Can an IRB credit institution have the standardised approach applied to type of clients to whom the IRB approach is being used? I.e. if the standardised approach is approved for a specific portfolio of exposures, can this portfolio be defined by the type of client only or may it also be defined by the type of business?
Article 150 of the CRR stipulates the possibility to use the standardised approach for “exposures in non-significant business units as well as exposure classes or types of exposure that are immaterial in terms of size and perceived risk profile“, without being specific about what “type of exposure” means, i.e. whether this relates just to the type of client or also to the type of business (e.g. purchased receivables). An issue arises in the case where a bank with an approved IRB approach performed factoring (or purchased receivables) operations in its subsidiary following an approved standardised approach, and subsequently the subsidiary merged with the bank and the bank applied for the standardised approach for exposures ensuing from factoring activities.
Under Article 150(1)(c) of Regulation (EU) No 575/2013 (CRR) competent authorities may grant permission for institutions to apply the Standardised Approach for exposures in non-significant business units as well as exposure classes or types of exposures that are immaterial in terms of size and perceived risk profile.
The terms 'business unit' and 'types of exposures' are defined by the CRR. Article 142(3) of the CRR states that 'business unit' means "any separate organisational or legal entities, business lines, geographical locations", Article 142(2) states that 'type of exposures' means "a group of homogeneously managed exposures which are formed by a certain type of facilities and which may be limited to a single entity or a single sub-set of entities within a group provided that the same type of exposures is managed differently in other entities in the group", and Article 147 sets out how institutions which have received permission to apply the IRB Approach are to assign exposures to exposure classes.
Neither the definition of 'business unit' nor the definition of 'types of exposures' refer to 'type of client' (which is not defined in the CRR), and it is therefore possible to grant permission to apply the Standardised Approach irrespective of the type of client as long as the exposures belong to a separate business unit, type of exposures, or exposure class and the criteria set out in Article 150(1)(c) of the CRR are met. The decision whether to grant permission to apply the Standardised Approach for a given business unit, type of exposure or exposure class rests with the competent authorities.
Update 26.03.2021: This Q&A has been reviewed in the light of the changes introduced to Regulation (EU) No 575/2013 (CRR) and continues to be relevant.