Credit Risk: Internal Ratings Based Approach (CRR)

1.

[Note: Provision left blank]

2.

[Note: Provision left blank]

1.

1.  
2. (a) An institution may, with the prior permission of the PRA, use the IRB Approach if, when it applies for IRB permission, it can demonstrate to the satisfaction of the PRA that its arrangements for using the IRB Approach materially comply with this Part.
3. (b) For the purpose of point (a), an institution shall be considered to materially comply with this Part if:
1. (i) the effect of any non-compliance is immaterial for each of its rating systems; and
2. (ii) the overall effect of any non-compliance is immaterial.

[Note: Rules 1.1 and 1.2 together with Article 143(1) and (2A) are a permission under sections 144G and 192XC of FSMA to which Part 8 of the Capital Requirements Regulations applies]

2.

[Note: Provision left blank]

2A.

An institution shall, when making an application under paragraph 1 to the PRA, make clear in relation to each exposure class, exposure subclass or type of exposures, as the case may be, its proposal to adopt one or more of the following IRB Approaches instead of the Standardised Approach:

1. (a) the Slotting Approach;
2. (b) the Foundation IRB Approach; or
3. (c) the Advanced IRB Approach.

[Note: Rules 1.1 and 1.2 together with this Article 143(1) and (2A) are a permission under sections 144G and 192XC of FSMA to which Part 8 of the Capital Requirements Regulations applies]

2B.

An institution with an IRB permission may, with the further prior permission of the PRA, in relation to an exposure class, exposure subclass or type of exposures, adopt:

1. (a) instead of the Standardised Approach, any of the IRB Approaches in points (a) to (c) in paragraph 2A, and
2. (b) where it already uses an IRB Approach, any of the following more sophisticated IRB Approaches:
1. (i) the Foundation IRB Approach instead of the Slotting Approach,
2. (ii) the Advanced IRB Approach instead of the Slotting Approach, or
3. (iii) the Advanced IRB Approach instead of the Foundation IRB Approach,

in each case only if the institution can demonstrate to the satisfaction of the PRA that the change proposed in the application materially complies with this Part.

[Note: Article 143(2B) together with (2C) is a permission under sections 144G and 192XC of FSMA to which Part 8 of the Capital Requirements Regulations applies]

2C.

For the purpose of paragraph 2B, the change proposed in an application shall be considered to materially comply with this Part if it fully complies with this Part or if both of the following conditions are met:

1. (a) the effect of any non-compliance for each of the institution’s relevant rating systems would be immaterial if the institution made the proposed change; and
2. (b) the overall effect of the non-compliance would be immaterial if the institution made the proposed change.

[Note: Article 143(2C) together with (2B) is a permission under sections 144G and 192XC of FSMA to which Part 8 of the Capital Requirements Regulations applies]

3.

1.  
2. (a) An institution may, with the prior permission of the PRA:
1. (i) make material changes to the range of application of a rating system that the institution has received permission to use, or
2. (ii) make material changes to a rating system that the institution has received permission to use,

if it is able to demonstrate to the satisfaction of the PRA that it meets at least one of the conditions in point (b);

[Note: This is a permission under sections 144G and 192XC of FSMA to which Part 8 of the Capital Requirements Regulations applies]

1. (b) The conditions referred to in point (a) are that:
   1. (i) the changes proposed in the application under point (a) materially comply with this Part; or
   2. (ii) the institution is remediating non-compliance in its rating systems and the proposed changes under point (a) reduce the extent or degree of such non-compliance, and no exposures would become subject to a more sophisticated approach;

Point (b)(ii) shall not be considered to be met where an exposure becomes subject to a more sophisticated approach from a less sophisticated approach (that is, from the Standardised Approach to the IRB Approach, from the Foundation IRB Approach to the Advanced IRB Approach, or from the Slotting Approach to either the Foundation IRB Approach or the Advanced IRB Approach).

1. (c) For the purpose of point (b)(i), the changes proposed in the application shall be considered to materially comply with this Part if they fully comply with this Part or if both of the following conditions are met:
2. (i) the effect of any non-compliance for each relevant rating system would be immaterial if the institution made the proposed changes; and
3. (ii) the overall effect of non-compliance would be immaterial if the institution made the proposed changes.

3A.

The range of application of a rating system shall comprise all exposures of the relevant type of exposures for which that rating system was developed.

4.

An institution shall:

1. (a) at least annually, submit details to the PRA of all rating systems that are included within the scope of its IRB permission; and
2. (b) notify the PRA in accordance with Article 143D(1) of all changes to rating systems for which PRA permission is not required in accordance with this Article.

5.

[Note: Provision left blank]

6.

An institution may, with the prior permission of the PRA, use the Overseas Model Approach, if it can demonstrate to the satisfaction of the PRA that its use of the Overseas Model Approach complies with the following conditions:

1. (a) the aggregate amount of risk-weighted exposure amounts calculated using the Overseas Model Approach is no more than 7.5% of the group credit risk risk-weighted exposure amounts and the aggregate exposure value using the Overseas Model Approach is no more than 7.5% of the group’s total exposure value, as calculated by the institution on a consolidated basis and prior to the application of the output floor;
2. (b) the scope of the rating system only includes exposures of a type specified in point (c) that are located within a subsidiary in an equivalent jurisdiction, as determined under Article 114(7) of CRR, the model used in the Overseas Model Approach has been reviewed and approved for the purpose of the institution calculating its local capital requirements by the relevant overseas regulator, and the institution uses that model to calculate local capital requirements in that jurisdiction;
3. (c) the scope of the rating system only includes one or both of the following:
   1. (i) retail exposures;
   2. (ii) exposures to SMEs that are in the corporate exposure class, as set out in point (a)(ii) of Article 147(5);
4. (d) the outputs of the rating system (such as estimates of PD, LGD, and conversion factors or EAD) are derived using both historical experience and empirical evidence (and not based purely on judgemental considerations), and the estimates are plausible, intuitive and based on the material drivers of the respective risk parameters;
5. (e) the population of exposures represented in the data used for estimation, the lending standards used when the data were generated, and other relevant characteristics, are comparable with those of the institution’s exposures and standards;
6. (f) the number of exposures in the sample and the data period used for quantification are sufficient to provide confidence in the accuracy and robustness of estimates;
7. (g) the rating system provides a meaningful differentiation of risk and is able to produce accurate and consistent quantitative estimates of risk;
8. (h) material weaknesses in the rating system are adequately compensated by an adjustment to parameter estimates;
9. (i) the rating system is subject to appropriate internal governance processes, with senior management in the overseas subsidiary possessing a general understanding of the rating system of the institution and detailed comprehension of its associated management reports;
10. (j) the rating system is subject to an appropriate validation of internal estimates process, with the process being objective, consistent, and accurate; and
11. (k) the rating system is used to inform credit risk decisions.

[Note: This is a permission under sections 144G and 192XC of FSMA to which Part 8 of the Capital Requirements Regulations applies]

7.

Where, on 31 December 2026, an institution had PRA permission to use the Overseas Model Approach as part of its IRB permission under Article 143 of CRR, as that provision existed on 31 December 2026, the institution shall, after 31 December 2026, be treated as having permission under paragraph 6.

8.

An institution with PRA permission to use the Overseas Model Approach shall ensure that its use of the Overseas Model Approach complies with each of the conditions in paragraph 6 on an ongoing basis.

[Note: This rule corresponds to Article 143(1) to (4) of CRR as it applied immediately before revocation by the Treasury]

1.

An institution shall classify the materiality of changes to the range of application of a rating system or of changes to a rating system into one of the following categories:

1. (a) material changes which, as specified in Article 143(3), require permission from the PRA; or
2. (b) other changes, which, as specified in point (b) of Article 143(4) require notification to the PRA.

2.

The changes referred to in point (b) of paragraph 1 shall further be classified into:

1. (a) changes that require notification before their implementation as specified in Article 143D; or
2. (b) changes that require notification after their implementation.

1.

An institution shall, where it is required to calculate the quantitative impact of any change on risk-weighted exposure amounts under Article 143C and Article 143D, apply the following methodology:

1. (a) for the purpose of the assessment of the quantitative impact the institution shall use the most recent data available;
2. (b) where a precise assessment of the quantitative impact is not feasible, the institution shall instead perform an assessment of the impact based on a representative sample or other reliable inference methodologies; and
3. (c) for changes having no direct quantitative impact, no quantitative impact as laid down in point (c) of Article 143C(1), needs to be calculated.

2.

An institution shall not split one material change into several changes of lower materiality.

3.

In case of doubt, an institution shall assign changes to the category of the highest potential materiality.

4.

An institution shall, where the PRA has granted permission in relation to a material change, calculate risk-weighted exposure amounts and expected loss amounts based on the approved material change from the date specified in the new permission, and shall not use the version of the rating system specified in the previous permission.

4A.

If an institution:

1. (a) decides not to implement an approved material change, it shall apply to the PRA for permission to not implement the change; or
2. (b) wishes to vary the implementation date specified in a permission, it shall apply to the PRA for permission to do so.

[Note: This is a permission under sections 144G and 192XC of FSMA to which Part 8 of the Capital Requirements Regulations applies]

5.

An institution shall, in case of delay of the implementation of a change for which permission from the PRA has been granted, notify the PRA and present to the PRA a plan for a timely implementation of the approved change, which it shall realise within a reasonable time.

6.

An institution shall, where a change is classified as one requiring prior notification to the PRA, and where, subsequent to the notification, the institution decides not to implement the change, notify the PRA of this decision without undue delay.

1.

For the purposes of Article 143(3), changes to the IRB Approach shall be considered material if they fulfil any of the following conditions:

1. (a) they fall under any of the changes to the range of application of a rating system described in Appendix 2, Part 1, Section 1;
2. (b) they fall under any changes to the rating systems described in Appendix 2, Part 2, Section 1;
3. (c) the change results in the institution’s risk-weighted exposure amounts:
   1. (i) decreasing by 1.5% or more for either of the following:
      1. (1) on a consolidated basis, the overall UK parent institution’s risk-weighted exposure amounts for credit and dilution risk;
      2. (2) the overall risk-weighted exposure amounts for credit and dilution risk in the case of an institution which is neither a parent institution, nor a subsidiary;
   2. (ii) decreasing by 15% or more of the risk-weighted exposure amounts for credit and dilution risk associated with the range of application of the rating system.

2.

For the purposes of point (c)(i) of paragraph 1, and in accordance with Article 143B(1), the impact of the change shall be assessed as a ratio calculated as follows:

1. (a) in the numerator, the difference in the risk-weighted exposure amounts for credit and dilution risk associated with the range of application of the rating system before and after the change at the UK parent institution's consolidated level or at the institution level which is neither a parent institution, nor a subsidiary;
2. (b) in the denominator, the overall risk-weighted exposure amounts for credit and dilution risk before the change at the UK parent institution's consolidated level or, at the institution level which is neither a parent institution, nor a subsidiary.

The calculation shall refer to the same point in time, and the set of exposures shall be assumed to remain constant.

3.

For the purposes of point (c)(ii) of paragraph 1, and in accordance with Article 143B(1), the impact of the change shall be assessed as a ratio calculated as follows:

1. (a) in the numerator, the difference in the risk-weighted exposure amounts for credit and dilution risk associated with the range of application of the rating system before and after the change;
2. (b) in the denominator, the risk-weighted exposure amounts for credit and dilution risk before the change associated with the range of application of the rating system.

The calculation shall refer to the same point in time, and the set of exposures shall be assumed to remain constant.

1.

An institution shall, for changes to the IRB Approach as specified in its IRB permission which are not material (in accordance with Article 143C) but which are to be notified to the PRA in accordance with point (b) of Article 143(4), notify the PRA as follows:

1. (a) changes which fulfil any of the following conditions shall be notified to the PRA at least two months before their implementation:
1. (i) changes described in Appendix 2, Part 1, Section 2;
2. (ii) changes described in Appendix 2, Part 2, Section 2;
3. (iii) changes which result in a decrease of 5% or more of the risk-weighted exposure amounts for credit and dilution risk associated with the range of application of the rating system;
2. (b) all other changes shall be notified to the PRA after their implementation at least on an annual basis.

2.

For the purposes of point (a)(iii) of paragraph 1, and in accordance with Article 143B(1), the impact of the change shall be assessed as a ratio calculated as follows:

1. (a) in the numerator, the difference in the risk-weighted exposure amounts for credit and dilution risk associated with the range of application of the rating system before and after the change;
2. (b) in the denominator, the risk-weighted exposure amounts for credit and dilution risk before the change associated with the range of application of the rating system.

The calculation shall refer to the same point in time, and the set of exposures shall be assumed to remain constant.

1.

An institution shall, for changes to the IRB Approach classified as requiring the permission of the PRA, submit, together with the application, the following documentation:

1. (a) description of the change, its rationale and objective;
2. (b) proposed implementation date;
3. (c) scope of application affected by the model change;
4. (d) technical and process document(s);
5. (e) reports of the institution’s independent review or validation;
6. (f) confirmation that the change has been approved through the institution's approval processes by its management body or a designated committee under Article 189(1), and the date of approval;
7. (g) where applicable, the quantitative impact of the change on the risk-weighted exposure amounts or expected loss amounts.

2.

An institution shall, for changes classified as requiring notification either before or after implementation, submit, together with the notification, the documentation referred to in points (a) to (g) of paragraph 1.

1.

An institution shall meet the following requirements when using the IRB Approach:

1. (a) each of the institution’s rating systems shall provide for a meaningful assessment of obligor and transaction characteristics, a meaningful differentiation of risk and accurate and consistent quantitative estimates of risk;
2. (b) internal ratings and default and loss estimates used in the calculation of own funds requirements and associated systems and processes shall 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 institution;
3. (c) the institution has a credit risk control unit responsible for each rating system that is appropriately independent and free from undue influence;
4. (d) the institution collects and stores all relevant data to provide effective support to its credit risk measurement and management process;
5. (e) the institution documents each rating system and the rationale for their design, and validates each rating system;
6. (f) the institution has validated each rating system during an appropriate time period prior to the permission to use each rating system, has assessed during this time period whether each rating system is suited to the range of application of each rating system, and has made necessary changes to each rating system following its assessment;
7. (g) the institution has calculated under the IRB Approach the own funds requirements resulting from its risk parameters estimates and is able to submit the reporting as required by Chapter 4 of Reporting (CRR) Part Article 430; and
8. (h) the institution has assigned and continues to assign each exposure in the range of application of a rating system to a rating grade or pool of each rating system.

