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Page 7 of 22: Article 153 to Article 180.

191. 153 Article 153

     Article 153 Risk-weighted exposure amounts for exposures to central governments and central banks, exposures to regional governments, local authorities and public sector entities, exposures to institutions and exposures to corporates 1. Subject to the application of the specific treatments laid down in paragraphs 2 and 4, the risk-weighted exposure amounts for exposures to central governments and central banks, exposures to regional governments, local authorities and public sector entities, exposures to institutions and exposures to corporates shall be calculated according to the following formulae: Risk – weighted exposure amount = RW · exposure value where the risk weight RW is defined as (i) if PD = 0, RW shall be 0; (ii) if PD = 1, i.e., for defaulted exposures: where institutions apply the LGD values set out in Article 161(1), RW shall be 0; where institutions use own estimates of LGDs, RW shall be RWmax 0;12.5LGD ELBE; where the expected loss best estimate (hereinafter referred to as ‘ELBE’) shall be the institution's best estimate of expected loss for the defaulted exposure in accordance with Article 181(1)(h); (iii) if 0 < PD < 1, then: where: N = the cumulative distribution function for a standard normal random variable, i.e. N(x) equals the probability that a normal random variable with mean of 0 and variance of 1, is less than or equal to x; G = the inverse cumulative distribution function for a standard normal random variable, i.e. if x = G(z), x is the value such that N(x) = z; R = the coefficient of correlation, which is defined as: b = the maturity adjustment factor, which is defined as: b = [ – ‏‏‏· ln(PD)]2; M = the maturity, expressed in years and determined in accordance with Article 162. 2. For exposures to large regulated financial sector entities and to unregulated financial sector entities, the coefficient of correlation R referred to in paragraph 1, point (iii), or paragraph 4, as applicable, shall be multiplied by when calculating the risk weights of those exposures. 3. The risk-weighted exposure amount for each exposure which meets the requirements set out in Articles 202 and 217 may be adjusted in accordance with the following formula: Risk – weighted exposure amount = RW · exposure value · (0.15 + 160 · PDpp) where: PDppPD of the protection provider. RW shall be calculated using the relevant risk weight formula set out in point 1 for the exposure, the PD of the obligor and the LGD of a comparable direct exposure to the protection provider. The maturity factor (b) shall be calculated using the lower of the PD of the protection provider and the PD of the obligor. 4. For exposures to companies where the total annual sales for the consolidated group of which the firm is a part is less than EUR 50 million, institutions may use the following correlation formula in paragraph 1 (iii) for the calculation of risk weights for corporate exposures. In this formula S is expressed as total annual sales in millions of euro with EUR 5 million ≤ S ≤ EUR 50 million. Reported sales of less than EUR 5 million shall be treated as if they were equivalent to EUR 5 million. For purchased receivables the total annual sales shall be the weighted average by individual exposures of the pool. R0.12 1 e50 PD1 e500.24 1 1 e50 PD1 e500.04 1 minmax5,S,50 545 Institutions shall substitute total assets of the consolidated group for total annual sales when total annual sales are not a meaningful indicator of firm size and total assets are a more meaningful indicator than total annual sales. 5. For specialised lending exposures in respect of which an institution is not able to estimate PDs or the institutions' PD estimates do not meet the requirements set out in Section 6, the institution shall assign risk weights to these exposures in accordance with Table 1, as follows: Table 1 Remaining MaturityCategory 1Category 2Category 3Category 4Category 5Less than 2,5 years50 %70 %115 %250 %0 %Equal or more than 2,5 years70 %90 %115 %250 %0 % In assigning risk weights to specialised lending exposures institutions shall take into account the following factors: financial strength, political and legal environment, transaction and/or asset characteristics, strength of the sponsor and developer, including any public private partnership income stream, and security package. 6. For their purchased corporate receivables institutions shall 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 corporate exposures 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. 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 the purchaser of the receivables or by the beneficiary of the collateral or of the partial guarantee in accordance with Subsections 2 and 3 of Section 3 of Chapter 5. The seller providing the refundable purchase price discount and the provider of a collateral or a partial guarantee shall treat those as an exposure to a first loss position in accordance with Subsections 2 and 3 of Section 3 of Chapter 5. 8. Where an institution 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, the risk weights of the exposures included in the basket will be aggregated, 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. 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. A % risk weight shall apply to positions in a basket for which an institution cannot determine the risk-weight under the IRB Approach. 9. EBA shall develop draft regulatory technical standards to specify how institutions are to take into account the factors referred to in paragraph 5, second subparagraph, when assigning risk weights to specialised lending exposures. EBA shall submit those draft regulatory technical standards to the Commission by 10 July 2026. Power is delegated to the Commission to supplement this Regulation by adopting the regulatory technical standards referred to in the first subparagraph of this paragraph in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.

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192. 154 Article 154

     Article 154 Risk-weighted exposure amounts for retail exposures 1. The risk-weighted exposure amounts for retail exposures shall be calculated in accordance with the following formulae: Risk – weighted exposure amount = RW · exposure value where the risk weight RW is defined as follows: (i) if PD = 1, i.e., for defaulted exposures, RW shall be RWmax0;12.5 LGD ELBE; where ELBE shall be the institution's best estimate of expected loss for the defaulted exposure in accordance with Article 181(1)(h); (ii) if PD < 1, then: where: N = the cumulative distribution function for a standard normal random variable, i.e. N(x) equals the probability that a normal random variable with mean of 0 and variance of 1, is less than or equal to x; G = the inverse cumulative distribution function for a standard normal random variable, i.e. if x = G(z), x is the value such that N(x) = z; R = the coefficient of correlation, which is defined as: 2. The risk-weighted exposure amount for each exposure to an SME as referred to in Article 147(5) which meets the requirements set out in Articles 202 and 217 may be calculated in accordance with Article 153(3). 3. For retail exposures that are not in default and are secured or partially secured by residential property, a coefficient of correlation R of shall replace the figure produced by the coefficient of correlation formula in paragraph 1. The risk weight calculated for an exposure partially secured by residential property pursuant to paragraph 1, point (ii), taking into account a coefficient of correlation R as set out in the first subparagraph of this paragraph, shall be applied both to the secured and the unsecured part of that exposure. 4. For QRREs that are not in default, a coefficient of correlation R of shall replace the figure produced by the coefficient of correlation formula in paragraph 1. Competent authorities shall review the relative volatility of loss rates across QRREs belonging to the same type of exposures, as well as across the aggregate QRRE exposure class, and shall share information on the typical characteristics of qualifying revolving retail loss rates with Member States and with EBA. 5. To be eligible for the retail treatment, purchased receivables shall comply with the requirements set out in Article 184 and the following conditions: (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; (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 firms that buy and sell to each other are ineligible; (c) the purchasing institution has a claim on all proceeds from the purchased receivables or a pro-rata interest in the proceeds; and (d) the portfolio of purchased receivables is sufficiently diversified. 6. For purchased retail 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 the purchaser of the receivables or by the beneficiary of the collateral or of the partial guarantee in accordance with Subsections 2 and 3 of Section 3 of Chapter 5. The seller providing the refundable purchase price discount and the provider of a collateral or a partial guarantee shall treat those as an exposure to a first loss position in accordance with Subsections 2 and 3 of Section 3 of Chapter 5. 7. For hybrid pools of purchased retail receivables where purchasing institutions cannot separate exposures secured by immovable property collateral and qualifying revolving retail exposures from other retail exposures, the retail risk weight function producing the highest capital requirements for those exposures shall apply.

