Assuming that a parent institution does not have permission by the competent authorities to use the Internal Models Approach (IMA) on consolidated level, but
(i) it has the permission to use the IMA on individual level and/or one (or several) of its subsidiaries have the permission to use the IMA on individual level or
(ii) it has no permission to use the IMA on individual level and only one (or more) subsidiaries have the permission to use the IMA on individual level.
Is the parent institution compliant with the requirements of the CRR (in particular Articles 11 and 363(2) thereof) if it calculates the own funds requirements for market risk on consolidated level by summation of
(i) the individual VaR, sVaR (and where applicable IRC and CRM) where IMA permission on individual level has been granted; and
(ii) the own funds requirements according to the standardised approaches for market risk in accordance with Chapters 2, 3 and 4 of Title IV of Part Three of the CRR for consolidated entities which do not have IMA permission?
Does the assessment depend on whether permission has been granted for the consolidating parent entity on individual level?
In some EU jurisdictions this “summation approach” has been accepted.
For some institutions the permission to use internal models for market risk has been granted before CRR came into force, and was often granted to an individual entity (often a subsidiary) where the bulk of trading activities is concentrated.
If the parent institution would be granted IMA permission on the consolidated level on the same scope of positions modelled and to which the “summation approach” is applied on consolidated level, the resulting own funds requirements based on the IMA on consolidated basis would be the same as the own funds requirement calculated based on the “summation approach”, assuming that the significant share requirement of Art 363(2) CRR is met.
In this case the IMA approach (meaning a dedicated permission for the IMA approach on consolidated level according to Article 363(2) of the CRR) would lead to the same modelling and OFR as the summation approach (where no such permission for the IMA approach on consolidated level was granted). The difference lies in having or not a permission for the IMA on consolidated level.
On the other hand, this “summation approach” is not contemplated explicitly in the CRR while generally, in order to use an internal model for the purpose of calculating own funds requirements an approval should be sought according to Article 363(2) of the CRR.
Where own funds requirements are computed for an institution on a consolidated basis, Article 11 of Regulation (EU) No 575/2013 (CRR) states that parent institutions are required to comply with the own funds requirements on the basis of their consolidated situation.
Article 4(47) states that “consolidated situation” means ‘the situation that results from applying the requirements of this Regulation in accordance with Part One, Title II, Chapter 2 to an institution as if that institution formed, together with one or more other entities, a single institution’.
Article 18(1) states that “The institutions that are required to comply with the requirements referred to in Section 1 on the basis of their consolidated situation shall carry out a full consolidation of all institutions and financial institutions that are its subsidiaries or, where relevant, the subsidiaries of the same parent financial holding company or parent mixed financial holding company.”
It results from the above that compliance on a consolidated basis with the requirements of Article 363 implies that internal model permission is granted at the consolidated level of an institution for consolidated own funds requirements for that institution to be calculated using internal models.
With regard to the application of market risk capital requirements on a consolidated basis, Article 325 provides the conditions, at consolidated level, for positions resulting from the consolidated situation of the group to be allowed to be offset with each other.
Where competent authorities have not granted permission to the institution to offset positions in accordance with Article 325, the institution is required to compute capital requirements on a consolidated basis, separately for each subset of positions on a consolidated basis stemming from each of those institutions or undertakings, without any offset with other positions of the group.
In accordance with Article 11, where own funds requirements are computed on a consolidated basis, parent institutions are required to comply with the own funds requirements on the basis of their consolidated situation. As a result, permission is not required to be granted at the individual level of the parent institution for own funds requirements to be computed using the IMA on the basis of its consolidated situation, provided permission has been granted at consolidated level.