1A.

Where the institution has implemented a rating system, or model used within a rating system, that it has purchased from a third-party vendor, the institution shall ensure that the rating system or model, as the case may be, and their use by the institution, complies with this Part.

2.

[Note: Provision left blank]

[Note: This rule corresponds to Article 144(1) of CRR as it applied immediately before revocation by the Treasury]

1.

An institution applying for permission to use the IRB Approach shall demonstrate to the satisfaction of the PRA that it has been using for the IRB exposure classes in question rating systems that were broadly in line with the requirements set out in Section 6 for internal risk measurement and management purposes for at least three years prior to its qualification to use the IRB Approach.

2.

An institution applying for permission to use the Advanced IRB Approach for non-retail exposures shall demonstrate to the satisfaction of the PRA that it has been estimating and employing own estimates of LGDs, and conversion factors or EADs, in a manner that is broadly consistent with the requirements for use of own estimates of those parameters set out in Section 6 for at least three years prior to qualification to use the Advanced IRB Approach for non-retail exposures.

3.

Where an institution applies for a permission to extend the use of the IRB Approach as provided for in its IRB permission, the institution shall demonstrate to the satisfaction of the PRA that its experience as previously evidenced is sufficient to satisfy the requirements of paragraphs 1 and 2 in respect of the additional exposures covered. If the use of a rating system is extended to exposures that are significantly different from the scope of the existing coverage, such that the existing experience is not reasonably considered sufficient to meet the requirements of these provisions in respect of the additional exposures, then the institution shall confirm to the PRA in writing and submit documentary evidence that demonstrates that it meets the requirements of paragraphs 1 and 2 in relation to the additional exposures.

[Note: This rule corresponds to Article 145 of CRR as it applied immediately before revocation by the Treasury]

1.

Where an institution which has been granted a permission by the PRA to use the IRB Approach does not comply with the requirements laid down in this Part, it shall notify the PRA promptly and do one of the following:

1. (a) demonstrate that the effect of non-compliance is immaterial; or
2. (b) present a plan for addressing non-compliance in a timely way such that the effect of non-compliance would become immaterial under point (a) or the institution would become compliant, and realise this plan within a reasonable time period.

2.

For the purposes of point (a) of paragraph 1, the institution shall confirm to the PRA in writing and submit documentary evidence that demonstrates that:

1. (a) it has taken into account all instances of non-compliance with the requirements;
2. (b) the effect of non-compliance is immaterial for each rating system; and
3. (c) the overall effect of non-compliance is immaterial.

3.

An institution shall, where the non-compliance referred to in paragraph 1 results in a material reduction in risk-weighted exposure amounts or expected loss amounts for a particular rating system, quantify the following post model adjustments to offset the impact of non-compliance in relation to risk-weighted exposure amounts and expected loss amounts:

1. (a) an adjustment in respect of risk-weighted exposure amounts relating to exposures to institutions and corporates;
2. (b) an adjustment in respect of risk-weighted exposure amounts relating to retail exposures; and
3. (c) an adjustment in respect of expected loss amounts.

[Note: This rule corresponds to Article 146 of CRR as it applied immediately before revocation by the Treasury]

1.

An institution shall ensure that the methodology it uses for assigning exposures to different exposure classes is appropriate and consistent over time.

2.

An institution shall assign each exposure to one of the following exposure classes and exposure subclasses as the case may be:

1. (a) exposures to central governments, central banks or quasi-sovereigns
2. (b) exposures to institutions;
3. (c) exposures to corporates, which shall be divided into the following exposure subclasses:
   1. (i) specialised lending exposures;
   2. (ii) financial corporates and large corporates; and
   3. (iii) other general corporates;
4. (d) retail exposures, which shall be divided into the following exposure subclasses:
   1. (i) qualifying revolving retail exposures;
   2. (ii) retail exposures secured by residential immovable property; and
   3. (iii) other retail;
5. (e) equity exposures;
6. (ea) exposures in the form of units or shares in a CIU;
7. (f) items representing securitisation positions;
8. (g) other non-credit obligation assets.

3.

Exposures to any of the following entities shall be assigned to the exposure class referred to in point (a) of paragraph 2:

1. (a) central governments;
2. (b) central banks;
3. (c) regional governments;
4. (d) local authorities;
5. (e) public sector entities;
6. (f) multilateral development banks;
7. (g) international organisations which are assigned a risk weight of 0% under paragraph 1 of Credit Risk: Standardised Approach (CRR) Part Article 118;
8. (h) deferred tax assets which are assigned a risk weight of 250% under paragraph 4 of Own Funds (CRR) Part Article 48.

4.

The following exposures shall be assigned to the exposure class referred to in point (b) of paragraph 2 (exposures to institutions):

1. (a) exposures to institutions, with the exception of any exposures that are assigned to the exposure class referred to in point (e) of paragraph 2 (equity exposures) in accordance with paragraph 6;
2. (b) exposures to financial institutions treated as exposures to institutions in accordance with Credit Risk: Standardised Approach (CRR) Part Article 119(5), with the exception of any exposures that are assigned to the exposure class referred to in point (e) of paragraph 2 (equity exposures) in accordance with paragraph 6.

4A.

Any credit obligation not assigned to an exposure class referred to in points (a), (b), (d), (e), (ea) and (f) of paragraph 2 shall be assigned to the corporate exposure class referred to in point (c) of that paragraph (exposures to corporates).

4B.

Exposures to corporates shall be assigned to the specialised lending exposure subclass referred to in point (c)(i) of paragraph 2, if they possess all of the following characteristics, in legal form or economic substance:

1. (a) the exposure is to an entity which was created specifically to finance and/or operate physical assets;
2. (b) the borrowing entity has few or no other material assets or activities, and therefore little or no independent capacity to repay the obligation, apart from the income that it receives from the asset(s) being financed;
3. (c) the terms of the obligation give the lender a substantial degree of control over the asset(s) and the income that it generates; and
4. (d) as a result of points (a) to (c), the primary source of repayment of the obligation is the income generated by the asset(s), rather than the independent capacity of a broader commercial enterprise.

Specialised lending exposures shall be assigned to one of the following categories (in accordance with their definitions): object finance exposures, project finance exposures, commodities finance exposure, IPRE exposures or HVCRE exposures. Specialised lending exposures that can meet both the definition of IPRE exposures and HVCRE exposures shall be assigned to HVCRE exposures.

4C.

Exposures to corporates shall be assigned to the financial corporates and large corporates exposure subclass referred to in point (c)(ii) of paragraph 2 if:

1. (a) they do not fall within the specialised lending exposure subclass referred to in point (c)(i) of paragraph 2; and
2. (b) the exposures are to:
1. (i) financial sector entities; or
2. (ii) ‘large’ corporates with annual revenue of more than GBP 440 million, taken at the highest level of consolidation which is performed and at which audited financial statements are available, if applicable. For this purpose, annual revenue shall be calculated as the average annual amount over the last three years.

4D.

Any other exposures to corporates not assigned to the exposure subclasses referred to in points (c)(i) or (c)(ii) of paragraph 2 shall be assigned to the exposure subclass referred to in point (c)(iii) of paragraph 2 (other general corporates).

5.

An institution shall ensure that exposures assigned to the retail exposures exposure class referred to in point (d) of paragraph 2, meet the following criteria:

1. (a) they are one of the following:
1. (i) exposures to one or more natural persons; or
2. (ii) exposures to an SME, provided that the total amount owed (including past due exposures) to the institution, its parent undertakings, its subsidiaries and subsidiaries of its parent undertakings by the obligor or group of connected clients, excluding exposures secured by residential immovable property collateral, shall not exceed GBP 880,000; 
2. (b) they are treated by the institution in its risk management consistently over time and in a similar manner;
3. (c) they are not managed just as individually as exposures in the corporate exposure class; and
4. (d) they each represent one of a significant number of similarly managed exposures.

In addition to the exposures listed in the first sub-paragraph, the present value of retail minimum lease payments shall be included in the retail exposures retail exposure class.

5A.

Retail exposures shall be assigned to the qualifying revolving retail exposures exposure subclass referred to in point (d)(i) of paragraph 2, if they meet the following conditions:

1. (a) the exposures are to individuals;
2. (b) the exposures are revolving, unsecured, and to the extent they are not drawn, immediately and unconditionally cancellable by the institution. For the purpose of this point:
1. (i) revolving exposures are defined as those where customers’ outstanding balances are permitted to fluctuate based on their decisions to borrow and repay, up to a limit established by the institution; and
2. (ii) undrawn commitments may be considered as unconditionally cancellable if the terms permit the institution to cancel them to the full extent allowable under consumer protection and related legislation;
3. (c) the largest aggregate nominal exposure to a single individual, out of all aggregate nominal exposures to individuals in the sub-portfolio, is GBP 90,000 or less;
4. (d) the use of the coefficient of correlation referred to in Article 154(4) is limited to portfolios that have exhibited low volatility of loss rates, relative to their average level of loss rates, especially within the low PD bands; and
5. (e) the treatment as a qualifying revolving retail exposure shall be consistent with the underlying risk characteristics of the sub-portfolio.

By way of derogation from point (b), the requirement to be unsecured does not apply in respect of collateralised credit facilities linked to a wage account. In this case, amounts recovered from the collateral connected to those credit facilities shall not be taken into account in the LGD estimate.

An institution shall identify qualifying revolving retail exposures as either transactor exposures or non-transactor exposures. In particular, qualifying revolving retail exposures with less than 12 months of repayment history shall be identified as exposures that are non-transactor exposures.

5B.

The following exposures shall be assigned to the exposure subclass referred to in point (d)(ii) of paragraph 2: retail exposures secured by residential immovable property.

5C.

Any other retail exposures not assigned to the exposure subclasses referred to in points (d)(i) or (d)(ii) of paragraph 2 shall be assigned to the exposure subclass referred to in point (d)(iii) of paragraph 2 (other retail).

6.

The following exposures shall be assigned to the exposure class referred to in point (e) of paragraph 2: 

1. (a) equity exposures which are not exposures in the form of units or shares in a CIU;
2. (b) exposures which are assigned a risk weight of 1,250% in accordance with paragraph 3 of Own Funds (CRR) Part Article 89; and
3. (c) exposures which are not deferred tax assets and which are assigned a risk weight of 250% in accordance with paragraph 4 of Own Funds (CRR) Part Article 48.
   

6A.

The following exposures shall be assigned to the exposure class referred to in point (ea) of paragraph 2: exposures in the form of units or shares in a CIU.

7.

[Note: Provision left blank. See paragraph 4A]

8.

The following exposures shall be assigned to the exposure class referred to in point (g) of paragraph 2: other non-credit obligation assets. This shall include the residual value of leased properties, except to the extent that residual value is already included in the lease exposure referred to in Article 166A(4).

9.

The exposure from providing protection under an nth-to-default basket credit derivative shall be assigned to the same single exposure class referred to in paragraph 2 to which the underlying exposures in the basket would be assigned, provided that if the individual exposures in the basket would be assigned to more than one exposure classes, the exposure shall be assigned to the corporates exposure class referred to in point (c) of paragraph 2.

[Note: This rule corresponds to Article 147 of CRR as it applied immediately before revocation by the Treasury]

1.

An institution shall, for the purpose of calculating the own funds requirement for credit risk, for exposures assigned to the exposure class or exposure subclass, as the case may be, set out in this Article, use the following specified approaches:

1. (a) for point (a) of Article 147(2) (central governments, central banks or quasi-sovereigns), the Standardised Approach;
2. (b) for point (b) of Article 147(2) (institutions):
   1. (i) the Standardised Approach for exposures where permission has been granted under Article 148 or Article 150;
   2. (ii) the Foundation IRB Approach for all other exposures within that exposure class;
3. (c) for point (c)(i) of Article 147(2) (specialised lending) for IPRE exposures and HVCRE exposures:
   1. (i) the Standardised Approach for exposures where permission has been granted under Article 148 or Article 150; or
   2. (ii) the Slotting Approach for all other IPRE exposures and HVCRE exposures;
4. (d) for point (c)(i) of Article 147(2) (specialised lending) for object finance exposures, project finance exposures and commodities finance exposures:
   1. (i) the Standardised Approach for exposures where permission has been granted under Article 148 or Article 150;
   2. (ii) the Foundation IRB Approach for exposures where permission has been granted under Article 143(2A) or (2B) or Article 149(2) to use the Foundation IRB Approach;
   3. (iii) the Advanced IRB Approach for exposures where permission has been granted under Article 143(2A) or (2B) to use the Advanced IRB Approach;
   4. (iv) the Slotting Approach for all other object finance exposures, project finance exposures and commodities finance exposures;
5. (e) for point (c)(ii) of Article 147(2) (financial corporates and large corporates):
   1. (i) the Standardised Approach for exposures where permission has been granted under Article 148 or Article 150;
   2. (ii) the Foundation IRB Approach for all other exposures within that exposure subclass;
6. (f) for points (c)(iii) of Article 147(2) (other general corporates):
   1. (i) the Standardised Approach for exposures where permission has been granted under Article 148 or Article 150;
   2. (ii) the Advanced IRB Approach for exposures where permission has been granted under Article 143(2A) or (2B) to use the Advanced IRB Approach;
   3. (iii) the Foundation IRB Approach for all other exposures within that exposure subclass;
7. (g) for point (d) of Article 147(2) (retail):
   1. (i) the Standardised Approach for exposures where permission has been granted under Article 148 or Article 150;
   2. (ii) the Advanced IRB Approach for all other exposures within that exposure class;
8. (h) for point (e) of Article 147(2) (equity), the Standardised Approach;
9. (i) for point (ea) of Article 147(2) (units or shares in a CIU), the approach set out in Article 152 and Article 158(4);
10. (j) for point (f) of Article 147(2) (items representing securitisation positions), the approach set out in the Securitisation (CRR) Part;
11. (k) for point (g) of Article 147(2) (other non-credit obligation assets), the approach set out in Article 156, Article 158(3) and Article 168.