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193. 155 Article 155

     Article 155 Risk-weighted exposure amounts for equity exposures 1. Institutions shall determine their risk-weighted exposure amounts for equity exposures, excluding those deducted in accordance with Part Two or subject to a 250 % risk weight in accordance with Article 48, in accordance with the approaches set out in paragraphs 2, 3 and 4 of this Article. An institution may apply different approaches to different equity portfolios where the institution itself uses different approaches for internal risk management purposes. Where an institution uses different approaches, the choice of the PD/LGD approach or the internal models approach shall be made consistently, including over time and with the approach used for the internal risk management of the relevant equity exposure, and shall not be determined by regulatory arbitrage considerations. Institutions may treat equity exposures to ancillary services undertakings in accordance with the treatment of other non credit- obligation assets. 2. Under the simple risk weight approach, the risk-weighted exposure amount shall be calculated in accordance with the formula: Risk – weighted exposure amount = RW * exposure value, where: Risk weight (RW)190 % for private equity exposures in sufficiently diversified portfolios.Risk weight (RW)290 % for exchange traded equity exposures.Risk weight (RW)370 % for all other equity exposures. Short cash positions and derivative instruments held in the non-trading book are permitted to offset long positions in the same individual stocks provided that these instruments have been explicitly designated as hedges of specific equity exposures and that they provide a hedge for at least another year. Other short positions are to be treated as if they are long positions with the relevant risk weight assigned to the absolute value of each position. In the context of maturity mismatched positions, the method is that for corporate exposures as set out in Article 162(5). Institutions may recognise unfunded credit protection obtained on an equity exposure in accordance with the methods set out in Chapter 4. 3. Under the PD/LGD approach, risk-weighted exposure amounts shall be calculated according to the formulas in Article 153(1). If institutions do not have sufficient information to use the definition of default set out in Article 178, a scaling factor of 1,5 shall be assigned to the risk weights. At the individual exposure level the sum of the expected loss amount multiplied by 12,5 and the risk-weighted exposure amount shall not exceed the exposure value multiplied by 12,5. Institutions may recognise unfunded credit protection obtained on an equity exposure in accordance with the methods set out in Chapter 4. This shall be subject to an LGD of 90 % on the exposure to the provider of the hedge. For private equity exposures in sufficiently diversified portfolios an LGD of 65 % may be used. For these purposes M shall be five years. 4. Under the internal models approach, the risk-weighted exposure amount shall be the potential loss on the institution's equity exposures as derived using internal value-at-risk models subject to the 99th percentile, one-tailed confidence interval of the difference between quarterly returns and an appropriate risk-free rate computed over a long-term sample period, multiplied by 12,5. The risk-weighted exposure amounts at the equity portfolio level shall not be less than the total of the sums of the following: (a) the risk-weighted exposure amounts required under the PD/LGD Approach; and (b) the corresponding expected loss amounts multiplied by 12,5. The amounts referred to in point (a) and (b) shall be calculated on the basis of the PD values set out in Article 165(1) and the corresponding LGD values set out in Article 165(2). Institutions may recognise unfunded credit protection obtained on an equity position.

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194. 156 Article 156

     Article 156 Risk-weighted exposure amounts for other non credit-obligation assets The risk-weighted exposure amounts for other non credit-obligation assets shall be calculated in accordance with the following formula: Risk – weighted exposure amount = 100 % · exposure value, except for: (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, in which case a 0 % risk-weight shall be assigned; (b) when the exposure is a residual value of leased assets in which case it shall be calculated as follows: 1t 100 % exposure value where t is the greater of 1 and the nearest number of whole years of the lease remaining.

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195. 157 Article 157

     Article 157 Risk-weighted exposure amounts for dilution risk of purchased receivables 1. Institutions 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. Institutions shall determine the input parameters PD and LGD in accordance with Section 4. 3. Institutions shall determine the exposure value in accordance with Section 5. 4. For the purposes of this Article, the value of M is 1 year. 5. The competent authorities shall exempt an institution from calculating and recognising risk-weighted exposure amounts for dilution risk of a type of exposures caused by purchased corporate or retail receivables where the institution has demonstrated to the satisfaction of the competent authority that dilution risk for that institution is immaterial for this type of exposures. 6. EBA shall develop draft regulatory technical standards to further specify: (a) the methodology for the calculation of risk-weighted exposure amount for dilution risk of purchased receivables, including recognition of credit risk mitigation in accordance with Article 160(4), and the conditions for the use of own estimates and parameters of the fall-back approach; (b) the assessment of the immateriality criterion for the type of exposures referred to in paragraph 5. EBA shall submit those draft regulatory technical standards to the Commission by 10 July 2027. Power is delegated to the Commission to supplement this Regulation by adopting the regulatory technical standards referred to in the first subparagraph of this paragraph in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.

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196. 158 Article 158

     Article 158 Treatment by exposure type 1. The calculation of expected loss amounts shall be 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. The expected loss amounts for securitised exposures shall be calculated in accordance with Chapter 5. 3. The expected loss amount for exposures belonging to the ‘other non credit obligations assets’ exposure class referred to in point (g) of Article 147(2) shall be zero. 4. The expected loss amounts for exposures in the form of shares or units of a CIU referred to in Article 152 shall be calculated in accordance with the methods set out in this Article. 5. The expected loss (EL) and expected loss amounts for exposures to corporates, institutions, central governments and central banks, regional governments, local authorities and public sector entities and retail exposures shall be calculated in accordance with the following formulae: expected loss (EL) = PD * LGD expected loss amount = EL [multiplied by] exposure value. For defaulted exposures (PD = 100 %) where institutions use own estimates of LGD, EL shall be ELBE, the institution’s best estimate of expected loss for the defaulted exposure in accordance with Article 181(1), point (h). 6. The EL values for specialised lending exposures where institutions use the methods set out in Article 153(5) for assigning risk weights shall be assigned in accordance with Table 2. Table 2 Remaining MaturityCategory 1Category 2Category 3Category 4Category 5Less than 2,5 years0 %0,4 %2,8 %8 %50 %Equal to or more than 2,5 years0,4 %0,8 %2,8 %8 %50 % 7. The expected loss amounts for equity exposures where the risk-weighted exposure amounts are calculated in accordance with the simple risk weight approach shall be calculated in accordance with the following formula: Expected loss amount = EL · exposure value The EL values shall be the following: Expected loss (EL)0,8 % for private equity exposures in sufficiently diversified portfoliosExpected loss (EL)0,8 % for exchange traded equity exposuresExpected loss (EL)2,4 % for all other equity exposures. 8. The expected loss and expected loss amounts for equity exposures where the risk-weighted exposure amounts are calculated in accordance with the PD/LGD approach shall be calculated in accordance with the following formula: Expected loss (EL) = PD · LGD Expected loss amount = EL · exposure value 9. The expected loss amounts for equity exposures where the risk-weighted exposure amounts are calculated in accordance with the internal models approach shall be zero. 9a. The expected loss amount for a minimum value commitment that meets all the requirements set out in Article 132c(3) shall be zero. 10. The expected loss amounts for dilution risk of purchased receivables shall be calculated in accordance with the following formula: Expected loss (EL) = PD · LGD Expected loss amount = EL · exposure value

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197. 159 Article 159

     Article 159 Treatment of expected loss amounts, IRB shortfall and IRB excess 1. Institutions shall subtract the expected loss amounts of exposures referred to in Article 158(5), (6) and (10) from the sum of all of the following: (a) the general and specific credit risk adjustments related to those exposures, calculated in accordance with Article 110; (b) additional value adjustments due to counterparty default determined in accordance with Article 34 and related to exposures for which the expected loss amounts are calculated in accordance with Article 158(5), (6) and (10); (c) other own funds reductions related to those exposures other than the deductions made in accordance with Article 36(1), point (m). Where the calculation performed in accordance with the first subparagraph results in a positive amount, the amount obtained shall be called ‘IRB excess’. Where the calculation performed in accordance with the first subparagraph results in a negative amount, the amount obtained shall be called ‘IRB shortfall’. 2. For the purposes of the calculation referred to in the paragraph 1 of this Article, institutions shall treat discounts determined in accordance with Article 166(1) on balance-sheet exposures purchased when in default in the same manner as specific credit risk adjustments. Discounts on balance-sheet exposures purchased when not in default shall not be allowed to be included in the calculation of the IRB shortfall or IRB excess. Specific credit risk adjustments on exposures in default shall not be used to cover expected loss amounts on other exposures. Expected loss amounts for securitised exposures and general and specific credit risk adjustments related to those exposures shall not be included in the calculation of the IRB shortfall or IRB excess.

