institution is permitted to use its own estimates of the effects of financial collateral, it shall do so on a basis consistent with the approach adopted in the calculation of capital requirements.

• (6) Credit institutions permitted to use own estimates of LGDs and conversion factors for an exposure class under Chapter 3 of Part 4 which do not calculate the value of their exposures using the method referred to in paragraph (3) may be permitted to use one only of -

• (a) the approach set out in paragraph (1), or

• (b) the exemption set out in Regulation 59(1)(o),

for calculating the value of exposures.

• (7) A credit institution which is permitted to use the methods described in paragraphs (1) to (6) in calculating the value of exposures for the purposes of Regulation 57(1) to (5) shall conduct periodic stress tests of their credit risk concentrations including in relation to the realisable value of any collateral taken.

• (8) The stress tests shall address risks arising from potential changes in market conditions that could adversely impact the credit institution's adequacy of own funds and risks arising from the realisation of collateral in stressed situations.

• (9) The credit institution shall satisfy the Bank that the stress tests carried out are adequate and appropriate for the assessment of such risks.

• (10) Where a stress test indicates a lower realisable value of collateral taken than would be permitted to be taken into account under paragraphs (1) and (2)or (3) to (6), as appropriate, the value of collateral permitted to be recognised in calculating the value of exposures for the purposes of Regulation 57 (1) to (5) shall be reduced accordingly.

• (11) Such credit institutions shall include the following in their strategies to address concentration risk:

• (a) policies and procedures to address risks arising from maturity mismatches between exposures and any credit protection on those exposures,

• (b) policies and procedures in the event that a stress test indicates a lower realisable value of collateral than taken into account under paragraphs (1) to (6), and

• (c) policies and procedures relating to concentration risk arising from the application of credit risk mitigation techniques, and in particular large indirect credit exposures (for example, a single issuer of securities taken as collateral).

• (12) Where the effects of collateral are recognised under the terms of paragraphs (1) and (2) or (3) to (6), any covered part of the exposure shall be treated as having been incurred to the collateral issuer rather than to the client.

• (13) In paragraph (1), “fully adjusted exposure value” means that calculated under Chapter 4 of Part 4 taking into account the credit risk mitigation, volatility adjustments, and any maturity mismatch (E^*).

Action to be taken by credit institution when obligations in other provisions of this Part are disapplied, etc.

61.

PART 7 QUALIFYING HOLDINGS OUTSIDE FINANCIAL SECTOR

Limits on qualifying holdings which may be held by credit institutions.

62.

• (2) The total amount of a credit institution's qualifying holdings in undertakings other than credit institutions, financial institutions or undertakings carrying on activities referred to in the second subparagraph of Article 43(2)(f) of Directive 86/635/EEC may not exceed 60% of its own funds.

• (3) The limits set out in paragraphs (1) and (2) may be exceeded only in exceptional circumstances.

• (4) Where paragraph (3) applies to a credit institution, the Bank shall require the institution to increase its own funds or to take other equivalent measures.

Exclusions from Regulation 62(1) and (2).

63.

• (2) Shares which are not financial fixed assets as defined in Article 35(2) of Directive 86/635/EEC shall not be included in the calculation.

Discretions of Bank.

64.

• (2) The Bank need not apply the limits set out in Regulation 62 (1) and (2) if it provides that 100% of the amounts by which a credit institution's qualifying holdings exceed those limits must be covered by own funds and that the latter shall not be included in the calculation under Regulation 19.

• (3) Where both the limits set out in Regulation 62 (1) and (2) are exceeded, the amount to be covered by own funds shall be the greater of the excess amounts.

PART 8 CREDIT INSTITUTIONS' ASSESSMENT PROCESS

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

65.

• (2) The strategies and processes referred to in paragraph (1) shall be subject to regular internal review to ensure that they remain comprehensive and proportionate to the nature, scale and complexity of the activities of the credit institution concerned.

PART 9 SUPERVISION AND DISCLOSURES BY COMPETENT AUTHORITIES

Review and evaluation by Bank of credit institutions' compliance with recast Directive (CI).