1.

 Each of the following is a roll-out class applicable for the IRB Approach:

1. (a) exposures to institutions as set out in point (b) of Article 147(2);
2. (b) specialised lending exposures as set out in point (c)(i) of Article 147(2);
3. (c) exposures to purchased receivables within the corporate exposure class as set out in point (c) of Article 147(2);
4. (d) exposures to financial corporates and large corporates and to other general corporates as set out in points (c)(ii) and (c)(iii) of Article 147(2);
5. (e) qualifying revolving retail exposures as set out in point (d)(i) of Article 147(2);
6. (f) retail exposures secured by residential property as set out in point (d)(ii) of Article 147(2);
7. (g) exposures to purchased receivables within the retail exposures exposure class as set out in point (d) of Article 147(2); and
8. (h) exposures to other retail as set out in point (d)(iii) of Article 147(2).

2.

The non-Retail AIRB Modelling roll-out category applicable for the IRB Approach is:

1. (a) with the exception of IPRE exposures and HVCRE exposures, exposures to specialised lending as set out in point (c)(i) of Article 147(2);
2. (b) exposures to other general corporates, as set out in point (c)(iii) of Article 147(2).

1.

An institution which has a permission to apply the IRB Approach in accordance with Article 143 shall, subject to any permission granted under Article 148, implement the IRB Approach for all exposures referred to in Article 147B(1), except for exposures which fall within the scope of points (e), (k) and (l) of Article 150(1) and for which it has received the prior permission of the PRA to permanently use the Standardised Approach in accordance with Article 150(1).

2.

An institution which has permission to apply the Advanced IRB Approach for some types of exposures in the non-Retail AIRB Modelling roll-out category shall, subject to any permission granted under Article 148, implement one or more of the following approaches for all exposures in that category:

1. (a) the Advanced IRB Approach,
2. (b) the Slotting Approach in relation to the exposures set out in point (a) of Article 147B(2), or
3. (c) the Standardised Approach,

unless it meets the condition in point (b) of Article 150(4) and it has received the prior permission of the PRA to permanently use the Foundation IRB Approach in accordance with Article 150(4).

1.

An institution may, with the prior permission of the PRA carry out the implementation of Article 147C(1) sequentially:

1. (a) across different roll-out classes,
2. (b) across different types of exposures within the same roll-out class, or
3. (c) for a given roll-out class, across different business units in the same group,

as set out in the permission, if it is able to demonstrate to the satisfaction of the PRA that the conditions in paragraph 3 are met.

[Note: This is a permission under sections 144G and 192XC of FSMA to which Part 8 of the Capital Requirements Regulations applies]

1A.

An institution may, with the prior permission of the PRA, carry out the implementation of Article 147C(2) sequentially:

1. (a) across different types of exposures within the non-Retail AIRB Modelling roll-out category, or
2. (b) for a given type of exposures within the non-Retail AIRB Modelling roll-out category, across different business units in the same group,

as set out in the permission, if it is able to demonstrate to the satisfaction of the PRA that the conditions in paragraph 3 are met.

[Note: This is a permission under sections 144G and 192XC of FSMA to which Part 8 of the Capital Requirements Regulations applies]

2.

An institution shall implement the IRB Approach in accordance with a permission granted under paragraphs 1 and 1A within such time period and according to such timing and sequence as is specified in its IRB permission.

3.

The conditions referred to in paragraphs 1 and 1A are:

1. (a) the institution shall submit an implementation plan which specifies the extent to which it intends to implement more sophisticated approaches;
2. (b) the time period for realising the implementation plan shall be appropriate on the basis of the nature and scale of the activities of the institution, or of any parent undertaking and its subsidiaries, and the number and nature of the rating systems to be implemented; and
3. (c) the timing and sequencing of the implementation plan shall be driven by the practicality and feasibility of moving to the more sophisticated approaches, and not motivated by a desire to adopt an approach that minimises the capital requirements for the institution.

4.

[Note: Provision left blank]

5.

[Note: Provision left blank]

6.

[Note: Provision left blank]

[Note: Paragraphs 1 to 3 of this rule correspond to Article 148(1) to (3) of CRR.]

1.

An institution that uses the IRB Approach for a particular roll-out class or type of exposures shall continue to use that approach and shall not instead use the Standardised Approach for the calculation of risk-weighted exposure amounts, except that the institution may, with the prior permission of the PRA, stop using that approach and use instead the Standardised Approach for the calculation of risk-weighted exposure amounts, if it can demonstrate to the satisfaction of the PRA that the use of the Standardised Approach:

1. (a) is not proposed in order to reduce the own funds requirement of the institution;
2. (b) is necessary on the basis of the nature and complexity of the institution’s total exposures of this type;
3. (c) would not have a material adverse impact on the solvency of the institution or its ability to manage risk effectively; and
4. (d) either:
1. (i) would result in the Standardised Approach being applied to all exposures of the institution; or
2. (ii) in accordance with Article 147C(1), would meet the requirements of Article 148(1) (on sequential roll-out) and Article 150(1) (on permanent partial use of the Standardised Approach).

[Note: This is a permission under sections 144G and 192XC of FSMA to which Part 8 of the Capital Requirements Regulations applies]

2.

An institution that uses the Advanced IRB Approach for a particular type of exposures within the non-Retail AIRB Modelling roll-out category shall continue to use that approach and shall not instead use the Foundation IRB Approach, except that the institution may, with the prior permission of the PRA, instead use the Foundation IRB Approach if it can demonstrate to the satisfaction of the PRA that the use of the Foundation IRB Approach for a type of exposures within the non-Retail AIRB Modelling roll-out category:

1. (a) is not proposed in order to reduce the own funds requirement of the institution;
2. (b) is necessary on the basis of nature and complexity of the institution’s total exposures of this type;
3. (c) would not have a material adverse impact on the solvency of the institution or its ability to manage risk effectively; and
4. (d) either:
1. (i) would result in the Advanced IRB Approach no longer being applied to any exposures within the non-Retail AIRB Modelling roll-out category; or
2. (ii) in accordance with Article 147C(3), would meet the requirements of Article 148(1A) (on sequential roll-out) or Article 150(4) (on permanent partial use of the Foundation IRB Approach).

[Note: This is a permission under sections 144G and 192XC of FSMA to which Part 8 of the Capital Requirements Regulations applies]

2A.

An institution that uses the Advanced IRB Approach or the Foundation IRB Approach in respect of specialised lending exposures as set out in point(c)(i) of Article 147(2) for a particular roll-out class or type of exposures shall continue to use that approach and shall not instead use the Slotting Approach for the calculation of risk-weighted exposure amounts, except that the institution may, with the prior permission of the PRA, instead use the Slotting Approach for the calculation of risk-weighted exposure amounts, if it can demonstrate to the satisfaction of the PRA that the change proposed in the application materially complies with this Part.

For the purpose of the first sub-paragraph, the change proposed in the application shall be considered to materially comply with this Part if it fully complies with this Part or if both of the following conditions are met:

1. (a) the effect of any non-compliance for each rating system in the institution’s application would be immaterial if the institution made the proposed change; and
2. (b) the overall effect of the non-compliance would be immaterial if the institution made the proposed change.

[Note: This is a permission under sections 144G and 192XC of FSMA to which Part 8 of the Capital Requirements Regulations applies]

[Note: This rule corresponds to Article 149 of CRR]

1.

An institution which has been granted permission by the PRA to use the IRB Approach in the calculation of risk-weighted exposure amounts and expected loss amounts may, with the prior permission of the PRA, apply the Standardised Approach to a subset of its exposures if it can demonstrate to the satisfaction of the PRA that such exposures fall within the following categories:

1. (a) [Note: Provision left blank]
2. (b) [Note: Provision left blank]
3. (c) [Note: Provision left blank]
4. (d) [Note: Provision left blank]
5. (e) exposures of an 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, mixed financial holding company, financial institution, asset management company or ancillary services undertaking subject to appropriate prudential requirements or an undertaking linked by a common management relationship;
6. (f) [Note: Provision left blank]
7. (g) [Note: Provision left blank]
8. (h) [Note: Provision left blank]
9. (i) [Note: Provision left blank]
10. (j) [Note: Provision left blank]
11. (k) all exposures in one or more roll-out classes, where:
1. (i) the application of the Standardised Approach to each such roll-out class does not result in significantly lower capital requirements than if the IRB Approach were applied;
2. (ii) the institution cannot reasonably model the exposures in each such roll-out class; or
3. (iii) the exposures in each such roll-out class are immaterial;
12. (l) all exposures in one or more types of exposures, where the application of the Standardised Approach to each such type of exposures would not result in the Standardised Approach applying to a majority of exposures in a roll-out class, and where either:
1. (i) the institution cannot reasonably model the exposures in each such type of exposures; or
2. (ii) the exposures are immaterial in aggregate.

[Note: This is a permission under sections 144G and 192XC of FSMA to which Part 8 of the Capital Requirements Regulations applies]

1A.

For the purpose of:

1. (a) point (k)(i) of paragraph 1, ‘significantly lower capital requirements’ means the institution reasonably estimates that group credit risk risk-weighted exposure amounts for that roll-out class under the Standardised Approach are less than 95% of the group credit risk risk-weighted exposure amounts for that roll-out class on the basis of the institution applying the IRB Approach;
2. (b) point (k)(ii) of paragraph 1, the institution cannot reasonably model the exposures only if either:

1. (i) the institution does not have sufficient data to model exposures in the roll-out class and cannot reasonably be expected to obtain sufficient data in a timely manner, and the deficiency in data does not arise due to historic non-compliance with the data collection and storage requirement provisions in the CRR, BIPRU or this Part as applicable;
2. (ii)  the institution cannot reasonably develop a compliant modelling approach due to the nature and complexity of the exposures in the roll-out class; or
3. (iii)  the use of the IRB Approach for the roll-out class would not result in significant improvements in risk differentiation or risk quantification than if the Standardised Approach were applied to the exposures in the roll-out class;

1. (c) point (k)(iii) of paragraph 1, exposures are immaterial if the institution’s total group credit risk risk-weighted exposure amounts, as calculated under the Standardised Approach, for that roll-out class do not exceed 5% of total group credit risk risk-weighted exposure amounts;
2. (d) point (l)(i) of paragraph 1, the institution cannot reasonably model the exposures only if either:
3. 1. (i) the institution does not have sufficient data to model the exposures in the type of exposures and cannot reasonably be expected to obtain sufficient data in a timely manner, and the deficiency in data does not arise due to historic non-compliance with the data collection and storage requirement provisions in the CRR, BIPRU or this Part as applicable;
   2. (ii) the institution cannot reasonably develop a compliant modelling approach due to the and complexity of the exposures in the type of exposures; or
   3. (iii) the use of the IRB Approach for the exposures would not result in significant improvements in risk differentiation or risk quantification than if the Standardised Approach were applied to the exposures in the type of exposures;
4. (e) point (l)(ii) of paragraph 1, the exposures are immaterial in aggregate if the institution’s total group credit risk risk-weighted exposure amounts of all exposures across all roll-out classes for which the Standardised Approach is permanently applied on the basis of the firm having received permission to do so under point (I)(ii), do not exceed 5% of the total group credit risk risk-weighted exposure amounts for all roll-out classes for which the institution has permission to use the IRB Approach for some or all exposures;
5. (f) point (I) of paragraph 1, the Standardised Approach shall be considered to be applied to a majority of exposures within the roll-out class if the total group credit risk risk-weighted exposure amounts for all exposures to which the Standardised Approach is permanently applied exceeds 50% of the total group credit risk risk-weighted exposure amounts for that roll-out class. When calculating the total group credit risk risk-weighted exposure amounts, an institution shall exclude from the numerator and the denominator the exposures set out in points (e) of paragraph 1.

2.

[Note: Provision left blank]

3.

[Note: Provision left blank]

4.

1.  
2. (a) An institution which has been granted permission by the PRA to use the Advanced IRB Approach in the calculation of risk-weighted exposure amounts and expected loss amounts for one or more type of exposures within the non-Retail AIRB Modelling roll-out category may, with the prior permission of the PRA, apply the Foundation IRB Approach for a given type of exposures in that category if it can demonstrate to the satisfaction of the PRA that the requirement in point (b) is met.
3. (b) An institution shall not permanently use the Foundation IRB Approach for a given type of exposures within the non-Retail AIRB Modelling roll-out category in order to achieve lower capital requirements, compared to using the Advanced IRB Approach.

[Note: This is a permission under sections 144G and 192XC of FSMA to which Part 8 of the Capital Requirements Regulations applies]

[Note: This rule corresponds to Article 150(1) of CRR as it applied immediately before revocation by the Treasury]

1.

An institution shall calculate the risk-weighted exposure amount for credit risk for exposures that use the Slotting Approach, the Foundation IRB Approach or the Advanced IRB Approach in accordance with Sub-section 2, unless:

1. (a) it deducts the exposure amount from own funds; or
2. (b) it deducts the exposure from Common Equity Tier 1 items, Additional Tier 1 items or Tier 2 items.

2.

An institution shall calculate the risk-weighted exposure amounts for dilution risk for purchased receivables in accordance with Article 157. Where an institution has full recourse to the seller of purchased receivables for default risk and for dilution risk, the provisions of this Article and Article 152 and Article 158(1) to (4) in relation to purchased receivables shall not apply and the institution shall treat the exposure as a collateralised exposure.

3.

An institution shall calculate risk-weighted exposure amounts for credit risk and dilution risk based on the relevant parameters associated with the exposure in question. These shall include PD, LGD, maturity (hereinafter referred to as ‘M’) and exposure value of the exposure. PD and LGD may be considered separately or jointly, in accordance with Section 4.

4.

[Note: Provision left blank]

5.