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198. 159A Article 159a

     Article 159a Non-application of PD, LGD and CCF input floors For the purposes of Chapter 3, and in particular with regard to Articles 160(1), 161(4), 164(4) and 166(8c), where an exposure is covered by an eligible guarantee provided by a central government or central bank or by the ECB, the PD, LGD and CCF input floors shall not apply to the part of the exposure covered by that guarantee. However, the part of the exposure that is not covered by that guarantee shall be subject to the PD, LGD and CCF input floors concerned.

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199. 160 Article 160

     Article 160 Probability of default (PD) 1. For exposures assigned to the exposure classes referred to in Article 147(2), point (b), or point (c)(i), (ii) or (iii), for the sole purpose of calculating risk-weighted exposure amounts and the expected loss amounts of those exposures, in particular for the purposes of Articles 153 and 157, and Article 158(1), (5) and (10), the PD value that is used for each exposure as an input of the risk-weighted exposure amounts and expected loss formulae shall not be less than the following PD input floor value: %. 1a. For exposures assigned to the exposure classes referred to in Article 147(2), point (aa)(i) or (ii), for the sole purpose of calculating risk-weighted exposure amounts and the expected loss amounts of those exposures, the PD value that is used for each exposure as an input of the risk-weighted exposure amounts and expected loss formulae shall not be less than the following PD input floor value: %. 2. 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, the PDs for these exposures shall be determined in accordance with the following methods: (a) for senior claims on purchased corporate receivables PD shall be the institutions estimate of EL divided by LGD for these receivables; (b) for subordinated claims on purchased corporate receivables PD shall be the institution's estimate of EL; (c) an institution that has received the permission of the competent authority to use own LGD estimates for corporate exposures pursuant to Article 143 and that can decompose its EL estimates for purchased corporate receivables into PDs and LGDs in a manner that the competent authority considers to be reliable, may use the PD estimate that results from this decomposition. 3. The PD of obligors in default shall be 100 %. 4. For an exposure covered by an unfunded credit protection, an institution using own estimates of LGD under Article 143 for both the exposure that is covered by the unfunded credit protection and for comparable direct exposures to the protection provider may recognise the unfunded credit protection in the PD in accordance with Article 183. 5. Institutions using own LGD estimates may recognise unfunded credit protection by adjusting PDs subject to Article 161(3). 6. For dilution risk of purchased corporate receivables, PD shall be set equal to the EL estimates of the institution for dilution risk. An institution that has received permission from the competent authority pursuant to Article 143 to use own estimates of LGD for corporate exposures that can decompose its EL estimates for dilution risk of purchased corporate receivables into PDs and LGDs in a manner that the competent authority considers to be reliable, may use the PD estimates that result from that decomposition. Institutions may recognise unfunded credit protection in the PD in accordance with Chapter 4. 7. An institution that has received the permission of the competent authority pursuant to Article 143 to use own estimates of LGD for dilution risk of purchased corporate receivables may recognise unfunded credit protection by adjusting PDs subject to Article 161(3).

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200. 161 Article 161

     Article 161 Loss Given Default (LGD) 1. Institutions shall use the following LGD values: (a) senior exposures without eligible funded credit protection to central governments and central banks, to financial sector entities and to regional governments, local authorities and public sector entities: 45 %; (aa) senior exposures without eligible funded credit protection to corporates which are not financial sector entities: 40 %; (b) subordinated exposures without eligible collateral: 75 %; (c) institutions may recognise funded and unfunded credit protection in the LGD in accordance with Chapter 4; (d) covered bonds eligible for the treatment set out in Article 129(4) or (5) may be assigned an LGD value of 11,25 %; (e) for senior purchased corporate receivables exposures where an institution is not able to estimate PDs or where the institution’s PD estimates do not meet the requirements set out in Section 6: 40 %; (f) for subordinated purchased corporate receivables exposures where an institution is not able to estimate PDs or the institution's PD estimates do not meet the requirements set out in Section 6: 100 %; (g) for dilution risk of purchased corporate receivables: 100 %. 2. For dilution and default risk if an institution has received permission from the competent authority to use own LGD estimates for corporate exposures pursuant to Article 143 and it can decompose its EL estimates for purchased corporate receivables into PDs and LGDs in a manner the competent authority considers to be reliable, the LGD estimate for purchased corporate receivables may be used. 3. For an exposure covered by an unfunded credit protection, an institution using own estimates of LGD pursuant to Article 143 for both the exposure that is covered by an unfunded credit protection and for comparable direct exposures to the protection provider may recognise the unfunded credit protection in the LGD in accordance with Article 183. 4. For exposures assigned to the exposure classes referred to in Article 147(2), point (c)(i), (ii) or (iii), for the sole purpose of calculating risk-weighted exposure amounts and the expected loss amounts of those exposures, and in particular for the purposes of Article 153(1), point (iii), Article 157, and Article 158(1), (5) and (10), where own estimates of LGD are used, the LGD values for each exposure used as an input of the risk-weighted exposure amounts and expected loss formulae shall not be less than the following LGD input floor values, calculated in accordance with paragraph 6 of this Article. Table 1 LGD input floors (LGDfloor) for exposures belonging to the exposure classes referred to in Article 147(2), point (c)(i), (ii) or (iii)Exposure without eligible FCP (LGDU-floor)Exposure fully secured by eligible FCP (LGDS-floor)25 %financial collateral0 %receivables10 %residential property or commercial immovable property10 %other physical collateral15 % 5. For exposures assigned to the exposure classes referred to in Article 147(2), point (aa)(i) or (ii), for the sole purpose of calculating risk-weighted exposure amounts and the expected loss amounts of those exposures, and in particular for the purposes of Article 153(1), point (iii), Article 157, and Article 158(1), (5) and (10), where own estimates of LGD are used, the LGD value used as an input of the risk-weighted exposure amounts and expected loss formulae for exposures without eligible FCP shall not be less than the following LGD input floor value: 5 %. 6. For the purposes of paragraph 4 of this Article, the LGD input floors in Table 1 in that paragraph for exposures fully secured by eligible funded credit protection shall apply when the value of the funded credit protection, after the application of the volatility adjustments Hc and Hfx concerned in accordance with Article 230, is equal to or exceeds the value of the underlying exposure. For the purposes of paragraph 4 of this Article and for the purposes of the application of the relevant related adjustments, Hc and Hfx, in accordance with Article 230, funded credit protection shall be eligible pursuant to this Chapter. In that case, the type of funded credit protection ‘other physical collateral’ in Article 230, Table 1, shall be understood as ‘other physical and other eligible collateral’. The applicable LGD input floor (LGDfloor) for an exposure partially secured by FCP is calculated as the weighted average of LGDU-floor for the part of the exposure without FCP and LGDS-floor for the fully secured part, as follows: where: LGDU-floor and LGDS-floor are the relevant floor values in Table 1; E, ES, EU and HE are determined in accordance with Article 230. 7. Where an institution that uses own estimates of LGD for a given type of unsecured exposures to corporates and unsecured exposures to regional governments, local authorities and public sector entities is not able to take into account the effect of the funded credit protection securing one of the exposures of that type of exposures in the own estimate of LGD due to lack of data on recoveries for that funded credit protection, the institution shall be permitted to apply the formula set out in Article 230, with the exception that the LGDU in that formula shall be the institution’s own estimate of LGD for unsecured exposures. In that case, the funded credit protection shall be eligible in accordance with Chapter 4 and the institution’s own estimate of LGD used as LGDU shall be calculated based on underlying loss data excluding any recoveries arising from that funded credit protection.