66.

• (2) The scope of the review and evaluation referred to in paragraph (1) shall be that of the requirements of the recast Directive (CI).

• (3) The Bank shall, on the basis of the review and evaluation referred to in paragraph (1), determine whether the arrangements, strategies, processes and mechanisms implemented by the credit institutions and the own funds held by them ensure a sound management and coverage of their risks.

• (4) Subject to paragraph (5), the Bank shall establish the frequency and intensity of the review and evaluation referred to in paragraph (1) having regard to the size, systemic importance, nature, scale and complexity of the activities of the credit institution concerned and taking into account the principle of proportionality.

• (5) The review and evaluation referred to in paragraph (1) shall be updated at least on an annual basis.

• (6) The review and evaluation referred to in paragraph (1) shall include the exposure of credit institutions to the interest rate risk arising from non-trading activities.

• (7) For the purposes of paragraph (6), measures shall be required in the case of credit institutions whose economic value declines by more than 20% of their own funds as a result of a sudden and unexpected change in interest rates the size of which shall be prescribed by the Bank and shall not differ between credit institutions.

Joint decisions of competent authorities.

67.

• (a) coordination of the gathering and dissemination of relevant or essential information in going concern and emergency situations, and

• (b) planning and coordination of supervisory activities in going concern as well as in emergency situations, including in relation to the activities in Regulation 66, in cooperation with the competent authorities involved.

• (2) In the case of applications for the permissions referred to in Regulations 29(1) to (4), 32(13) and 51 and in Part 6 of Annex III to the recast Directive (CI), respectively submitted by an EU parent credit institution and its subsidiaries, or jointly by the subsidiaries of an EU parent financial holding company, the Bank shall work together with any other EU competent authorities that have authorised any subsidiaries, in full consultation, to decide whether or not to grant the permission sought and to determine the terms and conditions, if any, to which such permission should be subject.

• (3) An application referred to in paragraph (2) shall be submitted only to the Bank.

• (4) The Bank shall make reasonable efforts to reach a joint decision with the other competent authorities on the application within six months.

• (5) This joint decision shall be set out in a document containing the fully reasoned decision which shall be provided to the applicant by the Bank.

• (6) The period referred to in subparagraph (4) shall begin on the date of receipt of the complete application by the Bank.

• (7) The Bank shall forward the complete application to the other competent authorities without delay.

• (8) In the absence of a joint decision between the competent authorities within six months, the Bank shall -

• (a) make its own decision on the application,

• (b) ensure that the decision is set out in a document, is fully reasoned and takes into account the views and reservations of the other competent authorities expressed during the six months period, and

• (c) provide the decision to the applicant and the other competent authorities.

• (9) The Bank shall apply any decisions made in pursuance of this Regulation by the competent authorities in the Member States of any parent entity of a subsidiary authorised by the Bank.

Reporting by Bank.

68.

• (2) The Bank, when it needs information which has already been given to another competent authority in respect of a group for which it is the consolidating supervisor, shall contact that competent authority whenever possible in order to prevent duplication of reporting to the various authorities involved in supervision.

Persons who direct business of financial holding company to be of good repute.

69.

Actions to be taken by Bank if credit institution does not meet the requirements of these Regulations.

70.

• (2) For the purposes of paragraph (1), the measures available to the Bank shall include the following:

• (a) obliging credit institutions to hold own funds in excess of the minimum level set out in Regulation 19,

• (b) requiring the reinforcement of the arrangements, processes, mechanisms and strategies implemented to comply with Regulation 16(3) and 4 (as inserted by Regulation 79) of the European Communities (Licensing and Supervision of Credit Institutions) Regulations 1992 and Regulation 65,

• (c) requiring credit institutions to apply a specific provisioning policy or treatment of assets, in terms of own funds requirements,

• (d) restricting or limiting the business, operations or network of credit institutions,

• (e) requiring the reduction of the risk inherent in the activities, products and systems of credit institutions.