An institution that is permitted to use the Slotting Approach shall, for exposures within the scope of the permission, calculate risk weights in accordance with Article 153(5) and exposure values in accordance with Articles 166A and 166C.

6.

An institution that is permitted to use the Foundation IRB Approach or the Advanced IRB Approach shall, for exposures within the scope of the permission, provide its own estimates of PDs in accordance with Section 6, except where the institution provides its own estimates of ELs in accordance with Articles 160(2), 160(6) or 163(3).

7.

1. (a) An institution permitted to use the Foundation IRB Approach shall, for exposures within the scope of the permission, use LGD values in accordance with Article 161(1) and exposure values in accordance with Articles 166A, 166B and 166C; and
2. (b) An institution permitted to use the Advanced IRB Approach shall, for exposures within the scope of the permission, provide its own estimates of LGDs in accordance with Section 6, except where the institution uses LGD values in accordance with Article 161(2) or points (b) or (c) of Article 164(1), and calculate exposure values in accordance with Articles 166A, 166B and 166D.

8.

[Note: Provision left blank]

9.

[Note: Provision left blank]

9A.

An institution that is permitted to use either the Foundation IRB Approach or the Advanced IRB Approach, shall, for exposures that are not within point (d) of Article 147(2) and are within the scope of the permission, calculate M in accordance with Article 162.

10.

[Note: Provision left blank]

[Note: This rule corresponds to Article 151 of CRR as it applied immediately before revocation by the Treasury]

1.

An institution shall calculate the risk-weighted exposure amounts for its exposures in the form of units or shares in a CIU by multiplying the risk-weighted exposure amount of the CIU, calculated in accordance with the approaches set out in paragraphs 2 and 5, with the percentage of units or shares held by the institution.

2.

An institution shall, where the conditions set out in paragraph 3 of Credit Risk: Standardised Approach (CRR) Part Article 132 are met and the institution has sufficient information about the individual underlying exposures of a CIU, look through to those underlying exposures to calculate the risk-weighted exposure amount of the CIU, risk weighting all underlying exposures of the CIU as if they were directly held by the institution.

3.

An institution may, by way of derogation from point (d) of of paragraph 3 Required Level of Own Funds (CRR) Part Article 92 if the institution calculates the risk-weighted exposure amount of the CIU in accordance with paragraph 1 or 2, calculate the own funds requirement for CVA risk of derivative exposures of that CIU as an amount equal to 50% of the own funds requirement for those derivative exposures calculated in accordance with Sections 3, 4 or 5 of Chapter 3 of the Counterparty Credit Risk (CRR) Part, as applicable.

3A.

An institution may, by way of derogation from paragraph 3, exclude from the calculation of the own funds requirement for CVA risk derivative exposures which would not be subject to that requirement if they were incurred directly by the institution.

4.

An institution that applies the look-through approach in accordance with paragraphs 2 and 3 and is either using the Standardised Approach or does not meet the conditions for using the methods set out in this Part or one or more of the methods set out in the Securitisation (CRR) Part for all or parts of the underlying exposures of the CIU, shall calculate risk-weighted exposure amounts and expected loss amounts in accordance with the following principles:

1. (a) [Note: Provision left blank]
2. (b) for exposures assigned to the items representing securitisation positions exposure class referred to in point (f) of Article 147(2), the institution shall apply the treatment set out in Securitisation (CRR) Part Article 254 as if those exposures were directly held by the institution;
3. (c) for all other underlying exposures, the institution shall apply the Standardised Approach laid down in the Credit Risk: Standardised Approach (CRR) Part.

5.

An institution may, where the conditions set out in paragraph 3 of Credit Risk: Standardised Approach (CRR) Part Article 132 are met and the institution does not have sufficient information about the individual underlying exposures of a CIU, calculate the risk-weighted exposure amount for those exposures in accordance with the mandate-based approach set out in paragraph 2 of Credit Risk: Standardised Approach (CRR) Part Article 132A. However, for the exposures listed in points (b) and (c) of paragraph 4, the institution shall apply the approaches set out therein.

6.

An institution shall, subject to paragraph 2 of Credit Risk: Standardised Approach (CRR) Part Article 132B, if the institution does not apply the look-through approach in accordance with paragraphs 2 and 3 or the mandate-based approach in accordance with paragraph 5, apply the fall-back approach referred to in paragraph 2 of Credit Risk: Standardised Approach (CRR) Part Article 132.

7.

An institution may calculate the risk-weighted exposure amount for its exposures in the form of units or shares in a CIU by using a combination of the approaches referred to in this Article, provided that the conditions for using those approaches are met.

8.

An institution that does not have adequate data or information to calculate the risk-weighted exposure amount of a CIU in accordance with the approaches set out in paragraphs 2 to 5 may rely on the calculations of a third party, provided that all the following conditions are met:

1. (a) the third party is one of either:
1. (i) the depository institution or the depository financial institution of the CIU, provided that the CIU exclusively invests in securities and deposits all securities at that depository institution or depository financial institution;
2. (ii) for for CIUs not covered by point (a)(i), the CIU management company;
2. (b) for exposures other than those listed in points (b) and (c) of paragraph 4, the third party carries out the calculation in accordance with the look-through approach set out in paragraph 1 of Credit Risk: Standardised Approach (CRR) Part Article 132A;
3. (c) for exposures listed in points (b) and (c) of paragraph 4, the third party carries out the calculation in accordance with the approaches set out therein; and
4. (d) an external auditor has confirmed the correctness of the third party's calculation.

An institution that relies on third party calculations shall multiply the risk-weighted exposure amounts of a CIU's exposures resulting from those calculations by a factor of 1.2, unless the institution has unrestricted access to the detailed calculations carried out by the third party. The institution shall be able to, upon request by the PRA, provide those calculations.

9.

For the purposes of this Article, paragraph 5 and 6 of Credit Risk: Standardised Approach (CRR) Part Article 132 and Credit Risk: Standardised Approach (CRR) Part Article 132B shall apply. For the purposes of this Article, Credit Risk: Standardised Approach (CRR) Part Article 132C shall also apply, using the risk weights calculated in accordance with this Part.

[Note: This rule corresponds to Article 152 of CRR as it applied immediately before revocation by the Treasury]

[Note: This rule is subject to the transitional provisions in Credit Risk General Provisions CRR Part 4.4 to 4.10]

1.

An institution shall, subject to the application of the specific treatments laid down in paragraphs 2, 4, 5 and 5A, calculate the risk-weighted exposure amounts for exposures to corporates and institutions according to the following formulae:

Risk-weighted exposure amount = RW · exposure value

where the risk weight (RW) is defined as:

1. (a) [Note: Provision left blank]
2. (b) if PD = 1, i.e., for defaulted exposures:
   — where an institution uses the Foundation IRB Approach, RW shall be 0;
   — where an institution uses the Advanced IRB Approach, RW shall be:
3. RW = max (0, 12.5 · (LGD – BEEL))
4. where BEEL is the best estimate of expected loss (BEEL);
5. (c) if PD < 1

\[\textrm{RW}=\left ( \textrm{LGD}\cdot\textrm{N}\left (\frac{1}{\sqrt{1-\textrm{R}}}\cdot \textrm{G (PD)}+\sqrt{\frac{\textrm{R}}{1-\textrm{R}}}\cdot \textrm{G(0.999)}\right )-\textrm{LGD}\cdot \textrm{PD} \right )\cdot \frac{1+(\textrm{M - 2.5}\cdot \textrm{b})}{1-1.5\cdot \textrm{b}}\cdot 12.5\]

\[\textrm{R}= 0.12\cdot\frac{1-\textrm{e}^{-50\cdot \textrm{PD}}}{1-\textrm{e}^{-50}}{+0.24}\cdot \left ( 1-\frac{1-\textrm{e}^{-50\cdot \textrm{PD}}}{1-\textrm{e}^{-50}} \right )\]

b = (0.11852 – 0.05478 · ln(PD))²

2.

For all exposures to large financial sector entities and unregulated financial sector entities, the institution shall multiply the coefficient of correlation (R) of point (c) of paragraph 1 and paragraph 4 by 1.25.

3.

[Note: Provision left blank]

4.

An institution may, for exposures to corporates where the total annual revenue for the consolidated group of which the entity is a part is less than GBP 44 million, use the following coefficient of correlation formula in point (c) of paragraph 1 for the calculation of risk weights for exposures to corporates. In this formula S is expressed as total annual revenue in millions with GBP 4.4 million ≤ S ≤ GBP 44 million. Reported revenue of less than GBP 4.4 million shall be treated as if it was equivalent to GBP 4.4 million. For purchased receivables the total annual revenue of the obligor shall be the weighted average by individual exposures of the pool. 

\[\textrm{R}= 0.12\cdot\frac{1-\textrm{e}^{-50\cdot \textrm{PD}}}{1-\textrm{e}^{-50}}{+0.24}\cdot \left ( 1-\frac{1-\textrm{e}^{-50\cdot \textrm{PD}}}{1-\textrm{e}^{-50}} \right )-0.04\cdot\left ( 1-\frac{\textrm{min\{max\{4.4,S\},44\}-4.4}}{\textrm{39.6}} \right )\]

An institution shall substitute total assets of the consolidated group for total annual revenue when total annual revenue is not a meaningful indicator of entity size and total assets are a more meaningful indicator than total annual revenue.

5.

The Slotting Approach applies as follows for specialised lending exposures:

1. (a) an institution shall:
1. (i) for non-defaulted exposures to IPRE exposures or HVCRE exposures, assign rating grades in accordance with the factors set out in List 1 of Appendix 1;
2. (ii) for non-defaulted exposures which are project finance exposures, assign rating grades in accordance with the factors set out in List 2 of Appendix 1;
3. (iii) for non-defaulted exposures which are object finance exposures, assign rating grades in accordance with the factors set out in List 3 of Appendix 1; and
4. (iv) for non-defaulted exposures which are commodities finance exposures; assign rating grades in accordance with the factors set out in List 4 of Appendix 1;
2. (b) for the purpose of point (a) of this paragraph, where a specialised lending exposure benefits from: 
1. (i) a guarantee that is recognised through the Risk-Weight Substitution Method,
2. (ii) collateral that is recognised through the Financial Collateral Comprehensive Method, or
3. (iii) on-balance sheet netting recognised in accordance with the Credit Risk Mitigation (CRR) Part,

the guarantee or the collateral or the on-balance sheet netting, as the case may be, shall not be taken into account when considering the factors set out in Lists 1 to 4 of Appendix 1;

1. (c) subject to points (d) to (f) of this paragraph an institution shall:
   1. (i) assign the relevant risk weight in column B of Table A to exposures assigned to the ‘Strong’ rating grade;
   2. (ii) assign the relevant risk weight in column D of Table A to exposures assigned to the ‘Good’ rating grade;
   3. (iii) assign the relevant risk weight in the ‘Satisfactory’ column of Table A to exposures assigned to the ‘Satisfactory’ rating grade; and
   4. (iv) assign the relevant risk weight in the ‘Weak’ column of Table A to exposures assigned to the ‘Weak’ rating grade.
2. (d) an institution may, for all categories of specialised lending exposures, if less than 2.5 years remain until maturity of an exposure:
   1. (i) for exposures assigned to the ‘Strong’ rating grade: assign the relevant risk weight in column A of Table A to the exposure instead of the risk weight in column B of Table A; and
   2. (ii) for exposures assigned to the ‘Good’ rating grade: assign the relevant risk weight in column C of Table A to the exposure instead of the risk weight in column D of Table A;
      
3. (e) an institution may, for IPRE exposures assigned to the ‘Strong’ rating grade, assign the relevant risk weight in column A of Table A to the exposure instead of the risk weight of column B in Table A if:
   1. (i)    the institution’s underwriting of the exposure and the exposure’s other characteristics are substantially stronger than required by the ‘Strong’ rating grade;
   2. (ii)  the loan to value ratio is very low for the property type;
   3. (iii) the income stream on which the repayment of the obligation depends is consistent with that which the institution would reasonably expect for an investment grade exposure, including that the tenant income from the property is at least 100% of the obligor’s debt service obligations; and
   4. (iv) the exposure does not finance the land acquisition, development and construction (‘ADC’) of commercial real estate;
      
4. (f) an institution may, for project finance exposures assigned to the ‘Strong’ rating grade, assign the relevant risk weight in column A of Table A to the exposure instead of the risk weight in column B of Table A if the institution’s underwriting of the exposure and the exposure’s other characteristics are substantially stronger than required by the ‘Strong’ rating grade;
5. (g) an institution shall, for defaulted exposures, assign the relevant risk weight in the ‘Default’ column of Table A.

Table A

5A.

The institution shall increase total risk-weighted exposure amounts calculated under paragraphs 1, 2, 4 and 5 for exposures to institutions and corporates to reflect:

1. (a) any post model adjustments in respect of risk-weighted exposure amounts calculated under point (a) of Article 146(3);
2. (b) any unrecognised exposure adjustment calculated under Article 166D(6).

6.

An institution shall, for its purchased corporate receivables, comply with the requirements set out in Article 184. For purchased corporate receivables that comply in addition with the conditions set out in Article 154(5), and where it would be unduly burdensome for an institution to use the risk quantification standards for exposures to corporates as set out in Section 6 for these receivables, the risk quantification standards for retail exposures as set out in Section 6 may be used.

7.

1.  
2. (a) For purchased corporate receivables, refundable purchase price discounts, collaterals or partial guarantees that provide first loss protection for default losses, dilution losses, or both, may be treated as a first loss protection by an institution that is the purchaser of the receivables or by the beneficiary of the collateral or of the partial guarantee in accordance with Securitisation (CRR) Part Articles 254 to 266. 
3. (b) An institution that is the seller providing the refundable purchase price discount or the provider of a collateral or a partial guarantee shall treat those as an exposure to a first loss position in accordance with Securitisation (CRR) Part Articles 254 to 266.

8.