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201. 162 Article 162

     Article 162 Maturity 1. For exposures for which an institution has not received permission from the competent authority to use own estimates of LGD, the maturity value (M) shall be applied consistently and, either be set at years, except for exposures arising from securities financing transactions, for which M shall be years, or, alternatively, be calculated in accordance with paragraph 2. 2. For exposures for which an institution applies own estimates of LGD, the maturity value (M) shall be calculated using periods expressed in years, as set out in this paragraph and subject to paragraphs 3, 4 and 5 of this Article. M shall be no greater than five years, except in the cases specified in Article 384(2) where M as specified therein shall be used. M shall be calculated as follows in each of the following cases: (a) for an instrument subject to a cash flow schedule, M shall be calculated in accordance with the following formula: Mmax1,mintt CFttCFt,5 where CFt denotes the cash flows (principal, interest payments and fees) contractually payable by the obligor in period t; (b) for derivatives subject to a master netting agreement, M shall be the weighted average remaining maturity of the exposure, where M shall be at least 1 year, and the notional amount of each exposure shall be used for weighting the maturity; (c) for exposures arising from fully or nearly-fully collateralised derivative instruments listed in Annex II and fully or nearly-fully collateralised margin lending transactions which are subject to a master netting agreement, M shall be the weighted average remaining maturity of the transactions where M shall be at least 10 days; (d) for repurchase transactions or securities or commodities lending or borrowing transactions which are subject to a master netting agreement, M shall be the weighted average remaining maturity of the transactions where M shall be at least five days. The notional amount of each transaction shall be used for weighting the maturity; (da) for secured lending transactions which are subject to a master netting agreement, M shall be the weighted average remaining maturity of the transactions where M shall be at least 20 days; the notional amount of each transaction shall be used for weighting the maturity; (db) for a master netting agreement including more than one of the transaction types corresponding to point (c), (d) or (da) of this paragraph, M shall be the weighted average remaining maturity of the transactions where M shall be at least the longest holding period, expressed in years, applicable to such transactions as provided for in Article 224(2), either 10 days or 20 days, depending on the cases; the notional amount of each transaction shall be used for weighting the maturity; (e) an institution that has received the permission of the competent authority pursuant to Article 143 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 90 days. 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 90 days; (f) for any instrument other than those referred to in this paragraph 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, including the principal, interest, and fees, where M shall be at least one year; (g) for institutions using the Internal Model Method set out in Section 6 of Chapter 6 to calculate the exposure values, M shall be calculated for exposures to which they apply 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: MminkEffective EEtk Δtk dftk stkk EEtk Δtk dftk1 stkkEffective EEtk Δtk dftk stk,5 where: Stka dummy variable whose value at future period tk is equal to 0 if tk > 1 year and to 1 if tk ≤ 1;EEtkthe expected exposure at the future period tk;Effective EEtkthe effective expected exposure at the future period tk;dftkthe risk-free discount factor for future time period tk; Δtktktk1; (h) an institution that uses an internal model to calculate a one-sided credit valuation adjustment (CVA) may use, subject to the permission of the competent authorities, the effective credit duration estimated by the internal model as M. Subject to paragraph 2, for netting sets in which all contracts have an original maturity of less than one year the formula in point (a) shall apply; (i) for institutions using the approaches referred to in Article 382a(1), point (a) or (b), to calculate the own funds requirements for the CVA risk of transactions with a given counterparty, M shall be no greater than 1 in the formula set out in Article 153(1), point (iii), for the purpose of calculating the risk-weighted exposure amounts for counterparty risk for the same transactions, as referred to in Article 92(4), point (a) or (g), as applicable; (j) for revolving exposures, M shall be determined using the maximum contractual termination date of the facility; institutions shall not use the repayment date of the current drawing if that date is not the maximum contractual termination date of the facility. 3. 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 remargin, M shall be the weighted average remaining maturity of the transactions and M shall be at least one day for: (a) fully or nearly-fully collateralised derivative instruments listed in Annex II; (b) fully or nearly-fully collateralised margin lending transactions; (c) repurchase transactions, securities or commodities lending or borrowing transactions. In addition, 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. Qualifying short term exposures shall include the following: (a) exposures to institutions or investment firms arising from the settlement of foreign exchange obligations; (b) self-liquidating short-term trade finance transactions and corporate purchased receivables, provided that the respective exposures have a residual maturity of up to one year; (c) exposures arising from settlement of securities purchases and sales within the usual delivery period or two business days; (d) 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; (e) issued as well as confirmed letters of credit that are short term, that is, they have a maturity below one year, and are self-liquidating. 4. For exposures to corporates established in the Union which are not large corporates, institutions may choose to set for all such exposures M as set out in paragraph 1 instead of applying paragraph 2. 5. Maturity mismatches shall be treated as specified in Chapter 4. 6. For the purpose of expressing in years the minimum numbers of days referred to in paragraph 2, points (c) to (db), and paragraph 3, the minimum numbers of days shall be divided by .

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202. 163 Article 163

     Article 163 Probability of default (PD) 1. For the sole purpose of calculating risk-weighted exposure amounts and the expected loss amounts of those exposures, and in particular for the purposes of Articles 154 and 157, and Article 158(1), (5) and (10), the PD for each exposure that is used as an input of the risk-weighted exposure amounts and expected loss formulae shall be the higher of the one-year PD associated with the internal borrower grade or pool to which the retail exposure is assigned and the following PD input floor values: (a) % for QRRE revolvers; (b) % for retail exposures which are not QRRE revolvers. 2. The PD of obligors or, where an obligation approach is used, of exposures in default shall be 100 %. 3. For dilution risk of purchased receivables PD shall be set equal to EL estimates for dilution risk. If an institution can decompose its EL estimates for dilution risk of purchased receivables into PDs and LGDs in a manner the competent authorities consider to be reliable, the PD estimate may be used. 4. For an exposure covered by an unfunded credit protection, an institution using own estimates of LGD under Article 143 for comparable direct exposures to the protection provider may recognise the unfunded credit protection in the PD in accordance with Article 183.