• (3) The adoption of measures referred to in paragraph (2) shall be subject to Articles 44 to 52 of the recast Directive (CI).

• (4) A specific own funds requirement in excess of the minimum level laid down in Regulation 19 shall be imposed by the Bank at least on the credit institutions which do not meet the requirements set out under Regulation 16(3) and 4 (as inserted by Regulation 79) of the European Communities (Licensing and Supervision of Credit Institutions) Regulations 1992 and Regulations 55 and 65, or in respect of which a negative determination has been made on the issue described in Regulation 66(3), if the sole application of other measures is unlikely to improve the arrangements, processes, mechanisms and strategies sufficiently within an appropriate timeframe.

PART 10 DISCLOSURES BY COMPETENT AUTHORITIES

Disclosure by competent authorities.

71.

• (a) the texts of laws, regulations, administrative rules and general guidance adopted in the State in the field of prudential regulation,

• (b) the manner of exercise of the options and discretions available in Community legislation,

• (c) the general criteria and methodologies they use in the review and evaluation referred to in Regulation 66, and

• (d) without prejudice to the provisions set out in Section 2 of Chapter 1 of Title V to the recast Directive (CI), aggregate statistical data on key aspects of the implementation of the prudential framework in each Member State.

• (2) The disclosures provided for in paragraph (1) shall be -

• (a) sufficient to enable a meaningful comparison of the approaches adopted by the competent authorities of the different Member States,

• (b) published with a common format and updated regularly, and

• (c) accessible at a single electronic location.

PART 11 DISCLOSURES BY CREDIT INSTITUTIONS

Disclosures by credit institutions.

72.

• (2) Recognition by the Bank under Chapters 3 and 4 of Part 4 and Regulation 51 of the instruments and methodologies referred to in Part 3 of Annex XII to the recast Directive (CI) shall be subject to the public disclosure by credit institutions of the information set out therein.

• (3) Credit institutions shall adopt a formal policy to comply with the disclosure requirements set out in paragraphs (1) and (2), and have policies for assessing the appropriateness of their disclosures, including their verification and frequency.

Exceptions to disclosures required under Regulation 72.

73.

• (2) Notwithstanding Regulation 72, credit institutions may omit one or more items of information included in the disclosures listed in Parts 2 and 3 of Annex XII to the recast Directive (CI) if those items include information which, in the light of the criteria specified in points 2 and 3 of Part 1 of Annex XII to the recast Directive (CI), is regarded as proprietary or confidential.

• (3) In the exceptional cases referred to in paragraph (2), the credit institution concerned shall state in its disclosures the fact that the specific items of information are not disclosed, the reason for non-disclosure, and publish more general information about the subject matter of the disclosure requirement, except where these are to be classified as secret or confidential under the criteria set out in points 2 and 3 of Part 1 of Annex XII to the recast Directive (CI).

Publication of disclosures.

74.

• (a) on an annual basis at a minimum, and

• (b) as soon as is practicable.

• (2) Credit institutions shall determine whether more frequent publication than is provided for in paragraph (1) is necessary in the light of the criteria set out in point 4 of Part 1 of Annex XII to the recast Directive (CI).

Where disclosures are published.

75.

• (2) To the degree feasible, all disclosures shall be provided in one medium or location.

• (3) Equivalent disclosures made by credit institutions under accounting, listing or other requirements may be deemed to constitute compliance with Regulation 72.

• (4) Where disclosures are not included in the financial statements, credit institutions shall indicate where they can be found.

Powers of Bank relating to disclosures.

76.

• (a) to make one or more of the disclosures referred to in Parts 2 and 3 of Annex XII to the recast Directive (CI),

• (b) to publish one or more disclosures more frequently than annually, and to set deadlines for publication,

• (c) to use specific media and locations for disclosures other than the financial statements,

• (d) to use specific means of verification for the disclosures not covered by statutory audit.

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

Definition of “Principal Regulations”.

77.

Amendment of Regulation 3 of Principal Regulations.

78.