1.  
2. (a) An institution shall, where it provides credit protection for a number of exposures subject to the condition that the nth default among the exposures shall trigger payment and that this credit event shall terminate the contract, aggregate the risk weights of the exposures included in the basket, excluding n-1 exposures, where the sum of the expected loss amount multiplied by 12.5 and the risk-weighted exposure amount shall not exceed the nominal amount of the protection provided by the credit derivative multiplied by 12.5. 
3. (b) The n-1 exposures to be excluded from the aggregation shall be determined on the basis that they shall include those exposures each of which produces a lower risk-weighted exposure amount than the risk-weighted exposure amount of any of the exposures included in the aggregation.
4. (c) A 1,250% risk weight shall apply to positions in a basket for which an institution cannot determine the risk weight under the IRB Approach.

9.

[Note: Provision left blank]

[Note:  Paragraphs 1, 2 and 4, 5, 6, 7 and 8 of this rule correspond to Article 153(1), (2) and (4) to (8) of CRR as it applied immediately before revocation by the Treasury]

1.

An institution shall, subject to the requirements laid down in paragraphs 3, 4 and 4A, calculate the risk-weighted exposure amounts for retail exposures in accordance with the following formulae:

Risk-weighted exposure amount = RW · exposure value

where the risk weight (RW) is defined as follows:

1. (a) if PD = 1, i.e., for defaulted exposures:

RW = max{0 ,12.5 · (LGD – BEEL)};

1. (b) if PD < 1, i.e., for any possible value for PD other than under (a)

\[\textrm{RW}=\left ( \textrm{LGD}\cdot\textrm{N}\left (\frac{1}{\sqrt{1-\textrm{R}}}\cdot \textrm{G (PD)}+\sqrt{\frac{\textrm{R}}{1-\textrm{R}}}\cdot \textrm{G(0.999)}\right )-\textrm{LGD}\cdot \textrm{PD} \right )\cdot 12.5\]

2.

[Note: Provision left blank]

3.

For retail exposures secured by immovable property collateral a coefficient of correlation (R) of 0.15 shall replace the figure produced by the coefficient of correlation formula in paragraph 1.

4.

For qualifying revolving retail exposures as set out in Article 147(5A), a coefficient of correlation (R) of 0.04 shall replace the figure produced by the coefficient of correlation formula in paragraph 1.

4A.

An institution shall increase the total risk-weighted exposure amounts calculated under paragraphs 1, 3 and 4 for retail exposures to reflect:

1. (a) any post model adjustments in respect of risk-weighted exposure amounts calculated under point (b) of Article 146(3);
2. (b) any amount needed to ensure that risk-weighted exposure amounts for retail exposures secured by UK residential immovable property are greater than or equal to 10% of the exposure value for such exposures (following application of any post model adjustments calculated under point (b) of Article 146(3));
3. (c) any unrecognised exposure adjustment calculated under Article 166D(6).

5.

For purchased retail receivables, R shall be calculated in accordance with the coefficient of correlation formula in paragraph 1.

To be eligible for the retail treatment, purchased retail receivables shall comply with the requirements set out in Article 184 and meet the following conditions:

1. (a) the institution has purchased the receivables from unrelated third party sellers, and its exposure to the obligor of the receivable does not include any exposures that are directly or indirectly originated by the institution itself;
2. (b) the purchased receivables shall be generated on an arm’s-length basis between the seller and the obligor. As such, inter-company accounts receivables and receivables subject to contra-accounts between entities that buy and sell to each other are ineligible;
3. (c) the purchasing institution has a claim on all proceeds from the purchased receivables or a pro-rata interest in the proceeds; and
4. (d) the portfolio of purchased receivables is sufficiently diversified.

6.

An institution may, for purchased retail receivables, if the institution is the purchaser of the receivables or the beneficiary of collateral or of a partial guarantee, treat refundable purchase price discounts, collaterals or partial guarantees that provide first loss protection for default losses, dilution losses, or both, as a first loss protection in accordance with Securitisation (CRR) Part Articles 254 to 266. An institution that is the seller providing the refundable purchase price discount or the provider of a collateral or a partial guarantee shall treat those as an exposure to a first loss position in accordance with Securitisation (CRR) Part Articles 254 to 266.

7.

For hybrid pools of purchased retail receivables where a purchasing institution cannot separate exposures secured by immovable property collateral and qualifying revolving retail exposures from other retail exposures, the institution shall apply the retail risk weight function producing the highest capital requirements for those exposures.

[Note: This rule corresponds to Article 154 of CRR as it applied immediately before revocation by the Treasury]

1.

[Note: Provision left blank]

2.

[Note: Provision left blank]

3.

[Note: Provision left blank]

4.

[Note: Provision left blank]

1.

An institution shall calculate the risk-weighted exposure amounts for other non-credit obligation assets in accordance with the following formula:

Risk-weighted exposure amount = 100% · exposure value

except for:

1. (a) cash in hand and equivalent cash items as well as gold bullion held in own vault or on an allocated basis to the extent backed by bullion liabilities, to which an institution shall assign a 0% risk weight instead of a 100% risk-weight;
2. (b) when the exposure is a residual value of leased assets in which case the institution shall calculate the risk-weighted exposure amount as follows:

\[\frac{1}{\textrm{t}}\cdot 100 \textrm{%}\cdot \textrm{exposure value}\]

where t is the greater of 1 and the nearest number of whole years of the lease remaining.

[Note: This rule corresponds to Article 156 of CRR as it applied immediately before revocation by the Treasury]

1.

An institution shall calculate the risk-weighted exposure amounts for dilution risk of purchased corporate and retail receivables in accordance with the formula set out in Article 153(1).

2.

An institution shall determine the input parameters PD and LGD in accordance with Section 4.

3.

An institution shall determine the exposure value in accordance with Section 5.

4.

For the purposes of this Article, the value of M is:

1. (a) one year if an institution can demonstrate that the dilution risk is appropriately monitored and can be resolved within one year; and otherwise
2. (b) the period over which dilution risk can be resolved, subject to a maximum period of 5 years.

5.

An institution is not required to calculate and recognise risk-weighted exposure amounts for dilution risk of a type of exposures caused by purchased corporate or retail receivables where the dilution risk for the institution is immaterial for this type of exposures.

[Note: This rule corresponds to Article 157 of CRR as it applied immediately before revocation by the Treasury]

1.

An institution using the Foundation IRB Approach or Advanced IRB Approach shall, unless otherwise stated in this Article, calculate expected loss amounts based on the same input figures of PD, LGD and the exposure value for each exposure as are used for the calculation of risk-weighted exposure amounts in accordance with Article 151.

2.

An institution shall calculate the expected loss amounts for securitised exposures in accordance with the Securitisation (CRR) Part.

4.

An institution shall calculate the expected loss amounts for exposures in the form of shares or units of a CIU referred to in Article 152 in accordance with the methods set out in this Article.

5.

An institution using the Foundation IRB Approach or Advanced IRB Approach shall, subject to the specific treatment laid down in  paragraphs 6 and 6A, calculate the expected loss (EL) and expected loss amounts for exposures to corporates and institutions and for retail exposures in accordance with the following formulae:

Expected loss (EL) = PD · LGD

Expected loss amount = EL · exposure value

except for defaulted exposures (PD = 1) where the institution uses the Advanced IRB Approach, EL shall be BEEL.

6.

Subject to paragraph 6A, where an institution has assigned a risk weight to a specialised lending exposure under the Slotting Approach, the institution shall calculate an expected loss amount in accordance with the formula in paragraph 5. For this purpose the institution shall use the same exposure value as is used for the calculation of risk-weighted exposure amounts in accordance with Article 151, and use the EL value in the cell of Table B that is in the corresponding row and column to the risk weight value in Table A that the institution has assigned to the exposure in accordance with Article 153(5).

Table B:

6A.

An institution shall increase the total expected loss amounts calculated under paragraphs 5 and 6 to reflect any post model adjustments in respect of expected loss amounts calculated under point (c) of Article 146(3).

7.

[Note: Provision left blank]

8.

[Note: Provision left blank]

9.

[Note: Provision left blank]

10.

An institution shall calculate expected loss amounts for dilution risk of purchased receivables in accordance with the following formulae:

Expected loss (EL) = PD · LGD

Expected loss amount = EL · exposure value

[Note: This rule corresponds to Article 158 of CRR as it applied immediately before revocation by the Treasury]

1.

The following definitions apply for the purpose of this Article:

2.

For the purposes of paragraph 1:

1. (a) an institution shall treat discounts on balance sheet items purchased when in default in accordance with Article 166A(2) in the same manner as specific credit risk adjustments;
2. (b) an institution shall not include expected loss amounts for securitised exposures and general and specific credit risk adjustments related to those exposures; and
3. (c) an institution taking credit risk mitigation into account using the Risk-Weight Substitution Method shall not include any credit risk adjustments in respect of the covered part of an exposure, calculated in accordance with Credit Risk Mitigation (CRR) Part Article 235.

3.

Where ‘A’ > ‘B’ and ‘D’ > ‘C’, an institution shall, in order to compare expected loss amounts with credit risk adjustments, additional value adjustments and other own fund reductions, such that specific credit risk adjustments on exposures in default are not used to cover expected loss amounts on other exposures:

1. (a) calculate the following negative amount: ‘B’ – ‘A’; and
2. (b) calculate the following positive amount: ‘D’ – ‘C’.

In all other cases, an institution shall, in order to compare expected loss amounts with credit risk adjustments, additional value adjustments and other own fund reductions:

1. (c) if (‘A’ + ‘C’) > (‘B’ + ‘D’), calculate the following negative amount: (‘B’ + ‘D’) – (‘A’ + ‘C’);
2. (d) if (‘B’ + ‘D’) > (‘A’ + ‘C’), calculate the following positive amount: (‘B’ + ‘D’) – (‘A’ + ‘C’).

[Note: This rule corresponds to Article 159 of CRR as it applied immediately before revocation by the Treasury]

1.

An institution shall, for exposures to corporates and institutions, when calculating risk-weighted exposure amounts, expected loss amounts, risk weights and expected loss for those exposures (including but not limited to under Article 153, Article 157, Article 158(1), Article 158(5) and Article 158(10)) not use PD values as inputs to the risk-weight and expected loss formulae that are less than 0.05%.

2.

An institution shall, for purchased corporate receivables in respect of which an institution is not able to estimate PDs or an institution’s PD estimates do not meet the requirements set out in Section 6, determine the PDs for these exposures in accordance with the following methods:

1. (a) for senior claims on purchased corporate receivables PD shall be the institution’s estimate of EL divided by LGD for these receivables;
2. (b) for subordinated claims on purchased corporate receivables PD shall be the institution’s estimate of EL;
3. (c) where an institution is using the Advanced IRB Approach in accordance with Article 147A and can decompose its EL estimates for purchased corporate receivables into PDs and LGDs in a manner that is reliable, the institution may, as an alternative to applying the methods in points (a) and (b), use the PD estimate that results from this decomposition.

3.

An institution shall use a PD of 100% for obligors in default.

4.

1.  
2. (a) Subject to point (b), an institution may take into account unfunded credit protection in accordance with Credit Risk Mitigation (CRR) Part Article 191A.
3. (b) An institution reflecting guarantees or other support arrangements through an unfunded credit protection technique in accordance with Credit Risk Mitigation (CRR) Part Article 191A, or through an adjusted grade assignment in accordance with point (e) of Article 172(1), shall:
1. (i) not assign final PDs or LGDs post application of those techniques such that the risk weight would be lower than that of a comparable direct exposure to the guarantor or provider of the support arrangements; and
2. (ii) calculate risk-weighted exposure amounts, expected loss amounts, risk weights and expected loss for exposures to corporates and institutions, after it has applied the input floors that would apply to a comparable direct exposure to the guarantor or provider of support arrangements under Articles 160(1), 161(5), 163(1) and 164(4).

5.

[Note: Provision left blank]

6.

An institution shall, for dilution risk of purchased corporate receivables, set PD equal to the EL estimate of the institution for dilution risk. Alternatively, an institution may, where it uses the Advanced IRB Approach in accordance with Article 147A and can decompose its EL estimates for dilution risk of purchased corporate receivables into PDs and LGDs in a manner that is reliable, use the PD estimate that results from this decomposition. An institution may recognise unfunded credit protection in the PD in accordance with Credit Risk Mitigation (CRR) Part Article 191A.

7.

[Note: Provision left blank]

[Note: Paragraphs 1 to 4 and 6 of this rule correspond to Article 160(1) to (4) and (6) of CRR as it applied immediately before revocation by the Treasury]

1.

An institution using the Foundation IRB Approach shall use the following LGD values:

1. (a) senior exposures without collateral recognised under the Foundation Collateral Method to financial sector entities: 45%;
2. (aa) subject to point (e), senior exposures without collateral recognised under the Foundation Collateral Method to corporates which are not financial sector entities: 40%;
3. (b) subject to point (f), subordinated exposures without collateral recognised under the Foundation Collateral Method: 75%;
4. (c) an institution may recognise funded and unfunded credit protection in the LGD in accordance with Credit Risk Mitigation (CRR) Part Article 191A;
5. (d) eligible covered bonds may be assigned an LGD value of 11.25%;
6. (e) for senior purchased corporate receivables exposures where PD is determined in accordance with point (a) of Article 160(2): 40%;
7. (f) for subordinated purchased corporate receivables exposures where PD is determined in accordance with point (b) of Article 160(2): 100%;
8. (g) for dilution risk of purchased corporate receivables where PD is determined in accordance with the first sentence of Article 160(6): 100%.

2.

1.  
2. (a) An institution using theAdvanced IRB Approach shall apply the LGD value in:
   1. (i) point (e) of paragraph 1 where PD is determined in accordance with point (a) of Article 160(2);
   2. (ii) point (f) of paragraph 1 where PD is determined in accordance with point (b) of Article 160(2);
   3. (iii) point (g) of paragraph 1 where PD is determined in accordance with the first sentence of Article 160(6).
3. (b) An institution using the Advanced IRB Approach shall:
   1. (i) where it uses the PD estimate that results from the decomposition of its EL estimates for purchased corporate receivables in accordance with point (c) of Article 160(2), use the LGD estimate that results from the decomposition; 
   2. (ii) for dilution risk of purchased corporate receivables, where it uses the PD estimate that results from its decomposition of its EL estimates for dilution risk in accordance with the second sentence of Article 160(6), use the LGD estimate that results from the decomposition.

