General considerations
Competent authorities should assess and score the risks to capital that have been identified as material for the institution.
The purpose of this title is to provide common methodologies to be considered for assessing individual risks and risk management and controls. It is not intended to be exhaustive and gives leeway to competent authorities to take into account other additional criteria that may be deemed relevant based on their experience and the specific features of the institution.
This title provides competent authorities with guidelines for the assessment and scoring of the following risks to capital:
The title also identifies a set of subcategories within each risk category above, which need to be taken into account when risks to capital are assessed. Depending on the materiality of any these subcategories to a particular institution, they can be assessed and scored individually.
The decision on materiality depends on the supervisory judgement. However, for FX lending risk, in light of the ESRB Recommendation on lending in foreign currencies(29), materiality should be determined taking into account the following threshold:
Loans denominated in foreign currency to unhedged borrowers constitute at least 10% of an institution’s total loan book (total loans to non-financial corporations and households), where such a total loan book constitutes at least 25% of the institution’s total assets.
Competent authorities should also assess other risks that are identified as material to a specific institution but are not listed above (e.g. pension risk, reputational risk, strategic and business risk, step-in risk, intra- and inter-risk concentration). The following may assist with the identification process:
drivers of TREA;
risks identified in the institution’s ICAAP;
risks arising from the institution’s business model (including those identified by other institutions operating a similar business model);
information stemming from the monitoring of key indicators;
findings and observations from internal or external audit reports; and
recommendations and guidelines issued by the EBA, as well as warnings and recommendations issued by macroprudential authorities or the ESRB.
The above elements should also be taken into account by competent authorities when they are planning the intensity of their supervisory activity in relation to the assessment of a specific risk.
For credit, market and operational risk, competent authorities should verify the institution’s compliance with the minimum requirements specified in the relevant EU and national implementing legislation. However, these guidelines extend the scope of the assessment beyond those minimum requirements to allow competent authorities to form a comprehensive view on risks to capital.
For each material risk, competent authorities should assess and reflect in the risk score:
This assessment flow is represented in Figure 4 below.
Figure 4. Assessment workflow for risks to capital
Assessment of inherent individual risks Inherent risk assessment Assessment of individual risks and Risk score controls
Assessment of risks management and controls Risk management and controls assessment
When performing their assessments, competent authorities should use all available information sources, including regulatory reporting, ad hoc reporting agreed with the institution, the institution’s internal metrics and reports (e.g. internal audit report, risk management reports, information from the ICAAP), on-site inspection reports and external reports (e.g. the institution’s communications to investors, rating agencies). While the assessment is intended to be institution-specific, comparison with peers should be considered to identify potential exposure to risks to capital. For such purposes, peers should be defined on a risk-by-risk basis and might differ from those identified for BMA or other analyses.
In the assessment of risks to capital, competent authorities should also evaluate the accuracy and prudency of the calculation of minimum own fund requirements to identify situations where minimum own funds calculations may underestimate the actual level of risk. This assessment would inform the determination of additional own funds requirements as provided in Section 7.2.3.
The outcome of the assessment of each material risk should be reflected in a summary of findings that provides an explanation of the main risk drivers, and a risk score, as specified in the following sections.