• “(3) The institutions to which 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) does not apply pursuant to Article 2 of that Directive shall, except in the case of the central banks of the Member States, be treated as financial institutions for the purposes of -

  • (a) Article 39 of that Directive, and

  • (b) Section 1 of Chapter 4 of Title V to that Directive.”.

Amendment of Regulation 16 of Principal Regulations.

79.

• “(3) Subject to paragraph (4), every credit institution shall have robust governance arrangements including -

  • (a) a clear organisational structure with well defined, transparent and consistent lines of responsibility,

  • (b) effective processes to identify, manage, monitor and report the risks it is or might be exposed to,

  • (c) adequate internal control mechanisms, and

  • (d) without prejudice to the generality of subparagraph (c), sound administrative and accounting procedures.

• (4) Every credit institution shall, for the purposes of complying with paragraph (3) -

  • (a) ensure that the arrangements, processes and mechanisms referred to in that paragraph are comprehensive and proportionate to the nature, scale and complexity of the activities of the institution, and

  • (b) take into account the technical criteria set out in Annex V to Directive 2006/48/EC.”.

Amendment of Regulation 20 of Principal Regulations.

80.

• (a) in subparagraph (g), by deleting “and” where it last occurs,

• (b) in subparagraph (h), by substituting “with; and” for “with.”, and

• (c) by inserting the following after subparagraph (h):

• “(i) the financial institution is effectively included, for the activities in question in particular, in the consolidated supervision of the parent undertaking, or of each of the parent undertakings, in accordance with Part 9 of the European Communities (Capital Adequacy of Credit Institutions) Regulations 2006 [S.I. [..] of 2006), in particular for the purposes of the minimum own funds requirements set out in Regulation 19 of those Regulations for the control of large exposures and for purposes of the limitation of holdings provided for in Part 7 of those Regulations.”.

Amendment of Regulation 23 of Principal Regulations.

81.

• “(3) Branches which have commenced their activities, in accordance with the provisions in force in their host Member States, before 1 January 1993, shall be -

  • (a) presumed to be subject to the procedure set out in Regulation 21(1), and

  • (b) governed, on and from that date, by Regulations 18, 20(1) and 21(2) and (3) in addition to Regulations 23(3)(h), 27, 29 and 30.”.

PART 13 TRANSITIONAL PROVISIONS

Transitional provisions - general.

82.

• (2) Credit institutions using Regulation 51 for the calculation of their capital requirements for operational risk shall, during the second and third twelve-month periods after 31 December 2006, provide own funds which are at all times more than or equal to the amounts indicated in paragraphs (4) and (5).

• (3) For the first twelve-month period referred to in paragraph (1), the amount of own funds shall be 95% of the total minimum amount of own funds that would be required to be held during that period by the credit institution under Article 4 of Directive 93/6/EEC of 15 March 1993 on the capital adequacy of investment firms and credit institutions as that Directive and Directive 2000/12/EC¹⁰ stood prior to 1 January 2007.

• (4) For the second twelve-month referred to in paragraph (1), the amount of own funds shall be 90% of the total minimum amount of own funds that would be required to be held during that period by the credit institution under Article 4 of Directive 93/6/EEC as that Directive and Directive 2000/12/EC stood prior to 1 January 2007.

• (5) For the third twelve-month period referred to in paragraph (1), the amount of own funds shall be 80% of the total minimum amount of own funds that would be required to be held during that period by the credit institution under Article 4 of Directive 93/6/EEC as that Directive and Directive 2000/12/EC stood prior to 1 January 2007.

• (6) Compliance with the requirements of paragraphs (1) to [(4)] shall be on the basis of amounts of own funds fully adjusted to reflect differences in the calculation of own funds under Directive 2000/12/EC and Directive 93/6/EEC as those Directives stood prior to 1 January 2007 and the calculation of own funds under the recast Directive (CI) deriving from the separate treatments of expected loss and unexpected loss under Chapter 3 of Part 4.

• (7) For the purposes of paragraphs (1) to (6), Regulations 13 to 17 shall apply.