3.

An institution may, subject to Article 160(4), reflect unfunded credit protection in LGDs in accordance with Credit Risk Mitigation (CRR) Part Article 191A.

4.

[Note: Provision left blank]

5.

An institution using the Advanced IRB Approach shall not, for exposures to corporates and institutions, when calculating risk-weighted exposure amounts, expected loss amounts, risk weights and expected loss of those exposures, including but not limited to under Article 153(1), Article 157, and Article 158(1), (5) and (10), use LGD values as inputs to the risk weight and expected loss formulae that are less than the following LGD input floor values:

1. (a) a flat 25% floor value for unsecured exposures to corporates and for exposures where the institution chooses not to take into account funded credit protection covering that exposure;
2. (b) for secured and partially secured exposures where the institution chooses to take into account funded credit protection covering the exposure:
1. (i) in the case of a single type of collateral, a variable LGD input floor value equal to the value of LGD* in Credit Risk Mitigation (CRR) Part Article 230; or
2. (ii) in the case of multiple types of collateral, a variable LGD input floor value equal to the value of LGD* in Credit Risk Mitigation (CRR) Part Article 231,

calculated using the Foundation Collateral Method in accordance with the Credit Risk Mitigation (CRR) Part, provided that in calculating LGD* for the purpose of this point (b) with reference to Credit Risk Mitigation (CRR) Part Article 230 or 231, as applicable, the institution shall substitute:

(iii) 25% for \[{\rm LGD}_\textrm{U}\]; and
(iv) the following values for  \[{\rm LGD}_{\textrm{S}}\] or \[{\rm LGD}_{\textrm{S}_\textrm{i}}\] as applicable:

1. 1. (1) 0% for financial collateral;
   2. (2) 10% for receivables;
   3. (3) 10% for immovable property;
   4. (4) 15% for other physical collateral.

6.

An institution shall, for the purpose of point (b) of paragraph 5 where collateral reflected in the calculation of LGD* is held against multiple facilities, comply with the requirements set out in paragraph 7 Credit Risk Mitigation (CRR) Part Article 193.

[Note: This rule corresponds to Article 161 of CRR as it applied immediately before revocation by the Treasury]

1.

[Note: Provision left blank]

2.

An institution that uses the Foundation IRB Approach or the Advanced IRB Approach for exposures to corporates and institutions pursuant to Article 147A shall calculate M for each of these exposures in accordance with the calculation methods set out in paragraph 2A, subject to paragraph 3, provided that M shall be no greater than five years except in the cases specified in Credit Valuation Adjustment Risk Part 4.3 where M as specified there shall be used. Where an exposure falls within more than one point in paragraph 2A, the institution shall calculate M as follows:

1. (a) where an exposure falls within both points (g) or (h) and any of (b), (c), (d) or (da) of paragraph 2A, it shall calculate M in accordance with point (g) or (h) of paragraph 2A as applicable;
2. (b) where an exposure falls within both points (b) and (c) of paragraph 2A, it shall calculate M in accordance with point (c) of paragraph 2A; and
3. (c) where an exposure falls within both points (a) and (k) of paragraph 2A, it shall calculate M in accordance with point (k) of paragraph 2A.

2A.

1.  
2. (a) For an instrument subject to a cash-flow schedule, M shall be calculated in accordance with the following formula:

\[\textrm{M}= \max \{1,\textrm{min}\left\{ \frac{\sum _{\textrm{t}}\textrm{t}\cdot \textrm{CF}_{\textrm{t}}}{\sum _{\textrm{t}}\textrm{CF}_{\textrm{t}}},5\right\} \}\] 

where CF_t denotes the cash-flows (principal, interest payments and fees) contractually payable by the obligor in period t;

1. (b) for derivatives subject to a master netting agreement, the maturity of each derivative transaction shall first be calculated in accordance with this Article and M shall be the weighted average remaining maturity of the set of transactions, where M shall be at least one year, and the notional amount of each derivative transaction shall be used for weighting the maturity;
2. (c) for exposures arising from fully or nearly-fully collateralised derivative instruments listed in Annex 1 of Chapter 3 of the Counterparty Credit Risk (CRR) Part and fully or nearly-fully collateralised margin lending transactions which are subject to a master netting agreement, where the documentation:
   
   1. (i) requires daily re-margining or revaluation, and
   2. (ii) includes provisions that allow for the prompt liquidation or set-off of the collateral in the event of default or failure to re-margin,

the maturity of each fully or nearly-fully collateralised derivative transaction or collateralised margin lending transaction shall first be calculated in accordance with this Article and M shall be the weighted average remaining maturity of the set of transactions, where M shall be at least 10 days. The notional amount of each transaction shall be used for weighting the maturity;

1. (d) for repurchase transactions or securities or commodities lending or borrowing transactions which are subject to a master netting agreement, where the documentation:
   
   1. (i) requires daily re-margining or revaluation, and
   2. (ii) includes provisions that allow for the prompt liquidation or set-off of the collateral in the event of default or failure to re-margin,

the maturity of each repurchase transaction or securities or commodities lending or borrowing transaction shall first be calculated in accordance with this Article and M shall be the weighted average remaining maturity of the set of transactions where M shall be at least 5 days. The notional amount of each transaction shall be used for weighting the maturity;

1. (da) for a master netting agreement including transactions of the types set out in points (c) and (d), the maturity of each transaction shall first be calculated in accordance with this Article and M shall be the weighted average remaining maturity of the set of transactions where M shall be at least 10 days. The notional amount of each transaction shall be used for weighting the maturity;
2. (e) for an institution that has received an IRB permission to use own PD estimates for purchased corporate receivables, for drawn amounts, M shall equal the purchased receivables exposure weighted average maturity, where M shall be at least one year. This same value of M shall also be used for undrawn amounts under a committed purchase facility provided that the facility contains effective covenants, early amortisation triggers, or other features that protect the purchasing institution against a significant deterioration in the quality of the future receivables it is required to purchase over the facility’s term. Absent such effective protections, M for undrawn amounts shall be calculated as the sum of the longest-dated potential receivable under the purchase agreement and the remaining maturity of the purchase facility, where M shall be at least one year;
3. (f) for any instrument other than those referred to in this paragraph 2A or when an institution is not in a position to calculate M as set out in point (a), M shall be the maximum remaining time (in years) that the obligor is permitted to take to fully discharge its contractual obligations, where M shall be at least one year;
4. (g) for an institution using the Internal Model Method set out in Section 6 of Chapter 3 of the Counterparty Credit Risk (CRR) Part to calculate the exposure values, M shall be calculated for exposures to which it applies this method, and for which the maturity of the longest-dated contract contained in the netting set is greater than one year, in accordance with the following formula:

\[\textrm{M}=\textrm{min}\left\{ \frac{\sum _{\textrm{k}}\textrm{EffectiveEE}_{\textrm{t}_{\textrm{k}}}\cdot \bigtriangleup \textrm{t}_{\textrm{k}}\cdot \textrm{df}_{\textrm{t}_{\textrm{k}}}\cdot \textrm{s}_{\textrm{tk}}+\sum _{\textrm{k}}\textrm{EE}_{\textrm{t}_{\textrm{k}}}\cdot \bigtriangleup \textrm{t}_{\textrm{k}}\cdot \textrm{df}_{\textrm{t}_{\textrm{k}}}\cdot \left ( 1- \textrm{s}_{\textrm{t}_{\textrm{k}}}\right )}{\sum _{\textrm{k}}\textrm{EffectiveEE}_{\textrm{t}_{\textrm{k}}}\cdot \bigtriangleup \textrm{t}_{\textrm{k}}\cdot \textrm{df}_{\textrm{t}_{\textrm{k}}}\cdot \textrm{s}_{\textrm{t}_{\textrm{k}}}}\textrm{,5}\right\}\]

1. (h) an institution that uses an internal model to calculate a one-sided CVA and that uses the Internal Model Method set out in Section 6 of Chapter 3 of the Counterparty Credit Risk (CRR) Part to calculate the exposure values, may, as an alternative to point (g) and subject to the prior permission of the PRA, use the effective credit duration estimated by the internal model as M;
   
   [Note: This is a permission under sections 144G and 192XC of FSMA to which Part 8 of the Capital Requirements Regulations applies]
2. (ha)subject to the rest of this paragraph and paragraphs 2 and 3, for netting sets in which all contracts have an original maturity of less than one year, the formula in point (a) shall apply;
3. (i) for an institution using BA-CVA or SA-CVA as set out in the Credit Valuation Adjustment Risk Part for calculating own fund requirements for CVA risk, M may be capped at 1 for all netting sets contributing to CVA capital requirements;
4. (j) [Note: Provision left blank]
5. (k) for revolving exposures, M shall be determined using the maximum contractual termination date of the facility. An institution shall not use the repayment date of the current drawing.

3.

In application of the calculation methods set out in paragraph 2A, an institution shall, where the documentation requires daily re-margining and daily revaluation and includes provisions that allow for the prompt liquidation or set-off of collateral in the event of default or failure to re-margin, set M as at least one day, instead of the minimum set out in paragraph 2A, for: 

1. (a) fully or nearly-fully collateralised derivative instruments listed in Annex 1 of Chapter 3 of the Counterparty Credit Risk (CRR) Part;
2. (b) fully or nearly-fully collateralised margin lending transactions;
3. (c) repurchase transactions, securities or commodities lending or borrowing transactions.

In addition, in applying the calculation methods set out in paragraph 2A for qualifying short-term exposures which are not part of the institution’s ongoing financing of the obligor, M shall be at least one day, instead of the minimum set in paragraph 2A. Qualifying short term exposures shall include the following:

1. (d) exposures to institutions or investment firms arising from settlement of foreign exchange obligations;
2. (e) self-liquidating trade finance transactions, as set out in point (80 of Article 4(1) of CRR, with a residual maturity of less than one year;
3. (f) exposures arising from settlement of securities purchases and sales within the usual delivery period or two business days;
4. (g) exposures arising from cash settlements by wire transfer and settlements of electronic payment transactions and prepaid cost, including overdrafts arising from failed transactions that do not exceed a short, fixed agreed number of business days.

4.

[Note: Provision left blank]

5.

[Note: Provision left blank]

[Notes: Paragraphs 2 and 2A of this rule correspond to Article 162(2) of CRR and paragraph 3 of this rule corresponds to Article 162(3) of CRR, in each case as the provision in CRR applied immediately before revocation by the Treasury]

1.

An institution shall not, for retail exposures, when calculating risk-weighted exposure amounts, expected loss amounts, risk weights and expected loss for those exposures, including but not limited to under Article 154, Article 157, Article 158(1), Article 158(5) and Article 158(10), use PD values in the input of the risk weights and expected loss formulae that are less than the following: 

1. (a) 0.1% for qualifying revolving retail exposures, as set out in Article 147(5A), that are non-transactor exposures; 
2. (b) 0.1% for retail exposures secured by residential immovable property located in the UK; and
3. (c) 0.05% for all other retail exposures. 

2.

An institution shall, for retail exposures, use a PD of 100% for obligors in default or, where the institution applies the definition of default at the level of an individual credit facility, for exposures in default.

3.

1. (a) An institution shall, subject to point (b), for dilution risk of purchased receivables, set PD equal to EL estimates for dilution risk. 
2. (b) An institution may, if it can decompose its EL estimates for dilution risk of purchased receivables into PDs and LGDs in a manner that is reliable, use the PD estimate that results from the decomposition.

4.

1.  
2. (a) An institution may, subject to point (b), reflect unfunded credit protection in accordance with Credit Risk Mitigation (CRR) Part Article 191A. 
3. (b) An institution shall, when reflecting guarantees or other support arrangements through an unfunded credit protection technique in accordance with Credit Risk Mitigation (CRR) Part Article 191A, or through an adjusted grade assignment in accordance with point (e) of Article 172(1): 
1. (i) not assign final PDs or LGDs post application of those techniques such that the risk weight would be lower than that of a comparable direct exposure to the guarantor or provider of the support arrangements; and
2. (ii) calculate risk-weighted exposure amounts, expected loss amounts, risk weights and expected loss for retail exposures, after it has applied the input floors that would apply to a comparable direct exposure to the guarantor or provider of support arrangements under Articles 160(1), 161(5), 163(1) and 164(4). 

[Note: This rule corresponds to Article 163 of CRR as it applied immediately before revocation by the Treasury]

1.

1.  
2. (a) An institution shall provide own estimates of LGDs subject to the requirements specified in Section 6 and the terms of its IRB permission.
3. (b) An institution shall, subject to point (c), for dilution risk of purchased receivables, use an LGD value of 100% where PD is determined in accordance with point (a) of Article 163(3).
4. (c) An institution shall, for dilution risk of purchased receivables where it uses the PD estimate that results from the decomposition of its EL estimates for dilution risk in accordance with point (b) of Article 163(3), use the LGD estimate that results from the decomposition.

2.

An institution may, subject to Article 163(4), reflect unfunded credit protection in LGDs in accordance with Credit Risk Mitigation (CRR) Part Article 191A.

3.

[Note: Provision left blank]

4.

An institution shall, for retail exposures, when calculating risk-weighted exposure amounts, expected loss amounts, risk weights and expected loss of those exposures, including but not limited to under Article 154(1), Article 157, and Article 158(1) and (10), not use LGD values as inputs to the risk weight and expected loss formulae that are less than the following LGD input floor values:

1. (a) a flat 5% floor value for retail exposures secured by residential immovable property, irrespective of the level of collateral provided;
2. (b) for unsecured retail exposures:
1. (i) a flat 50% floor value for qualifying revolving retail exposures as set out in Article 147(5A); and
2. (ii) a flat 30% floor value for other unsecured retail exposures;
3. (c) for secured and partially secured exposures not within the scope of point (a), where the institution chooses to take into account funded credit protection covering the exposure:
1. (i) in the case of a single type of collateral, a variable LGD input floor value equal to the value of LGD^* in Credit Risk Mitigation (CRR) Part Article 230, or
2. (ii) in the case of multiple types of collateral, a variable LGD input floor value equal to the value of LGD* in Credit Risk Mitigation (CRR) Part Article 231, 

calculated using the Foundation Collateral Method (notwithstanding that this method would not normally apply to retail exposures) in accordance with Credit Risk Mitigation (CRR) Part, provided that in calculating LGD^* for the purpose of this point (c) with reference to Credit Risk Mitigation (CRR) Part Articles 230 or 231, as applicable, the institution shall substitute:

(iii) 30% for \[{\rm LGD}_\textrm{U}\]; and
(iv) the following values for  \[{\rm LGD}_{\textrm{S}}\] or \[{\rm LGD}_{\textrm{S}_\textrm{i}}\] as applicable:

1. (1) 0% for financial collateral;
2. (2) 10% for receivables;
3. (3) 10% for immovable property;
4. (4) 15% for other physical collateral.

