Question
What is the reference base for the materiality thresholds specified in the technical standards for assessing the materiality of extensions and changes of internal models be applied, if an EU parent institution uses an Internal Models Approach (IMA) on solo and/or (sub)consolidated level?
Background on the question
Competent authorities’ permissions to use internal models for the determination of own funds requirements for market risk may apply to solo and/or (sub)consolidated levels. The RTS on model change (Regulation (EU) No 529/2014) substantiates the assessment of materiality using qualitative and quantitative criteria. The quantitative condition of Article 7a (1) lit. c (i) of the RTS restricts indeed the scope of application of the 5% criterion to be computed at the level of the EU parent institution or, in the case of an institution which is neither a parent institution nor a subsidiary, at the level of that institution. The quantitative condition of Article 7a (1) lit. c (ii) (10%-criterion) does not have this restriction. Article 7a (1) lit. c (ii) is relevant to the scope of application of the relevant IMA model to which the risk number refers to. Within an EU banking group various IMA permissions may be granted. For example, a group-wide model (approved by a joint decision of the college of supervisors) may be used on different consolidation levels (solo and/or (sub)consolidated). Although the same model is used for the whole group, the different portfolio composition of the sublevel entities may cause the materiality according to Article 7a (1) lit. c (ii) of the RTS to differ for all the subsidiary levels where the group has a permission to use the model. Thus it may occur that a proposed model change classifies as material on subsidiary level but not on parent institution level.
Answer
Article 7a (1)(c)(i) of Regulation (EU) No 529/2014 (as amended by Regulation (EU) 2015/942) (RTS) sets out that the reference base for the 5% threshold is the total market risk own funds requirements for market risk according to Title IV of Regulation (EU) No 575/2013 (CRR), computed at the level of the EU parent institution or, in the case of an institution which is neither a parent institution nor a subsidiary, the level of that institution itself. This also applies in case the EU parent institution was only granted the permission to apply the IMA only on a sub consolidated level or for an individual institution within the group (solo level). In other words, Article 7a(1)(c)(i), i.e. the 5% threshold as set out above, applies at the highest EU level of consolidation. Article 7a (1)(c)(ii) of the same RTS sets out that the reference base for the 10% threshold is one or more of the relevant risk numbers referred to in Article 364(1)(a)(i), or Article 364(1)(b)(i), or Article 364(2)(b)(i) or Article 364(3)(a) of Regulation (EU) No 575/2013 (CRR), and associated with the scope of application of the relevant IMA model to which the risk number refers. In other words, Article 7a(1)(c)(ii), i.e. the 10% threshold as set out above, applies at the level of any relevant IMA model of any institution within the group that has been granted IMA model approval (‘scope of application of the relevant IMA model’).