Application for IRB approach, credit risk - Finansinspektionen

Application for IRB approach, credit risk= Februar 2007 TABLE OF CONTENTS 1. SUMMARY 1 2. BACKGROUND 2 3. GENERAL INFORMATION REGARDING THE REVIEW PROCEDURE 3 4. FORMULATION OF APPLICATION 6 5. FLYSHEET 8 6. APPLICATION QUESTIONNAIRE 16 = = = FINANSINSPEKTIONEN FEBRUARI 2007 N= = 1. Summary This report contains Finansinspektionen’s instructions regarding the manner in which an institution or financial group should structure its information when applying to use an internal ratings-based methodology for calculation of the capital requirement for credit risk. Questions regarding this report will be answered by the Credit and Operational Risk Unit at Finansinspektionen’s Stability Department. == FINANSINSPEKTIONEN FEBRUARI 2007 O= = 2. Background The Capital Adequacy and Large Exposures Act (2006:1371) and the Capital

Adequacy and Large Exposures Ordinance (2006:1533) entered into force on 1 February 2007. Pursuant to sections 32–34 of the Ordinance, Finansinspektionen has decided on regulations and general guidelines (FFFS 2007:1) for capital adequacy and large exposures. In accordance with these new rules, institutions, i.e. banks, credit market companies and investment firms, may apply for permission to use an internal ratings based approach, the IRB approach, to calculate the capital requirement for credit risk. Finansinspektionen issues this type of permission, and its review of the reliability of the institution’s methods is based on FFFS 2007:1. An institution intending to apply for permission to use an IRB approach should contact Finansinspektionen well in advance of the formal submittance of the application in order to start a dialogue and discuss an appropriate date for permission. This procedure is required in order to allow Finansinspektionen to allocate and distribute needed resources. The requirements imposed for using an IRB approach are relatively extensive. Consequently, Finansinspektionen must receive from institutions relatively extensive information in order to assess the quality of their IRB approach. Finansinspektionen has therefore compiled an instruction outlining which type of information the institution should submit in order for Finansinspektionen to be able to assess the institution’s compliance with the requirements set out in the individual sections of the regulations. This application can be used by institutions submitting an initial request for a review and by institutions that requested a gradual implementation and are about to submit supplementing information for the portfolios that will be reviewed. The application should also be used by institutions that at a later stage, after an initial review, will apply for permission in accordance with Chapter 38, section 6. FINANSINSPEKTIONEN FEBRUARI 2007 P= = 3. General information regarding the review procedure 3.1.1 Scope and gradual implementation A financial group may submit an application covering the capital requirement calculation on a consolidated basis and on an individual basis for the parent company and subsidiaries included in the group. (In the text below we refer to the institution as the applicant, however, the application may be submitted on group basis for the parent company and the subsidiaries included in the financial group.) Institutions which do not constitute subsidiaries but where the owner firm only holds a participating interest, i.e. the owner firm owns more than 20% but less than 50%, shall submit a separate application. In cases where such a firm...

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