4A.

An institution shall, for the purpose of point (c) of paragraph 4, where collateral is held against multiple facilities, comply with the requirements set out in paragraph 7 of Credit Risk Mitigation (CRR) Part Article 193.

5.

[Note: Provision left blank]

6.

[Note: Provision left blank]

7.

[Note: Provision left blank]

8.

[Note: Provision left blank]

[Note: This rule corresponds to Article 164(1) to (4) of CRR as it applied immediately before revocation by the Treasury]

1.

[Note: Provision left blank]

2.

[Note: Provision left blank]

3.

[Note: Provision left blank]

1.

[Note: Provision left blank]

2.

[Note: Provision left blank]

3.

[Note: Provision left blank]

4.

[Note: Provision left blank]

5.

[Note: Provision left blank]

6.

[Note: Provision left blank]

7.

[Note: Provision left blank]

8.

[Note: Provision left blank]

9.

[Note: Provision left blank]

10.

[Note: Provision left blank]

1.

An institution shall, subject to Article 166B, calculate the exposure value for off-balance sheet items in accordance with Article 166C where it is using the Foundation IRB Approach or the Slotting Approach, and in accordance with Article 166D where it is using the Advanced IRB Approach.

2.

Unless otherwise provided for in this Part, the exposure value of on-balance sheet items shall be the accounting value measured without taking into account any credit risk adjustments made. This requirement also applies to assets purchased at a price different than the amount owed.

For purchased assets, the difference between the amount owed and the accounting value remaining after specific credit risk adjustments (in accordance with Credit Risk: General Provision Parts (CRR) Article 110 and Commission Delegated Regulation (EU) No 183/2014) have been applied that has been recorded on the balance-sheet of the institution when purchasing the asset is the denoted discount if the amount owed is larger, and premium if it is smaller.

3.

An institution shall, in order to calculate the exposure value where it recognises on-balance sheet netting of loans and deposits, apply the methods set out in the Credit Risk Mitigation (CRR) Part.

4.

An institution shall set the exposure value for leases as the discounted minimum lease payments. Minimum lease payments shall comprise the payments over the lease term that the lessee is, or can, be required to make and any bargain option (being an option the exercise of which is reasonably certain). If a party other than the lessee may be required to make a payment related to the residual value of a leased asset and this payment obligation fulfils the set of conditions in Credit Risk Mitigation (CRR) Part Article 201 regarding the eligibility of protection providers, as well as the requirements for recognising other types of guarantees provided in Credit Risk Mitigation (CRR) Part Article 213, the institution may take the payment obligation into account as unfunded credit protection in accordance with the Credit Risk Mitigation (CRR) Part.

5.

An institution shall determine the exposure value for the calculation of risk-weighted exposure amounts of purchased receivables as the value determined in accordance with paragraph 1 minus the own funds requirements for dilution risk prior to credit risk mitigation.

An institution shall, for undrawn purchase commitments for revolving purchased receivables, calculate the exposure value using a conversion factor of 40%, except where such commitments meet the criteria set out in point 7 of Column A of Table A1 of paragraph 1 of Credit Risk: Standardised Approach (CRR) Part Article 111, in which case the conversion factor shall be 10%.

6.

An institution with permission to apply the Advanced IRB Approach shall assess EADs arising from facilities or relationships that are not captured in an exposure value in accordance with Article 166D(6).

[Note: Articles 166A to 166D of this Part correspond to Article 166 of CRR as it applied immediately before revocation by the Treasury]

1.

An institution that takes into account credit risk mitigation techniques in calculating the exposure value of securities financing transactions and long settlement transactions shall calculate such exposure value consistently with Credit Risk Mitigation (CRR) Part Article 191A in accordance with either Chapter 3 of the Counterparty Credit Risk (CRR) Part or Chapter 3 of Credit Risk Mitigation (CRR) Part; provided that where the institution takes into account a master netting agreements in relation to set of securities financing transactions, it shall calculate the exposure value for all provided that where the institution takes into account a master netting agreement in relation to a set of securities financing transactions, it shall calculate the exposure value for all transactions covered by that master netting agreement as a single exposure value at netting set level.

2.

In the case of any contract listed in Annex 1 of Chapter 3 of the Counterparty Credit Risk (CRR) Part, the exposure value shall be determined by the methods set out in the Counterparty Credit Risk (CRR) Part and shall not take into account any credit risk adjustment made.

3.

Unless otherwise determined by paragraph 1, where an exposure takes the form of securities or commodities sold, posted or lent under securities financing transactions or long settlement transactions, the institution shall use the exposure value of the securities or commodities determined in accordance with Groups Part Article 24. The institution shall, where it uses the Financial Collateral Comprehensive Method, increase such exposure value by the volatility adjustment appropriate to such securities or commodities, as prescribed in  Credit Risk Mitigation (CRR) Part Articles 223 to 224.

[Note: Articles 166A to 166D of this Part correspond to Article 166 of CRR as it applied immediately before revocation by the Treasury]

1.

An institution shall determine the exposure value for off-balance sheet items in respect of which it uses the Foundation IRB Approach or the Slotting Approach in accordance with Article 147A by multiplying the conversion factor that would be applicable to the off-balance sheet item under the Standardised Approach, as set out in Credit Risk: Standardised Approach (CRR) Part Article 111, by the item’s nominal value.

2.

An institution shall, in order to reflect the effect of funded credit protection in respect of exposures for which it uses the Slotting Approach, apply the methods set out in the Credit Risk Mitigation (CRR) Part. 

[Note: Articles 166A to 166D of this Part correspond to Article 166 of CRR as it applied immediately before revocation by the Treasury]

1.

An institution shall, subject to paragraph 3, determine the exposure value for off-balance sheet items in respect of which it uses the Advanced IRB Approach in accordance with Article 147A by multiplying the item’s nominal value by:

1. (a) for revolving loan commitments which would not be subject to a 100% conversion factor under  Credit Risk: Standardised Approach (CRR) Part Article 111: an own estimate of conversion factor that the institution shall provide in accordance with Section 6;
2. (b) for all other off-balance sheet items: the conversion factor that would be applicable to the off-balance sheet item under the Standardised Approach, as set out in Credit Risk: Standardised Approach (CRR) Part Article 111.

2.

An institution shall, where an on-balance sheet item and a revolving loan commitment relate to the same facility and the institution uses the approach set out in point (a) paragraph 1 for the revolving loan commitment, incorporate any expected increase in the value of the on-balance sheet item at the point of default in its own estimate of conversion factor for the revolving loan commitment.

3.

An institution may, in respect of, 

1. (a) fully undrawn revolving loan facilities (i.e. where a revolving loan commitment arises from a facility for which no on-balance sheet item is related), and
2. (b) partially drawn revolving loan facilities (i.e. where a revolving loan commitment and an on-balance sheet item relate to the same facility),

assign a single exposure value to each such facility instead of the exposure values that would otherwise be assigned to the revolving loan commitment in accordance with paragraph 1 and, where appliable, any related on-balance sheet item in accordance with Article 166A(2). The exposure value assigned to the facility shall be equal to an own estimate of EAD that the institution shall provide in accordance with section 6.

4.

An institution shall, in respect of fully drawn revolving loan facilities (i.e. where an on-balance sheet item arises from a facility that would have given rise to a revolving loan commitment had the facility not been fully drawn), assign an exposure value equal to an own estimate of EAD that the institution shall provide in accordance with section 6 instead of the exposure value that would otherwise be assigned to the on-balance sheet item in accordance with Article 166A(2).

5.

For exposures to corporates, and institutions and for retail exposures, when calculating risk-weighted exposure amounts and expected loss amounts, including but not limited to under Article 153(1), Article 154(1), Article 157, Article 158(1), Article 158(5) and Article 158(10):

1. (a) own estimates of conversion factors provided under point (a) of paragraph 1 shall not be lower than 50% of the conversion factor that would apply to the revolving loan commitment if the Standardised Approach was applied;
2. (b) own estimates of EAD provided under paragraph 3 shall not be lower than the sum of:
1. (i) the exposure value of the on-balance sheet item, where relevant, calculated in accordance with Article 166A(2), disregarding Article 166D; and
2. (ii) 50% of the exposure value that would be calculated for the off-balance sheet item under the Foundation IRB Approach in accordance with Article 166C(1);
3. (c) own estimates of EAD provided under paragraph 4 shall not be lower than the exposure value of the on-balance sheet item calculated in accordance with Article 166A(2), disregarding Article 166D.

6.

1. (a) An institution shall assess EADs arising from facilities or relationships that were not captured in exposure values prior to the amount being drawn, in cases where: 
1. (i) they are not captured in exposure values because the facilities or relationships were not intended to result in credit exposures; and
2. (ii) the institution would have applied the Advanced IRB Approach in accordance with Article 147A in respect of the facilities or relationships had they been captured in exposure values. 
2. (b) An institution shall, where the amounts referred to in point (a) are material, quantify an unrecognised exposure adjustment that reflects the risk-weighted exposure amounts that would be required to reflect the credit risk arising from such exposures. An institution shall allocate the total value of the unrecognised exposure adjustment to exposure classes and exposure subclasses on a best-efforts basis.

[Note: Articles 166A to 166D of this Part correspond to Article 166 of CRR as it applied immediately before revocation by the Treasury]

1.

[Note: Provision left blank]

2.

[Note: Provision left blank]

An institution shall, for the exposure value of other non-credit obligation assets, use the accounting value remaining after specific credit risk adjustments (in accordance with Credit Risk: General Provisions (CRR) Part Article 110 and Commission Delegated Regulation (EU) No 183/2014) have been applied.

[Note: This rule corresponds to Article 168 of CRR as it applied immediately before revocation by the Treasury]

1.

An institution shall, where it uses multiple rating systems, document the rationale for assigning an obligor or a transaction to a rating system and apply it in a manner that appropriately reflects the level of risk.

2.

An institution shall periodically review assignment criteria and processes to determine whether they remain appropriate for the current portfolio and external conditions.

3.

An institution may use direct estimates of LGDs, and conversion factors or EADs (but not PDs), for exposures and treat such estimates as representing an assignment to grades on a continuous rating scale.

[Note: This rule corresponds to Article 169 of CRR as it applied immediately before revocation by the Treasury]

1.

Subject to paragraph 2, an institution applying the LGD Modelling Collateral Method in accordance with Credit Risk Mitigation (CRR) Part Article 191A may recognise the existence of collateral in its LGD estimates. Collateral recognised by the institution shall be taken into account in its LGD estimates as follows:

1. (a) for an exposure where Article 169B does not apply to any collateral recognised by the institution that secures the exposure, the institution shall:
1. (i) include the collateral recognised by the institution in its consideration of risk drivers in accordance with point (b) of Article 170(4); and
2. (ii) take the collateral recognised by the institution into account when quantifying LGD estimates;
2. (b) for an exposure where Article 169B applies to any collateral recognised by the institution that secures the exposure, the institution shall take the collateral into account in accordance with that Article.

2.

An institution may only use the LGD Modelling Collateral Method referred to in paragraph 1 to the extent which it has:

1. (a) established internal requirements for collateral management, operational procedures, legal certainty and risk management in respect of the types of collateral that it takes into account in its LGD estimates; and
2. (b) those internal requirements are generally consistent with those required for the Foundation Collateral Method.

3.

Where an institution has an exposure that is covered by unfunded credit protection that, in turn, is covered by collateral, the institution uses both the LGD Adjustment Method and the LGD Modelling Collateral Method in accordance with paragraph 2 of Credit Risk Mitigation (CRR) Part Article 191A, and Article 169B does not apply to any collateral recognised by the institution that secures the exposure, the institution may apply the LGD Modelling Collateral Method by reflecting the effect of collateral by adjusting facility grades or LGD estimates in accordance with Article 183(2A) instead of applying the approach set out in point (a) of paragraph 1.

1.

This article applies where an institution applying the LGD Modelling Collateral Method recognises a particular type of collateral located in a particular jurisdiction that is held against an exposure, and it does not have sufficient data to model robustly the effect of that particular type of collateral on recoveries in that particular jurisdiction.

2.

Where the condition in paragraph 1 is met, an institution shall calculate own LGD estimates for the exposure by:

1. (a) in the case of an exposure secured by a single type of collateral that is recognised by the institution, applying the formula in Credit Risk Mitigation (CRR) Part Article 230, or
2. (b) in the case of an exposure secured by multiple types of collateral that is recognised by the institution, applying the formula in Credit Risk Mitigation (CRR) Part Article 231,
3. and, in applying these formulae:
4. (c) LGD_U shall represent the institution’s own estimate of unsecured LGD for the exposure disregarding recoveries from collateral;
5. (d) the institution shall meet the requirements of this Section 6 in respect of its own estimates of unsecured LGD, although the institution shall not take collateral into account for the purpose of assigning exposures to facility grades or pools and recoveries from collateral shall not be taken into account in LGD estimates; and
6. (e) all other parameters in the formula shall be calculated in accordance with the Foundation Collateral Method. Accordingly, only collateral which is eligible under the Foundation Collateral Method may be recognised for the purpose of determining the secured part of the exposure.

1.