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203. 164 Article 164

     Article 164 Loss Given Default (LGD) 1. Institutions shall provide own estimates of LGD subject to the requirements specified in Section 6 of this Chapter and to permission of the competent authorities granted in accordance with Article 143. For dilution risk of purchased receivables, an LGD value of 100 % shall be used. Where an institution can decompose its expected loss estimates for dilution risk of purchased receivables into PDs and LGDs in a reliable manner, the institution may use its own estimates of LGD. 2. Institutions using own estimates of LGD pursuant to Article 143 for comparable direct exposures to the protection provider may recognise the unfunded credit protection in the LGD in accordance with Article 183. 3. For the purposes of Article 154(2), the LGD of a comparable direct exposure to the protection provider referred to in Article 153(3) shall either be the LGD associated with an unhedged facility to the guarantor or the unhedged facility of the obligor, depending upon whether, in the event both the guarantor and obligor default during the life of the hedged transaction, available evidence and the structure of the guarantee indicate that the amount recovered would depend on the financial condition of the guarantor or obligor, respectively. 4. For the sole purpose of calculating risk-weighted exposure amounts and expected loss amounts for retail exposures, and in particular pursuant to Article 154(1), point (ii), Article 157, and Article 158(1), (5) and (10), the LGD values for each exposure used as an input of the risk-weighted exposure amounts and expected loss formulae shall not be less than the LGD input floor values set out in Table 1, calculated in accordance with paragraph 4a of this Article: Table 1 LGD input floors (LGDfloor) for retail exposuresExposure without FCP (LGDU-floor)Exposure secured by FCP (LGDS-floor)Retail exposure secured by residential propertyN/ARetail exposure secured by residential property5 %QRRE50 %QRREN/AOther retail exposure30 %Other retail exposure secured by financial collateral0 %Other retail exposure secured by receivables10 %Other retail exposure secured by residential property or commercial immovable property10 %Other retail exposure secured by other physical collateral15 % 4a. For the purposes of paragraph 4, the following shall apply: (a) LGD input floors in paragraph 4, Table 1 shall be applicable for exposures secured by funded credit protection when the funded credit protection is eligible pursuant to this Chapter; (b) except for retail exposures secured by residential property, the LGD input floors in paragraph 4, Table 1, of this Article shall be applicable to exposures fully secured by funded credit protection where the value of the FCP, after the application of the relevant volatility adjustments in accordance with Article 230, is equal to or exceeds the exposure value of the underlying exposure; for the purpose of the application of the relevant related adjustments, Hc and Hfx, in accordance with Article 230, funded credit protection shall be eligible pursuant to this Chapter; (c) except for retail exposures secured by residential property, the applicable LGD input floor for an exposure partially secured by funded credit protection is calculated in accordance with the formula set out in Article 161(6); (d) for retail exposures secured by residential property, the applicable LGD input floor shall be fixed at 5 % irrespective of the level of collateral provided by the residential property. 5. Member States shall designate an authority to be responsible for the application of paragraph 6. That authority shall be the competent authority or the designated authority. Where the authority designated by the Member State for the application of this Article is the competent authority, it shall ensure that the relevant national bodies and authorities which have a macroprudential mandate are duly informed of the competent authority's intention to make use of this Article, and are appropriately involved in the assessment of financial stability concerns in its Member State in accordance with paragraph 6. Where the authority designated by the Member State for the application of this Article is different from the competent authority, the Member State shall adopt the necessary provisions to ensure proper coordination and exchange of information between the competent authority and the designated authority for the proper application of this Article. In particular, authorities shall be required to cooperate closely and to share all the information that may be necessary for the adequate performance of the duties imposed upon the designated authority pursuant to this Article. That cooperation shall aim at avoiding any form of duplicative or inconsistent action between the competent authority and the designated authority, as well as ensuring that the interaction with other measures, in particular measures taken under Article 458 of this Regulation and Article 133 of Directive 2013/36/EU, is duly taken into account. 6. Based on the data collected under Article 430a and on any other relevant indicators, and taking into account forward-looking immovable property market developments the authority designated in accordance with paragraph 5 of this Article shall periodically, and at least annually, assess whether the LGD input floor values referred to in paragraph 4 of this Article are appropriate for retail exposures secured by residential property or other retail exposures secured by residential property or commercial immovable property located in one or more parts of the territory of the Member State of that authority. Where, on the basis of the assessment referred to in the first subparagraph of this paragraph, the authority designated in accordance with paragraph 5 concludes that the LGD input floor values referred to in paragraph 4 are not adequate, and if it considers that the inadequacy of LGD input floor values could adversely affect current or future financial stability in its Member State, it may set higher LGD input floor values for those exposures located in one or more parts of the territory of the Member State of that authority. Those higher LGD input floor values may also be applied at the level of one or more property segments of such exposures. The authority designated in accordance with paragraph 5 shall notify EBA and the ESRB before making the decision referred to in the second subparagraph of this paragraph. Within one month of receipt of that notification, EBA and the ESRB shall provide their opinion to the Member State concerned. EBA and the ESRB shall publish the higher LGD input floor values referred to in the second subparagraph of this paragraph. 7. Where the authority designated in accordance with paragraph 5 sets higher LGD input floor values pursuant to paragraph 6, institutions shall have a six-month transitional period to apply them. 8. EBA, in close cooperation with the ESRB, shall develop draft regulatory technical standards to specify the conditions that the authority designated in accordance with paragraph 5 shall take into account when assessing the appropriateness of LGD values as part of the assessment referred to in paragraph 6. EBA shall submit those draft regulatory technical standards to the Commission by 31 December 2019. Power is delegated to the Commission to supplement this Regulation by adopting the regulatory technical standards referred to in the first subparagraph in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010. 9. The ESRB may, by means of recommendations in accordance with Article 16 of Regulation (EU) No 1092/2010, and in close cooperation with EBA, give guidance to authorities designated in accordance with paragraph 5 of this Article on the following: (a) factors which could ‘adversely affect current or future financial stability’ referred to in paragraph 6; and (b) indicative benchmarks that the authority designated in accordance with paragraph 5 is to take into account when determining higher minimum LGD values. 10. The institutions of a Member State shall apply the higher minimum LGD values that have been determined by the authorities of another Member State in accordance with paragraph 6 to all their corresponding exposures secured by mortgages on residential property or commercial immovable property located in one or more parts of that Member State.

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204. 165 Article 165

     Article 165 Equity exposures subject to the PD/LGD method 1. PDs shall be determined in accordance with the methods for corporate exposures. The following minimum PDs shall apply: (a) 0,09 % for exchange traded equity exposures where the investment is part of a long-term customer relationship; (b) 0,09 % for non-exchange traded equity exposures where the returns on the investment are based on regular and periodic cash flows not derived from capital gains; (c) 0,40 % for exchange traded equity exposures including other short positions as set out in Article 155(2); (d) 1,25 % for all other equity exposures including other short positions as set out in Article 155(2). 2. Private equity exposures in sufficiently diversified portfolios may be assigned an LGD of 65 %. All other such exposures shall be assigned an LGD of 90 %. 3. M assigned to all exposures shall be five years.

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205. 166 Article 166

     Article 166 Exposures to corporates, institutions, central governments and central banks, regional governments, local authorities and public sector entities and retail exposures 1. Unless noted otherwise, the exposure value of on-balance sheet exposures shall be the accounting value measured without taking into account any credit risk adjustments made. This rule 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 have been applied that has been recorded on the balance-sheet of the institutions when purchasing the asset is denoted discount if the amount owed is larger, and premium if it is smaller. 2. Where institutions use master netting agreements in relation to repurchase transactions or securities or commodities lending or borrowing transactions, the exposure value shall be calculated in accordance with Chapter 4 or 6. 3. In order to calculate the exposure value for on-balance sheet netting of loans and deposits, institutions shall apply the methods set out in Chapter 4. 4. The exposure value for leases shall be 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 (i.e. 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 Article 201 regarding the eligibility of protection providers as well as the requirements for recognising other types of guarantees provided in Article 213, the payment obligation may be taken into account as unfunded credit protection in accordance with Chapter 4. 5. In the case of any contract listed in Annex II, the exposure value shall be determined by the methods set out in Chapter 6 and shall not take into account any credit risk adjustment made. 6. The exposure value for the calculation of risk-weighted exposure amounts of purchased receivables shall be the value determined in accordance with paragraph 1 minus the own funds requirements for dilution risk prior to credit risk mitigation. 7. Where an exposure takes the form of securities or commodities sold, posted or lent under repurchase transactions or securities or commodities lending or borrowing transactions, long settlement transactions and margin lending transactions, the exposure value shall be the value of the securities or commodities determined in accordance with Article 24. Where the Financial Collateral Comprehensive Method as set out under Article 223 is used, the exposure value shall be increased by the volatility adjustment appropriate to such securities or commodities, as set out therein. The exposure value of repurchase transactions, securities or commodities lending or borrowing transactions, long settlement transactions and margin lending transactions may be determined either in accordance with Chapter 6 or Article 220(2). 8. The exposure value of off-balance-sheet items which are not contracts as listed in Annex II shall be calculated by using either IRB-CCF or SA-CCFs, in accordance with paragraphs 8a and 8b of this Article and Article 151(8). Where only the drawn balances of revolving facilities have been securitised, institutions shall ensure that they continue to hold the required amount of own funds against the undrawn balances associated with the securitisation. An institution that has not received permission to use IRB-CCF shall calculate the exposure value as the committed but undrawn amount multiplied by the SA-CCF concerned. An institution that uses IRB-CCF shall calculate the exposure value for undrawn commitments as the undrawn amount multiplied by IRB-CCF. 8a. For an exposure for which an institution has not received permission to use IRB-CCF, the applicable CCF shall be the SA-CCF as provided for in Chapter 2 for the same types of items as laid down in Article 111. The amount to which the SA-CCF is to be applied shall be the lower of the value of the committed but undrawn amount and the value that reflects any possible constraining of the availability of the facility, including the existence of an upper limit on the potential lending amount which is related to an obligor’s reported cash flow. Where a facility is constrained in that way, the institution shall have sufficient line monitoring and management procedures to support the existence of that constraining. 8b. Subject to the permission of competent authorities, institutions that meet the requirements for the use of IRB-CCF as specified in Section 6 shall use IRB-CCF for exposures arising from undrawn revolving commitments treated under the IRB Approach provided that those exposures would not be subject to a SA-CCF of 100 % under the Standardised Approach. SA-CCFs shall be used for: (a) all other off-balance-sheet items, in particular undrawn non-revolving commitments; (b) exposures where the minimum requirements for calculating IRB-CCF as specified in Section 6 are not met by the institution or where the competent authority has not permitted the use of IRB-CCF. For the purposes of this Article, a commitment shall be deemed ‘revolving’ where it lets an obligor obtain a loan where the obligor has the flexibility to decide how often to withdraw from the loan and at what intervals, allowing the obligor to drawdown, repay and redraw loans advanced to it. Contractual arrangements that allow prepayments and subsequent redraws of those prepayments shall be considered revolving. 8c. Where IRB-CCF are used for the sole purpose of calculating risk-weighted exposure amounts and expected loss amounts of exposures arising from revolving commitments other than exposures assigned to the exposure class in accordance with Article 147(2), point (a), in particular pursuant to Article 153(1), Article 157 and Article 158(1), (5) and (10), the exposure value for each exposure used as an input of the risk-weighted exposure amount and expected loss formulae shall not be less than the sum of: (a) the drawn amount of the revolving commitment; (b) 50 % of the off-balance exposure amount of the remaining undrawn part of the revolving commitment calculated using the applicable SA-CCF provided for in Article 111. The sum of points (a) and (b) shall be referred to as the ‘CCF input floor’. 9. Where a commitment refers to the extension of another commitment, the lower of the two conversion factors associated with the individual commitment shall be used. 10. For all off-balance sheet items other than those mentioned in paragraphs 1 to 8, the exposure value shall be the following percentage of its value: (a) 100 % if it is a full risk item; (b) 50 % if it is a medium-risk item; (c) 20 % if it is a medium/low-risk item; (d) 0 % if it is a low-risk item. For the purposes of this paragraph the off-balance sheet items shall be assigned to risk categories as indicated in Annex I.

