2015_2058 Number of distinct calculations required to assess materiality of changes to internal IRC models

Question ID:: 2015_2058
Legal Act:: Regulation (EU) No 575/2013 (CRR)
Topic:: Market risk
Article:: 363
Paragraph:: 3
COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations:: Regulation (EU) No 529/2014 - RTS on materiality of extensions and changes in the advanced approaches (IRB and AMA)
Article/Paragraph:: Art. 7a
Disclose name of institution / entity:: Yes
Name of institution / submitter:: European Central Bank
Country of incorporation / residence:: EU
Type of submitter:: Competent authority
Subject Matter:: Number of distinct calculations required to assess materiality of changes to internal IRC models
Question:: Regulation (EU) No 529/2014 governs the assessment of materiality of changes and extensions to internal approaches for credit, market and operational risk. According to this regulation a change to the incremental default and migration risk charge (IRC) is to be considered material if within 15 consecutive business days (Article 7a(4)(a)) the thresholds of Article 7a(1)(c)(ii) are breached at least once. According to Article 374(1) CRR institutions may compute the IRC only weekly. Does this mean that?
Background on the question:: At ECB, we received a series of requests for changes to IMA in market risk. We were asked about the requirements to assess the materiality, w.r.t. the required frequency of parallel calculations for IRC models, in particular for banks that compute their IRC only on a weekly basis.
Date of submission:: 22/06/2015
Published as Final Q&A:: 25/09/2015
Final Answer:: Yes, in case an institution computes the incremental default and migration risk charge (IRC) weekly, in accordance with Regulation (EU) No 529/2014, three calculations are enough to decide upon the materiality of changes to IRC model. Moreover, in line with EBA/GL/2012/3 paragraph 29(2): "the institution should be able to prove that, on the day of the week chosen for the IRC calculation, its portfolio is representative of the portfolio held during the week and that the chosen portfolio does not lead to a systematic underestimation of the IRC numbers when computed weekly".
Status:: Final Q&A
Answer prepared by:: Answer prepared by the EBA.
Note to Q&A:: 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.