An institution shall ensure that the structure of a rating system for exposures to corporates and institutions complies with the following requirements:

1. (a) a rating system shall take into account obligor and transaction risk characteristics;
2. (b) a rating system shall have an obligor rating scale which reflects exclusively quantification of the risk of obligor default. The obligor rating scale shall have a minimum of 7 grades for non-defaulted obligors and one for defaulted obligors;
3. (c) an institution shall document the relationship between obligor grades in terms of the level of default risk each grade implies and the criteria used to distinguish that level of default risk;
4. (d) an institution with portfolios concentrated in a particular market segment and range of default risk shall have enough obligor grades within that range to avoid undue concentrations of obligors in a particular grade. Significant concentrations within a single grade shall be supported by convincing empirical evidence that the obligor grades covers a reasonably narrow PD band and that the default risk posed by all obligors in the grade falls within that band;
5. (e) where an institution uses the Advanced IRB Approach, a rating system shall incorporate a distinct facility rating scale which exclusively reflects LGD related transaction characteristics. The facility grade definition shall include both a description of how exposures are assigned to the grade and of the criteria used to distinguish the level of risk across grades;
6. (f) significant concentrations within a single facility grade shall be supported by convincing empirical evidence that the facility grade covers a reasonably narrow LGD band, respectively, and that the risk posed by all exposures in the grade falls within that band.

2.

An institution using the Slotting Approach for assigning risk weights for specialised lending exposures is exempt from the requirement to have an obligor rating scale which reflects exclusively quantification of the risk of obligor default for the specialised lending exposures. The institution shall have for these exposures at least four grades for non-defaulted obligors and at least one grade for defaulted obligors.

3.

An institution shall ensure that the structure of a rating system for retail retail exposures with the following requirements:

1. (a) the rating system shall reflect both obligor and transaction risk, and shall capture all relevant obligor and transaction characteristics;
2. (b) the level of risk differentiation shall ensure that the number of exposures in a given grade or pool is sufficient to allow for meaningful quantification and validation of the loss characteristics at the grade or pool level. The distribution of exposures and obligors across grades or pools shall be such as to avoid excessive concentrations;
3. (c) the process of assigning exposures to grades or pools shall provide for a meaningful differentiation of risk, for a grouping of sufficiently homogenous exposures, and shall allow for accurate and consistent estimation of loss characteristics at grade or pool level. For purchased receivables the grouping shall reflect the seller’s underwriting practices and the heterogeneity of its customers.

4.

An institution shall consider the following risk drivers when assigning exposures to grades or pools:

1. (a) obligor risk characteristics;
2. (b)
1. (i) subject to point (b)(ii), transaction risk characteristics, including product or collateral types or both. The institution shall explicitly address cases where several exposures benefit from the same collateral;
2. (ii) point (b)(i) only applies in relation to collateral where the collateral is recognised by an institution using the LGD Modelling Collateral Method and Article 169B does not apply to any collateral recognised by the institution that secures the exposure;
3. (c) delinquency, except where an institution demonstrates that delinquency is not a material driver of risk for the exposure.

[Note: This rule corresponds to Article 170 of CRR as it applied immediately before revocation by the Treasury]

1.

An institution shall have specific definitions, processes and criteria for assigning exposures to grades or pools within a rating system that comply with the following requirements:

1. (a) the grade or pool definitions and criteria shall be sufficiently detailed to allow those charged with assigning ratings to consistently assign obligors or facilities posing similar risk to the same grade or pool. This consistency shall exist across lines of business, departments and geographic locations;
2. (b) the documentation of the rating process shall allow third parties to understand the assignments of exposures to grades or pools, to replicate grade and pool assignments and to evaluate the appropriateness of the assignments to a grade or a pool;
3. (c) the criteria shall also be consistent with the institution’s internal lending standards and its policies for handling troubled obligors and facilities.

2.

An institution shall, subject to paragraph 3, take all relevant information into account in assigning obligors and facilities to grades or pools. Such information shall be current and shall enable the institution to forecast the future performance of the exposure. The less information an institution has, the more conservative shall be its assignments of exposures to obligor grades, facility grades or pools. If an institution uses an external rating as a primary factor determining an internal rating assignment, the institution shall ensure that it considers other relevant information.

3.

An institution shall not take the following information into account in assigning obligors and facilities to grades and pools:

1. (a) the impact of guarantees and credit derivatives which the firm recognises through the LGD Adjustment Method;
2. (b) the existence of collateral and the impact of such collateral on recoveries, except where:
   1. (i) the collateral is recognised by an institution when applying the LGD Modelling Collateral Method; and 
   2. (ii) Article 169B does not apply to any collateral recognised by the institution that secures the exposure.

[Note: This rule corresponds to Article 171 of CRR as it applied immediately before revocation by the Treasury]

1.

An institution shall assign exposures to corporates and institutions in accordance with the following criteria:

1. (a) each obligor shall be assigned to an obligor grade as part of the credit approval process;
2. (b) for those exposures for which an institution has an IRB permission to use the Advanced IRB Approach, each exposure shall also be assigned to a facility grade as part of the credit approval process;
3. (c) an institution using the Slotting Approach for assigning risk weights for specialised lending exposures shall assign each of these exposures to a grade in accordance with Article 170(2);
4. (d) each separate legal entity to which the institution is exposed shall be separately rated. An institution shall have appropriate policies regarding the treatment of individual obligor clients and groups of connected clients;
5. (e) separate exposures to the same obligor shall be assigned to the same obligor grade, irrespective of any differences in the nature of each specific transaction. However, separate exposures to the same obligor may be assigned to different grades where any of the following apply:
1. (i) the assignment reflects country transfer risk, this being dependent on whether the exposures are denominated in local or foreign currency;
2. (ii) the assignment reflects the impact on default risk of guarantees or other support arrangements that are associated to an exposure;
3. (iii) the assignment is necessary because of consumer protection, bank secrecy or other legislation prohibiting the exchange of client data.

2.

An institution shall, for retail exposures, assign each exposure to a grade or a pool as part of the credit approval process.

3.

An institution shall, subject to the second sub-paragraph, for grade and pool assignments, document the situations in which human judgement may override the inputs or outputs of the assignment process and the personnel responsible for approving these overrides. The institution shall document these overrides and note down the personnel responsible. The institution shall analyse the performance of the exposures whose assignments have been overridden. This analysis shall include an assessment of the performance of exposures whose rating has been overridden by a particular person, accounting for all the responsible personnel.

An institution shall not make overrides to reflect the information in points (a) and (b) of Article 171(3).

[Note: This rule corresponds to Article 172 of CRR as it applied immediately before revocation by the Treasury]

1.

An institution shall ensure that its assignment procedures in relation to exposures to corporates and institutions meet the following requirements of integrity:

1. (a) assignments and periodic reviews of assignments shall be completed or approved by an independent party that does not directly benefit from decisions to extend the credit;
2. (b) the institution shall review assignments at least annually and adjust the assignment where the result of the review does not justify carrying forward the current assignment. High risk obligors and problem exposures shall be subject to more frequent review. The institution shall undertake a new assignment if material information on the obligor or exposure becomes available;
3. (c) the institution shall have an effective process to obtain and update relevant information on obligor characteristics that affect PDs, and on transaction characteristics that affect LGDs, or conversion factors or EADs.

2.

An institution shall, for retail exposures, at least annually review obligor and facility assignments and adjust the assignment where the result of the review does not justify carrying forward the current assignment, or review the loss characteristics and delinquency status of each identified risk pool, whichever applicable. An institution shall also at least annually review in a representative sample the status of individual exposures within each pool as a means of ensuring that exposures continue to be assigned to the correct pool, and adjust the assignment where the result of the review does not justify carrying forward the current assignment.

3.

[Note: Provision left blank]

[Note: Paragraphs 1 and 2 of this rule correspond to Article 173(1) and (2) of CRR as it applied immediately before revocation by the Treasury]

An institution shall, where it uses statistical models and other mechanical methods (‘models’) to assign exposures to obligors or facilities grades or pools, comply with the following requirements:

1. (a) the model shall have good predictive power and capital requirements shall not be distorted as a result of its use. The input variables shall form a reasonable and effective basis for the resulting predictions. The model shall not have material biases;
2. (b) the institution shall have in place a process for vetting data inputs into the model, which includes an assessment of the accuracy, completeness and appropriateness of the data;
3. (c) the data used to build the model shall be representative of the population of the institution’s actual obligors or exposures;
4. (d) the institution shall have a regular cycle of model validation that includes monitoring of model performance and stability; review of model specification; and testing of model outputs against outcomes;
5. (e) the institution shall complement the statistical model by human judgement and human oversight to review model-based assignments and to ensure that the models are used appropriately. Review procedures shall aim at finding and limiting errors associated with model weaknesses. Human judgements shall take into account all relevant information not considered by the model. The institution shall document how human judgement and model results are to be combined.

[Note: This rule corresponds to Article 174 of CRR as it applied immediately before revocation by the Treasury]

1.

An institution shall document the design and operational details of its rating systems and shall ensure that the documentation provides evidence of compliance with the requirements in this Section 6, and addresses topics including portfolio differentiation, rating criteria, responsibilities of parties that rate obligors and exposures, frequency of assignment reviews, and management oversight of the rating process.

2.

An institution shall:

1. (a) document the rationale for and analysis supporting its choice of rating criteria; and
2. (b) document all major changes in the risk rating process, and such documentation shall support identification of changes made to the risk rating process subsequent to the last review by the PRA. The organisation of rating assignment, including the rating assignment process and the internal control structure, shall also be documented.

3.

An institution shall document the specific definitions of default and loss used internally and ensure consistency with the definitions set out in this Part.

4.

An institution shall document its methodologies where it employs statistical models in the rating process, and this documentation shall:

1. (a) provide a detailed outline of the theory, assumptions and mathematical and empirical basis of the assignment of estimates to grades, individual obligors, exposures, or pools, and the data source(s) used for model estimation;
2. (b) establish a rigorous statistical process including out-of-time and out-of-sample performance tests for validating the model;
3. (c) indicate any circumstances under which the model does not work effectively.

5.

An institution shall demonstrate that the requirements of this Article are met where the institution has obtained a rating system, or model used within a rating system, from a third-party vendor and that vendor refuses the institution access to, or restricts the institution from accessing, information pertaining to the methodology of that rating system or model, or underlying data used to develop that methodology or model, on the basis that such information is proprietary.

[Note: This rule corresponds to Article 175 of CRR as it applied immediately before revocation by the Treasury]

1.

An institution shall collect and store data on aspects of its internal ratings as required under the Disclosure (CRR) Part. The data collected and stored by an institution shall also include data on key borrower and facility characteristics in order to:

1. (a) provide effective support to the institution’s internal credit risk measurement and management processes;
2. (b) enable the institution to meet the other requirements in this Part;
3. (c) serve as a basis for supervisory reporting; and
4. (d) support retrospective re-allocation of obligors and facilities to grades.

2.

An institution shall, for exposures to corporates and institutions, collect and store:

1. (a) complete rating histories on obligors and recognised guarantors;
2. (b) the dates the ratings were assigned;
3. (c) the key data and methodology used to derive the rating;
4. (d) the person responsible for the rating assignment;
5. (e) the identity of obligors and exposures that defaulted;
6. (f) the date and circumstances of the defaults referred to in point (e);
7. (g) data on the PDs and realised default rates associated with rating grades and ratings migration.

3.

An institution with an IRB permission to use the Foundation IRB Approach shall, for exposures in respect of which it uses the Foundation IRB Approach, collect and store data on comparisons of realised LGDs with the values as set out in Article 161(1) and realised conversion factors with the values as set out in Credit Risk: Standardised Approach (CRR) Part Article 111 as referred to in Article 166C(1).

4.

Subject to paragraph 6, an institution with an IRB permission to use the Advanced IRB Approach shall, for exposures in respect of which it uses the Advanced IRB Approach, collect and store:

1. (a) complete histories of data on the facility ratings and estimates of LGD, and conversion factor or EADs, associated with each rating scale;
2. (b) the dates on which the ratings were assigned and the estimates were made;
3. (c) the key data and methodology used to derive the facility ratings and estimates of LGD, and conversion factor or EAD;
4. (d) information on the person who assigned the facility rating and the person who provided the estimates of LGD, and conversion factor or EAD;
5. (e) data on the estimated and realised LGDs, and conversion factors or EADs, associated with each defaulted exposure;
6. (f) data on the LGD of the exposure before and after evaluation of the effects of a guarantee or credit derivative, for those institutions that reflect the credit risk mitigating effects of guarantees or credit derivatives through the Parameter Substitution Method or the LGD Adjustment Method;
7. (g) data on the components of loss for each defaulted exposure, including:
   1. (i) amounts recovered; 
   2. (ii) source of recovery;
   3. (iii) time period requirement for recovery; 
   4. (iv) administrative costs;
8. (h) data on limits and balances used to derive conversion factor or EAD estimates, as well as realised conversion factors and realised exposure values at default.

6.

An institution with an IRB permission to use the Advanced IRB Approach need not meet the requirements relating to conversion factors and EADs set out in paragraphs 4 and 5 in respect of exposures for which it uses the Advanced IRB Approach and does not provide own estimates of conversion factors or EADs in accordance with Article 166D. The institution shall instead comply with the requirements in paragraph 3 relating to conversion factors as if it applied the Foundation IRB Approach to those exposures.

[Note: This rule corresponds to Article 176 of CRR as it applied immediately before revocation by the Treasury]

1.

An institution shall have in place sound stress testing processes for use in the assessment of its capital adequacy. Stress testing shall involve identifying possible events or future changes in economic conditions that could have unfavourable effects on an institution’s credit exposures and assessment of the institution’s ability to withstand such changes.

2.

An institution shall regularly perform a credit risk stress test to assess the effect of certain specific conditions on its total capital requirements for credit risk. The institution shall be able to submit, upon request, documentary evidence that demonstrates that the test chosen by the institution is meaningful and considers the effects of severe, but plausible, recession scenarios. An institution shall assess migration in its ratings under the stress test scenarios. Stressed portfolios shall contain the vast majority of an institution’s total exposure.

3.

[Note: Provision left blank]

[Note: This rule corresponds to Article 177 of CRR as it applied immediately before revocation by the Treasury]