4.5. Calculation of the aggregate risk weight (ARW)

1. Overview

26. The DGS should assign the ARW for a member institution ‘i’ on the basis of the ARS for that …

The DGS should assign the ARW for a member institution ‘i’ on the basis of the ARS for that institution.

27. The DGS should calculate the ARS by summing up all individual indicators’ risk scores (IRS) of …

The DGS should calculate the ARS by summing up all individual indicators’ risk scores (IRS) of that member institution, multiplied by appropriate indicator weights (IW) for each IRS.

28. The DGS should calculate the IRS based on appropriate risk indicators.

The DGS should calculate the IRS based on appropriate risk indicators.

(i) Risk categories and risk indicators

Risk categories

Table 1: Core risk indicators

Indicator name Formula / Description Sign

1. Capital

1.1. Leverage Ratio Leverage Ratio as stated in Article 429 of Regulation (EU) (-) A higher value

1.2.a Common Equity Tier 1 ratio (CET1 ratio)

No 575/2013 indicates lower risk CET1 ratio as stated in Article 92(2)(a) of Regulation (EU) No (-) A higher value 575/2013 indicates lower risk

1.2.b Capital Coverage Ratio (CCR)

Actual CET1 ratio Actual own funds (-) A higher value Required CET1 ratio or Required own funds indicates lower risk Where: ‘own funds’ as stated in Article 4(118) of Regulation (EU) No 575/2013. ‘required CET1’ and ‘required own funds’ refer to the total CET1 and total own funds requirements of an institution according to Article 92 of Regulation (EU) No 575/2013, Article 104(1)(a) and Article 128 (6) of Directive 2013/36/EU.

2. Liquidity and funding

2.1. Liquidity Coverage LCR as stated in Article 412 of Regulation (EU) No 575/2013 (-) A higher value Ratio (LCR) indicates lower risk

2.2. Net Stable Funding NSFR as defined in Article 428a-428az of Regulation (EU) No (-) A higher value Ratio (NSFR) 575/2013 indicates lower risk

3. Asset quality

3.1 Non-performing NPL ratio as specified in Article 11(2) subparagraph (g) (+) A higher value loans ratio (NPL ratio) point (ii) of Commission Implementing Regulation (EU) indicates higher risk 2021/451¹⁴

¹⁴ Commission Implementing Regulation (EU) 2021/451 of 17 December 2020 laying down implementing technical standards for the application of Regulation (EU) No 575/2013 of the European Parliament and of the Council with regard to supervisory reporting of institutions and repealing Implementing Regulation (EU) No 680/2014 .

4. Business model and management

4.1. Total risk exposure Total Risk Exposure Amount (TREA) (+) A higher value amount (TREA) / Total Total Assets indicates higher risk assets ratio

Where: ‘T otal risk exposure amount ’ as stated in Article 92(3) of Regulation (EU) No 575/2013 DGSs may use different calibrations for member institutions using the internal ratings-based approach or the standardised methods for calculating risk weighted exposures amounts

4.2 Return on assets Net Income (-)/(+) Generally, a (RoA) Total Assets higher value

indicates lower risk, DGSs should calculate the RoA as an average over at least 2 but too high values years to avoid including one-off events and avoid can also indicate procyclicality in contributions. high risk

5. Potential losses for the DGS 5.1. Covered deposits / Covered Deposits (+) A higher value unencumbered assets Unencumbered Assets indicates higher risk

Where: ‘unencumbered assets’ is defined in Article 411(5) of Regulation (EU) No 575/2013.

Additional risk indicators

(ii) Weights for risk indicators and categories

(iii) Individual risk indicators (IRS)

(iv) Aggregating the IRS into the ARS

(v) Calculating the ARW based on the ARS

𝐴𝑅𝑊 𝑖 = 𝛽 ∗ ( 𝛼 𝛽 ) ( 𝐴𝑅𝑆 𝑖 )

Where:

the ARS of an institution ‘I’ can take any value between 0 and 100;

𝛽 = 𝐴𝑅𝑊(0) , i.e. the desired ARW value corresponding to an ARS value of 0 (lower limit); and

𝛼 = 𝐴𝑅𝑊 ( 100 ) , i.e. the desired ARW value corresponding to an ARS of 100 (upper limit).

1.1 References

1.2 Identified Requirements

1.3 Related Standards

2. Identified Requirements

Requirements
Source	Requirement

3. Related Standards

Standards
Source	Requirement

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