Substitution approach for exposure and guarantor under different approaches

In case a bank has both SA and IRB positions it is possible to apply the substitution approach when the exposure and the guarantor are treated by the institution under different approaches. If the exposure is under the F-IRB approach and the guarantor under the SA the substitution approach may be applied pursuant to Article 108(1) and Article 235 CRR; if the exposure is under A-IRB approach and the guarantor under the SA the substitution approach can be applied in accordance to Article 108(2) and Article 183(4) CRR. The reporting of CRM techniques with substitution effect is explained in section 3.1.1 of Annex II to Regulation (EU) No 680/2014 (ITS on Supervisory Reporting). If a bank applies the IRB and an IRB exposure guaranteed by a guarantor that is under the SA and they apply the substitution approach at the level of the exposure, this guarantee is shown in the column outflows (070) and also included in the column original exposure amount pre conversion factor (020) of templates C 08.01 and C 08.02 (see Annex II, Part 2, sections 3.3.3.1 and 3.3.4, columns 070-080). The corresponding inflow is reported in the columns inflow (100) of template C 07.00. In the breakdown by obligor grades or pools (C 08.02 Template), the exposure is broken down according to the PD of the obligor in columns 020 and 030, before the application of the substitution approach. From column 070 (outflows) onwards it is broken down according to the PD of the obligor taking into account the effect of the guarantee (if applicable).