Bank of Russia revises procedure for calculating banks' internal ratings-based credit risk

The upcoming revisions will make it possible to take into account the experience accumulated in bank validation. The ordinance applies to the banks that have obtained permission to use internal ratings-based (IRB) credit risk management methods and quantitative risk analysis models to calculate capital adequacy ratios.

According to the document, starting from the third year after the bank obtained permission to use the IRB approach, the threshold for the ratio between the total IRB-based credit risk and the similar indicator based on the standardised approach will be reduced to 72.5%. Therefore, the maximum permissible capital saving for the banks applying IRB, as compared to the standardised approach, will increase from 20 to 27.5%.

In order to finally determine that a credit rating has escaped the default exposure, the regulator has introduced a supervision period (of at least 90 days) from the date when a defaulted loan claim ceased to meet the default criteria.

A requirement has been introduced for banks to carry out a scenario analysis of the qualitative characteristics of the internal credit risk assessment models in order to determine the thresholds for the target indicators of the quality of the models. Should the thresholds be violated, banks will, where necessary, take a decision to revise the model and to apply a buffer to a credit risk component or to the credit risk value for the respective revision period.

The regulator has introduced a ban to transfer a loan claim for calculating the credit risk and capital from the IRB approach to the standardised approach, without obtaining first permission from the Bank of Russia.

The document also enhances the requirements for organising the operations of the unit in charge of validating the rating-based systems, in particular, ensuring compliance with the principle of organisational and functional independence of the unit.

The novelties pertaining to the requirement to ensure the organisational and functional independence of the unit in charge of the validation of rating-based systems and to the revisions affecting the performance by the banks, as part of the stress test, of the scenario analysis of the qualitative characteristics of the credit risk assessment models will come into force from 1 January 2020, as requested by banks. The other rules set out in the document will become effective 10 days after the official publication of the ordinance.