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206. 167 Article 167

     Article 167 Equity exposures 1. The exposure value of equity exposures shall be the accounting value remaining after specific credit risk adjustment have been applied. 2. The exposure value of off-balance sheet equity exposures shall be its nominal value after reducing its nominal value by specific credit risk adjustments for this exposure.

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207. 168 Article 168

     Article 168 Other non credit-obligation assets The exposure value of other non credit-obligation assets shall be the accounting value remaining after specific credit risk adjustment have been applied

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208. 169 Article 169

     Article 169 General principles 1. Where an institution uses multiple rating systems, the rationale for assigning an obligor or a transaction to a rating system shall be documented and applied in a manner that appropriately reflects the level of risk. 2. Assignment criteria and processes shall be periodically reviewed to determine whether they remain appropriate for the current portfolio and external conditions. 3. Where an institution uses direct estimates of risk parameters for individual obligors or exposures these may be seen as estimates assigned to grades on a continuous rating scale. EBA shall issue guidelines, in accordance with Article 16 of Regulation (EU) No 1093/2010, on how to apply in practice the requirements on model design, risk quantification, validation and application of risk parameters using continuous or very granular rating scales for each risk parameter.

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209. 170 Article 170

     Article 170 Structure of rating systems 1. The structure of rating systems for exposures to corporates, institutions, central governments and central banks, and regional governments, local authorities and public sector entities shall comply with the following requirements: (a) a rating system shall take into account obligor and transaction risk characteristics; (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; (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; (d) institutions 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 grade covers a reasonably narrow PD band and that the default risk posed by all obligors in the grade falls within that band; (e) to be permitted by the competent authority to use own estimates of LGDs for own funds requirement calculation, 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; (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. Institutions using the methods set out in Article 153(5) for assigning risk weights for specialised lending exposures are exempt from the requirement to have an obligor rating scale which reflects exclusively quantification of the risk of obligor default for these exposures. These institutions shall have for these exposures at least four grades for non-defaulted obligors and at least one grade for defaulted obligors. 3. The structure of rating systems for retail exposures shall comply with the following requirements: (a) rating systems shall reflect both obligor and transaction risk, and shall capture all relevant obligor and transaction characteristics; (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; (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. Institutions shall consider the following risk drivers when assigning exposures to grades or pools: (a) obligor risk characteristics; (b) transaction risk characteristics, including product and funded credit protection types, recognised unfunded credit protection, loan-to-value measures, seasoning and seniority; institutions shall explicitly address cases where several exposures benefit from the same funded or unfunded credit protection; (c) delinquency, except where an institution demonstrates to the satisfaction of its competent authority that delinquency is not a material driver of risk for the exposure.

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210. 171 Article 171

     Article 171 Assignment to grades or pools 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: (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; (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; (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 take all relevant information into account in assigning obligors and facilities to grades or pools. 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 and 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. Institutions shall use a time horizon longer than one year in assigning ratings. An obligor rating shall represent the institution’s assessment of the obligor’s ability and willingness to contractually perform despite adverse economic conditions or the occurrence of unexpected events. Rating systems shall be designed in such a way that idiosyncratic changes and, where they are material drivers of risk for the type of exposure, industry-specific changes are a driver of migrations from one grade or pool to another. Business cycle effects may also be a driver of migrations.

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211. 172 Article 172

     Article 172 Assignment of exposures 1. For exposures to central governments and central banks, exposures to regional governments, local authorities and public sector entities, exposures to institutions and exposures to corporates, the assignment of exposures shall be carried out in accordance with the following criteria: (a) each obligor shall be assigned to an obligor grade as part of the credit approval process; (b) for those exposures for which an institution has received the permission of the competent authority to use own estimates of LGDs and conversion factors pursuant to Article 143, each exposure shall also be assigned to a facility grade as part of the credit approval process; (c) institutions using the methods set out in Article 153(5) for assigning risk weights for specialised lending exposures shall assign each of these exposures to a grade in accordance with Article 170(2); (d) each separate legal entity to which the institution is exposed shall be separately rated; (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, where separate exposures are allowed to result in multiple grades for the same obligor, the following shall apply: (i) country transfer risk, this being dependent on whether the exposures are denominated in local or foreign currency; (ii) the treatment of associated guarantees to an exposure may be reflected in an adjusted assignment to an obligor grade; (iii) consumer protection, bank secrecy or other legislation prohibit the exchange of client data. For the purposes of the first subparagraph, point (d), an institution shall have appropriate policies for the treatment of individual obligor clients and groups of connected clients. Those policies shall contain a process for the identification of Specific Wrong-Way risk for each legal entity to which the institution is exposed. For the purposes of Chapter 6, transactions with counterparties where a Specific Wrong-Way risk has been identified shall be treated differently when calculating their exposure value. 2. For retail exposures, each exposure shall be assigned to a grade or a pool as part of the credit approval process. 3. For grade and pool assignments institutions shall 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. Institutions shall document these overrides and note down the personnel responsible. Institutions 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.

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212. 173 Article 173

     Article 173 Integrity of assignment process 1. For exposures to central governments and central banks, exposures to regional governments, local authorities and public sector entities, exposures to institutions and exposures to corporates, the assignment process shall meet the following requirements: (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; (b) Institutions 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. Institutions shall undertake a new assignment if material information on the obligor or exposure becomes available; (c) An 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. 2. For retail exposures, an institution shall 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. EBA shall develop draft regulatory technical standards setting out the methodologies of the competent authorities to assess the integrity of the assignment process and the regular and independent assessment of risks. EBA shall submit those draft regulatory technical standards to the Commission by 10 July 2026. Power is delegated to the Commission to supplement this Regulation by adopting the regulatory technical standards referred to in the first subparagraph of this paragraph in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.

