EBA · 2015_2058 Final Q&A

Number of distinct calculations required to assess materiality of changes to internal IRC models

Regulation
Regulation (EU) No 575/2013 (CRR)
Article
363, para. 3
Topic
Market risk
Submitted by
Competent authority
Submitted
2015-06-22
Answered
2015-09-25
Answer provided by
ESAs (EBA, ESMA, EIOPA)
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Question

Regulation (EU) No 529/2014 governs the assessment of materiality of changes and extensions to internal approaches for credit, market and operational risk. According to this regulation a change to the incremental default and migration risk charge (IRC) is to be considered material if within 15 consecutive business days (Article 7a(4)(a)) the thresholds of Article 7a(1)(c)(ii) are breached at least once. According to Article 374(1) CRR institutions may compute the IRC only weekly. Does this mean that?

Background

At ECB, we received a series of requests for changes to IMA in market risk. We were asked about the requirements to assess the materiality, w.r.t. the required frequency of parallel calculations for IRC models, in particular for banks that compute their IRC only on a weekly basis.

Answer

Yes, in case an institution computes the incremental default and migration risk charge (IRC) weekly, in accordance with Regulation (EU) No 529/2014, three calculations are enough to decide upon the materiality of changes to IRC model. Moreover, in line with EBA/GL/2012/3 paragraph 29(2): "the institution should be able to prove that, on the day of the week chosen for the IRC calculation, its portfolio is representative of the portfolio held during the week and that the chosen portfolio does not lead to a systematic underestimation of the IRC numbers when computed weekly".

Original source: European Banking Authority, Q&A ID 2015_2058

This Q&A is published by European Banking Authority and is non-binding. It does not constitute legal advice. Updated weekly from official ESA sources.

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