• (8) Until 1 January 2008 credit institutions may treat the Articles constituting the Standardised Approach set out in Subsection 1 of Section 3 of Chapter 2 of Title V to the recast Directive (CI) as being replaced by Articles 42 to 46 of Directive 2000/12/EC as those Articles stood prior to 1 January 2007, and Chapter 2 of Part 4 shall be construed accordingly.

• (9) Where the discretion referred to in paragraph (8) is exercised, the following shall apply concerning the provisions of Directive 2000/12/EC:

• (a) the provisions of that Directive referred to in Articles 42 to 46 shall apply as they stood prior to 1 January 2007,

• (b) “risk-adjusted value” as referred to in Article 42(1) of that Directive shall mean “risk-weighted exposure amount”,

• (c) the figures produced by Article 42(2) of that Directive shall be considered risk-weighted exposure amounts,

• (d) “credit derivatives” shall be included in the list of “Full risk” items in Annex II to that Directive, and

• (e) the treatment set out in Article 43(3) of that Directive shall apply to derivative instruments listed in Annex IV to that Directive whether on- or off-balance sheet and the figures produced by the treatment set out in Annex III to that Directive shall be considered risk-weighted exposure amounts.

• (10) Where the discretion referred to in paragraph (8) is exercised, the following shall apply in relation to the treatment of exposures for which Chapter 2 of Part 4 is used:

• (a) Chapter 4 of Part 4 shall not apply,

• (b) Chapter 5 of Part 4 may be disapplied by the Bank.

• (11) Where the discretion referred to in paragraph (8) is exercised, the capital requirement for operational risk under Regulation 19(d) shall be reduced by the percentage representing the ratio of the value of the credit institution's exposures for which risk-weighted exposure amounts are calculated in accordance with the discretion referred to in that paragraph to the total value of its exposures.

• (12) Where a credit institution calculates risk-weighted exposure amounts for all of its exposures in accordance with the discretion referred to in paragraph (8), Articles 48 to 50 of Directive 2000/12/EC relating to large exposures may apply as they stood prior to 1 January 2007.

• (13) Where the discretion referred to in paragraph (8) is exercised, references to Articles 78 to 83 of the recast Directive (CI) shall be read as references to Articles 42 to 46 of Directive 2000/12/EC as those Articles stood prior to 1 January 2007, and Chapter 2 of Part 4 shall be construed accordingly.

• (14) Where the discretion referred to in paragraph (8) is exercised, Regulations 65, 66, 72 and 76 shall not apply before 1 January 2008.

Transitional provisions - calculation of risk-weighted exposure amounts for certain exposures, etc.

83.

• (2) Until 31 December 2010, the Bank may, for the purpose of defining the secured portion of a past due loan for the purposes of Annex VI to the recast Directive (CI), recognise collateral other than eligible collateral as set out under Chapter 4 of Part 4.

• (3) In the calculation of risk-weighted exposure amounts for the purposes of point 4 of Part 1 of Annex VI to the recast Directive (CI), until 31 December 2012 the same risk-weight shall be assigned in relation to exposures to Member States' central governments or central banks denominated and funded in the domestic currency of any Member State as would be applied to such exposures denominated and funded in their domestic currency.

Transitional provisions - discretions of Bank.

84.

• (2) Where the Bank does not exercise the discretion provided for in paragraph (1) in relation to exposures in the State, it may set a higher number of days for exposures to counterparties situated in the territories of other Member States, the competent authorities of which have exercised the discretion except that the specific number shall fall within 90 days and such figures as the other competent authorities have set for exposures to such counterparties within their territory.

• (3) For credit institutions applying for the use of the IRB Approach before 2010, subject to the approval of the Bank, the three years' use requirement prescribed in Regulation 29(5) may be reduced to a period not shorter than one year until 31 December 2009.

• (4) For credit institutions applying for the use of own estimates of LGDs or conversion factors, or both, the three year use requirement prescribed in Regulation 29(5) may be reduced to two years until 31 December 2008.