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213. 174 Article 174

     Article 174 Use of models Institutions shall use statistical or other mathematical methods (‘models’) to assign exposures to obligor or facility grades or pools. The following requirements shall be met: (a) the model shall have good predictive power and own funds requirements shall not be distorted as a result of its use; (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; (c) the data used to build the model shall be representative of the population of the institution's actual obligors or exposures; (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; (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. For the purposes of the first paragraph, point (a), the input variables shall form a reasonable and effective basis for the resulting predictions. The model shall not have material biases. There shall be a functional link between the inputs and the outputs of the model, which may be determined through expert judgement, where appropriate.

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214. 175 Article 175

     Article 175 Documentation of rating systems 1. The institutions shall document the design and operational details of its rating systems. The documentation shall provide evidence of compliance with the requirements in this Section, and address 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. The institution shall document the rationale for and analysis supporting its choice of rating criteria. An institution shall 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 competent authorities. The organisation of rating assignment including the rating assignment process and the internal control structure shall also be documented. 3. The institutions shall document the specific definitions of default and loss used internally and ensure consistency with the definitions set out in this Regulation. 4. Where the institution employs statistical models in the rating process, the institution shall document their methodologies. This material shall: (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 to estimate the model; (b) establish a rigorous statistical process including out-of-time and out-of-sample performance tests for validating the model; (c) indicate any circumstances under which the model does not work effectively. 5. An institution shall demonstrate to the satisfaction of the competent authority that the requirements of this Article are met, where an institution has obtained a rating system, or model used within a rating system, from a third-party vendor and that vendor refuses or restricts the access of the institution to 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.

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215. 176 Article 176

     Article 176 Data maintenance 1. Institutions shall collect and store data on aspects of their internal ratings as required under Part Eight. 2. For exposures to central governments and central banks, exposures to regional governments, local authorities and public sector entities, exposures to institutions and exposures to corporates, institutions shall collect and store: (a) complete rating histories on obligors and recognised guarantors; (b) the dates the ratings were assigned; (c) the key data and methodology used to derive the rating; (d) the person responsible for the rating assignment; (e) the identity of obligors and exposures that defaulted; (f) the date and circumstances of such defaults; (g) data on the PDs and realised default rates associated with rating grades and ratings migration. 3. For exposures for which this Chapter allows the use of own estimates of LGD or the use of IRB-CCF but for which institutions do not use own estimates of LGD or IRB-CCF, institutions shall collect and store data on comparisons between realised LGDs and the values as set out in Article 161(1), and between realised CCFs and SA-CCFs as set out in Article 166(8a). 4. Institutions using own estimates of LGDs and conversion factors shall collect and store: (a) complete histories of data on the facility ratings and LGD and conversion factor estimates associated with each rating scale; (b) the dates on which the ratings were assigned and the estimates were made; (c) the key data and methodology used to derive the facility ratings and LGD and conversion factor estimates; (d) the person who assigned the facility rating and the person who provided LGD and conversion factor estimates; (e) data on the estimated and realised LGDs and conversion factors associated with each defaulted exposure; (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 LGD; (g) data on the components of loss for each defaulted exposure. 5. For retail exposures, institutions shall collect and store: (a) data used in the process of allocating exposures to grades or pools; (b) data on the estimated PDs, LGDs and conversion factors associated with grades or pools of exposures; (c) the identity of obligors and exposures that defaulted; (d) for defaulted exposures, data on the grades or pools to which the exposure was assigned over the year prior to default and the realised outcomes on LGD and conversion factor; (e) data on loss rates for qualifying revolving retail exposures.

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216. 177 Article 177

     Article 177 Stress tests used in assessment of capital adequacy 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 test shall be one chosen by the institution, subject to supervisory review. The test to be employed shall be meaningful and consider 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. 2a. The scenarios used under paragraph 2 shall also include ESG risk drivers, in particular physical risk and transition risk drivers stemming from climate change. EBA shall issue guidelines, in accordance with Article 16 of Regulation (EU) No 1093/2010, on the application of paragraph 2 and 2a. 3. Institutions using the treatment set out in Article 153(3) shall consider as part of their stress testing framework the impact of a deterioration in the credit quality of protection providers, in particular the impact of protection providers falling outside the eligibility criteria.

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217. 178 Article 178

     Article 178 Default of an obligor or credit facility 1. A default shall be considered to have occurred with regard to a particular obligor when either or both of the following have taken place: (a) the institution considers that the obligor is unlikely to pay its credit obligations to the institution, the parent undertaking or any of its subsidiaries in full, without recourse by the institution to actions such as realising security; (b) the obligor is more than 90 days past due on any material credit obligation to the institution, the parent undertaking or any of its subsidiaries. In the case of retail exposures, institutions may apply the definition of default laid down in points (a) and (b) of the first subparagraph at the level of an individual credit facility rather than in relation to the total obligations of a borrower. 2. The following shall apply for the purposes of point (b) of paragraph 1: (a) for overdrafts, days past due commence once an obligor has breached an advised limit, has been advised a limit smaller than current outstandings, or has drawn credit without authorisation and the underlying amount is material; (b) for the purposes of point (a), an advised limit comprises any credit limit determined by the institution and about which the obligor has been informed by the institution; (c) days past due for credit cards commence on the minimum payment due date; (d) materiality of a credit obligation past due shall be assessed against a threshold, defined by the competent authorities. This threshold shall reflect a level of risk that the competent authority considers to be reasonable; (e) institutions shall have documented policies in respect of the counting of days past due, in particular in respect of the re-ageing of the facilities and the granting of extensions, amendments or deferrals, renewals, and netting of existing accounts. These policies shall be applied consistently over time, and shall be in line with the internal risk management and decision processes of the institution. 3. For the purpose of point (a) of paragraph 1, elements to be taken as indications of unlikeliness to pay shall include the following: (a) the institution puts the credit obligation on non-accrued status; (b) the institution recognises a specific credit adjustment resulting from a significant perceived decline in credit quality subsequent to the institution taking on the exposure; (c) the institution sells the credit obligation at a material credit-related economic loss; (d) the institution consents to a forbearance measure as referred to in Article 47b of the credit obligation where that measure is likely to result in a diminished financial obligation due to the material forgiveness, or postponement, of principal, interest or, where relevant, fees; (e) the institution has filed for the obligor's bankruptcy or a similar order in respect of an obligor's credit obligation to the institution, the parent undertaking or any of its subsidiaries; (f) the obligor has sought or has been placed in bankruptcy or similar protection where this would avoid or delay repayment of a credit obligation to the institution, the parent undertaking or any of its subsidiaries. 4. Institutions that use external data that is not itself consistent with the definition of default laid down in paragraph 1, shall make appropriate adjustments to achieve broad equivalence with the definition of default. 5. If the institution considers that a previously defaulted exposure is such that no trigger of default continues to apply, the institution shall rate the obligor or facility as they would for a non-defaulted exposure. Where the definition of default is subsequently triggered, another default would be deemed to have occurred. 6. EBA shall develop draft regulatory technical standards to specify the conditions according to which a competent authority shall set the threshold referred to in paragraph 2(d). EBA shall submit those draft regulatory technical standards to the Commission by 31 December 2014. Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010. 7. EBA shall issue guidelines on the application of this Article. Those guidelines shall be adopted in accordance with Article 16 of Regulation (EU) No 1093/2010. By 10 July 2025, EBA shall issue guidelines, in accordance with Article 16 of Regulation (EU) No 1093/2010, to update the guidelines referred to in the first subparagraph of this paragraph. In particular, that update shall take due account of the necessity to encourage institutions to engage in proactive, preventive and meaningful debt restructuring to support obligors. In developing those guidelines, EBA shall duly consider the need for granting a sufficient flexibility to institutions when specifying what constitutes a diminished financial obligation for the purposes of paragraph 3, point (d).

