How should be understood “institution” for applying the IRB approach to equity exposures? Should it be understood as group level or as individual level?
Article 148(5) sets that “an institution that is permitted to use the IRB Approach for any exposure class shall use the IRB Approach for the equity exposure class laid down in point (e) of Article 147(2), except where that institution is permitted to apply the Standardised Approach for equity exposures pursuant to Article 150 and for the other non credit- obligation assets exposure class laid down in point (g) of Article 147(2)” . The approval for internal models for credit, markets or operational risk is granted at individual institution level. Even in a consolidated group, the permission to use internal models is granted at each legal institution level. When the article mentions “an institution that is permitted to use IRB Approach (…)”, it refers to the individual legal institution could be under this scope. Therefore, in the case of a consolidated group where there are specific individual institutions that have permission to use internal models (and others that don’t), it is consistent with the rule that the equity exposures are treated in the same way as the permission such individual institutions have at individual level. So, if an individual institution that belongs to a consolidated group applies to all the exposure class the Standardised approach, then that institution must use the Standardised approach for the equity exposures as that institution doesn’t have been granted to use internal models. On the other hand, individual institutions within a group that have approval to use internal models even in only one exposure class must use IRB approach for the equity exposures in accordance with Article 148(5).
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