It is not clear whether an institution with an IRB Approach permission (Foundation Approach; PD models only) should notify the competent authorities in accordance with Article 143 if they want to recognise additional credit protection in the regulatory LGD in accordance with Article 161(1).
Paragraph 8 of Article 151 of the CRR states that "for exposures belonging to the exposure classes referred to in points (a) to (c) of Article 147(2), institutions shall apply the LGD values set out in Article 161(1), and the conversion factors set out in Article 166(8)(a) to (d), unless it has been permitted to use its own estimates of LGDs and conversion factors for those expo-sure classes in accordance with paragraph 9." Paragraph 1(c) of Article 161 of the CRR, states that 'institutions may recognise funded and un-funded credit protection in the LGD in accordance with Chapter 4.' Paragraph 4 of Article 143 of the CRR, states that 'Institutions shall notify the competent authorities of all changes to rating systems and internal models approaches to equity exposures.' Article 453 of the CRR, states that 'The institutions applying credit risk mitigation techniques shall disclose the following information: (a) the policies and processes for, and an indication of the extent to which the entity makes use of, on- and off- balance sheet netting; (b) the policies and processes for collateral valuation and management; (c) a description of the main types of collateral taken by the institution; (d) the main types of guarantor and credit derivative counterparty and their creditworthiness; (e) information about market or credit risk concentrations within the credit mitigation taken; (f) for institutions calculating risk-weighted exposure amounts under the Standardised Approach or the IRB Approach, but not providing own estimates of LGDs or conversion factors in respect of the exposure class, separately for each exposure class, the total exposure value (after, where applicable, on- or off-balance sheet netting) that is covered — after the application of volatility adjustments — by eligible financial collateral, and other eligible collateral; (g) for institutions calculating risk-weighted exposure amounts under the Standardised Approach or the IRB Approach, separately for each exposure class, the total exposure (after, where applicable, on- or off-balance sheet netting) that is covered by guarantees or credit derivatives. For the equity exposure class, this requirement applies to each of the approaches provided in Article 155.'
Article 143(3) and (4) of the CRR in conjunction with Commission Delegated Regulation (EU) No 529/2014 relates to changes to rating systems. According to Article 142(1)(1) CRR a rating system is defined as 'all of the methods, processes, controls, data collection and IT systems that support the assessment of credit risk, the assignment of exposures to rating grades or pools, and the quantification of default and loss estimates that have been developed for a certain type of exposures'.
Recognition of additional credit protection under Article 161(1)(c) of Regulation (EU) No 575/2013 (CRR) does not change a rating system where the institution is not permitted to use own LGD estimates for the type of exposures for which the rating system has been permitted for the IRB approach. Since the rating system remains unchanged, neither notification according to Article 143(4) CRR nor prior permission according to Article 143(3)(b) CRR is required. It should be noted, however, that recognition of physical collateral of a type other than indicated in paragraphs (2), (3) and (4) of Article 199 of the CRR does require permission by competent authorities, according to Article 199(6).
Institutions applying credit risk mitigation techniques shall also disclose the information required under Article 453 of the CRR.