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218. 179 Article 179

     Article 179 Overall requirements for estimation 1. In quantifying the risk parameters to be associated with rating grades or pools, institutions shall apply the following requirements: (a) an institution's own estimates of the risk parameters PD, LGD, conversion factor and EL shall incorporate all relevant data, information and methods. The estimates shall be derived using both historical experience and empirical evidence, and not based purely on judgemental considerations. The estimates shall be plausible and intuitive and shall be based on the material drivers of the respective risk parameters. The less data an institution has, the more conservative it shall be in its estimation; (b) an institution shall be able to provide a breakdown of its loss experience in terms of default frequency, LGD, conversion factor, or loss where EL estimates are used, by the factors it sees as the drivers of the respective risk parameters. The institution's estimates shall be representative of long run experience; (c) any changes in lending practice or the process for pursuing recoveries over the observation periods referred to in Article 180(1)(h) and (2)(e), Article 181(1)(j) and (2), and Article 182(2) and (3) shall be taken into account. An institution's estimates shall reflect the implications of technical advances and new data and other information, as it becomes available. Institutions shall review their estimates when new information comes to light but at least on an annual basis; (d) the population of exposures represented in the data used for estimation, the lending standards used when the data was generated and other relevant characteristics shall be comparable with those of the institution's exposures and standards. The economic or market conditions that underlie the data shall be relevant to current and foreseeable conditions. The number of exposures in the sample and the data period used for quantification shall be sufficient to provide the institution with confidence in the accuracy and robustness of its estimates; (e) for purchased receivables the estimates shall reflect all relevant information available to the purchasing institution regarding the quality of the underlying receivables, including data for similar pools provided by the seller, by the purchasing institution, or by external sources. The purchasing institution shall evaluate any data relied upon which is provided by the seller; (f) to overcome biases, an institution shall include appropriate adjustments in its estimates to the extent possible; after having included an appropriate adjustment, it shall add to its estimates a sufficient margin of conservatism that is related to the expected range of estimation errors; where methods and data are considered to be less satisfactory, the expected range of errors is larger, and the margin of conservatism shall be larger. Where institutions use different estimates for the calculation of risk weights and for internal purposes, it shall be documented and be reasonable. If institutions can demonstrate to their competent authorities that for data that have been collected prior to 1 January 2007 appropriate adjustments have been made to achieve broad equivalence with the definition of default laid down in Article 178 or with loss, competent authorities may permit the institutions some flexibility in the application of the required standards for data. 2. Where an institution uses data that is pooled across institutions it shall meet the following requirements: (a) the rating systems and criteria of other institutions in the pool are similar to its own; (b) the pool is representative of the portfolio for which the pooled data is used; (c) the pooled data is used consistently over time by the institution for its estimates; (d) the institution shall remain responsible for the integrity of its rating systems; (e) the institution shall maintain sufficient in-house understanding of its rating systems, including the ability to effectively monitor and audit the rating process.

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219. 180 Article 180

     Article 180 Requirements specific to PD estimation 1. In quantifying the risk parameters to be associated with rating grades or pools, institutions shall apply the following requirements specific to PD estimation to exposures to central governments and central banks, exposures to regional governments, local authorities and public sector entities, exposures to institutions and exposures to corporates: (a) institutions shall estimate PDs by obligor grade from long run averages of one-year default rates. PD estimates for obligors that are highly leveraged or for obligors whose assets are predominantly traded assets shall reflect the performance of the underlying assets based on periods of stressed volatilities; (b) for purchased corporate receivables institutions may estimate the EL by obligor grade from long run averages of one-year realised default rates; (c) if an institution derives long run average estimates of PDs and LGDs for purchased corporate receivables from an estimate of EL, and an appropriate estimate of PD or LGD, the process for estimating total losses shall meet the overall standards for estimation of PD and LGD set out in this part, and the outcome shall be consistent with the concept of LGD as set out in Article 181(1)(a); (d) institutions shall use PD estimation techniques only with supporting analysis. Institutions shall recognise the importance of judgmental considerations in combining results of techniques and in making adjustments for limitations of techniques and information; (e) to the extent that an institution uses data on internal default experience for the estimation of PDs, the estimates shall be reflective of current underwriting standards and of any differences in the rating system that generated the data and the current rating system; where underwriting standards or rating systems have changed, after including an appropriate adjustment, the institution shall add a greater margin of conservatism in its estimate of PD related to the expected range of estimation errors that is not already covered by the appropriate adjustment; (f) to the extent that an institution associates or maps its internal grades to the scale used by an ECAI or similar organisations and then attributes the default rate observed for the external organisation's grades to the institution's grades, mappings shall be based on a comparison of internal rating criteria to the criteria used by the external organisation and on a comparison of the internal and external ratings of any common obligors. Biases or inconsistencies in the mapping approach or underlying data shall be avoided. The criteria of the external organisation underlying the data used for quantification shall be oriented to default risk only and not reflect transaction characteristics. The analysis undertaken by the institution shall include a comparison of the default definitions used, subject to the requirements in Article 178. The institution shall document the basis for the mapping; (g) to the extent that an institution uses statistical default prediction models it is allowed to estimate PDs as the simple average of default-probability estimates for individual obligors in a given grade. The institution's use of default probability models for this purpose shall meet the standards specified in Article 174; (h) irrespective of whether an institution is using external, internal, or pooled data sources, or a combination of the three, for its PD estimation, the length of the underlying historical observation period used shall be at least five years for at least one source; (i) irrespective of the method used to estimate PD, institutions shall estimate a PD for each rating grade based on the observed historical average one-year default rate that is an arithmetic average based on the number of obligors (count weighted); other approaches, including exposure-weighted averages, shall not be permitted. For the purposes of the first subparagraph, point (h), of this paragraph where the available observation period spans a longer period for any source, and where those data are relevant, that longer period shall be used. The data shall include a representative mix of good and bad years of the economic cycle relevant for the type of exposures. Subject to the permission of competent authorities, institutions which have not received the permission of the competent authority pursuant to Article 143 to use own estimates of LGD or to use IRB-CCF, may use, when they implement the IRB Approach, relevant data covering a period of two years. The period to be covered shall be increased by one year each year until relevant data cover at least five years. 2. For retail exposures, the following requirements shall apply: (a) institutions shall estimate PDs by obligor or facility grade or pool from long run averages of one-year default rates, and default rates shall be calculated at facility level only where the definition of default is applied at individual credit facility level pursuant to Article 178(1), second subparagraph; (b) PD estimates may also be derived from an estimate of total losses and appropriate estimates of LGDs; (c) institutions shall regard internal data for assigning exposures to grades or pools as the primary source of information for estimating loss characteristics. Institutions may use external data (including pooled data) or statistical models for quantification provided that the following strong links both exist: (i) between the institution's process of assigning exposures to grades or pools and the process used by the external data source; and (ii) between the institution's internal risk profile and the composition of the external data; (d) if an institution derives long run average estimates of PD and LGD for retail exposures from an estimate of total losses and an appropriate estimate of PD or LGD, the process for estimating total losses shall meet the overall standards for estimation of PD and LGD set out in this part, and the outcome shall be consistent with the concept of LGD as set out in point (a) of Article 181(1); (e) irrespective of whether an institution is using external, internal or pooled data sources, or a combination of the three, for its PD estimation, the length of the underlying historical observation period used shall be at least five years for at least one source; (f) institutions shall identify and analyse expected changes of risk parameters over the life of credit exposures (seasoning effects). For purchased retail receivables, institutions may use external and internal reference data. Institutions shall use all relevant data sources as points of comparison. For the purposes of the first subparagraph, point (a), the PD shall be based on the observed historical average one-year default rate. For the purposes of the first subparagraph, point (e), where the available observation spans a longer period for any source, and where those data are relevant, that longer period shall be used. The data shall include a representative mix of good and bad years of the economic cycle relevant for the type of exposures. Subject to the permission of the competent authorities, institutions may use, when they implement the IRB Approach, relevant data covering a period of two years. The period to be covered shall be increased by one year each year until relevant data cover at least five years. 3. EBA shall develop draft regulatory technical standards to specify the methodologies in accordance with which competent authorities shall assess the methodology of an institution for estimating PD pursuant to Article 143. EBA shall submit those draft regulatory technical standards to the Commission by 10 July 2026. Power is delegated to the Commission to supplement this Regulation by adopting the regulatory technical standards referred to in the first subparagraph of this paragraph in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.

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