(iii) Individual risk indicators (IRS)

For each value of a risk indicator, the DGS should assign an individual risk score (IRS) ranging from 0 to 100, where 0 indicates the lowest risk and 100 the highest risk. For the calculation of each IRS, the DGS may either apply the ‘bucket’ or the ‘sliding scale’ method.

DGSs should apply expert judgement to calibrate the thresholds, but should in any case respect the following minimum thresholds:

• a. For the leverage ratio, core equity tier 1 ratio, liquidity coverage ratio and net stable funding ratio, if the value of the indicator of a member institution is lower than the applicable minimum regulatory requirement according to Article 92(1), 412 and 413 of Regulation (EU) No. 575/2013, then the corresponding IRS should be 100.
• b. For the capital coverage ratio, if the value of the indicator of a member institution is lower than 100%, then the corresponding IRS should be 100.
• c. For the total risk exposure amount / total assets ratio and covered deposits / unencumbered assets ratio, if the value of the indicator of a member institution is above 100%, then the corresponding IRS should be 100.

The ‘bucket’ method for the IRS

In the ‘bucket’ method, for a given risk indicator, the DGS defines a fixed number of risk classes (buckets), with the minimum being two buckets. The DGS should define the number of buckets to reflect different levels of risk posed by the member institutions (for example, high, medium, low risk) assessed on the basis of the respective risk indicator.

For each bucket of a risk indicator ‘ j ’ , the DGS should determine an upper and lower boundary of the value ‘ A ’ of the risk indicator in such a way that member institutions with a similar level of risk are grouped into the same bucket. The DGS should determine the buckets’ boundaries either on a relative or an absolute basis, where:

• a. When using the relative basis, the DGS should distribute member institutions evenly between buckets. The DGS determines the boundaries of the buckets after determining the values ‘ A ’ of the risk indicator of member institutions in the same bucket.
• b. When using the absolute basis, the DGS should determine the boundaries of the buckets to reflect that all values ‘ A ’ of the risk indicator within these boundaries represent a similar level of risk and that all member institutions with a similar level of risk end up in the same bucket.

The DGS should set the number and boundaries of the buckets to ensure there is sufficient and meaningful differentiation of member institutions. The DGS should avoid calibrating the number and boundaries in such a way that member institutions, despite representing significant differences in the risk levels measured by a particular risk indicator, would be classified in the same bucket.

The DGS should not set an upper boundary for the highest bucket and should not set a lower boundary for the lowest bucket.

For each bucket of a risk indicator, the DGS should assign a corresponding IRS. The DGS should assign an IRS of 100 to the riskiest bucket and an IRS of 0 to the least risky bucket. The DGS may deviate from this rule for risk indicators which can only have two possible values and where one of which represents an average risk level. If the DGS decides to make use of this possibility, then it should assign an IRS of 50 to the bucket representing the average risk level while the IRS assigned to the other bucket should be either 100 or 0.

The ‘sliding scale’ method for the IRS

In this method, for each institution ‘I’ and for each risk indicator ‘ j ’ , the DGS should calculate an IRS based on the value ‘ A ’ of the risk indicator. The DGS should define an upper boundary ‘ 𝑎 𝑗 ’ and a lower boundary ‘ 𝑏 𝑗 ’ for each indicator. If the indicator’s value is between the defined boundaries, the DGS should assign the value of the IRS between 0 and 100 according to the following two formulas:

• a. When a higher indicator value indicates a higher risk and the indicator is above the upper boundary ‘ 𝑎 𝑗 ’ , the DGS should fix the value of the IRS at 100. Similarly, when the indicator’s value is below the lower boundary ‘ 𝑏 𝑗 ’ , the DGS should fix the value of the IRS at 0. The corresponding formula is:

where j = indicator ‘j’, ranging from 1 to ‘m’ .

• b. Analogously, if a lower indicator indicates a higher risk and the indicator is below the lower boundary ‘ 𝑏 𝑗 ’ , the DGS should fix the value of the IRS at 100. Correspondingly, when the indicator value is above the upper boundary ‘ 𝑎 𝑗 ’ , the DGS should fix the value of the IRS at 0. The corresponding formula is:

For each risk indicator the DGS should calibrate the upper boundary ‘ 𝑎 𝑗 ’ and the lower boundary ‘ 𝑏 𝑗 ′ to ensure there is sufficient and meaningful differentiation of member institutions. The DGS should avoid calibrating the upper and lower boundaries in such a way that all member institutions, despite significant differences in the area measured by a particular risk indicator, should persistently fall either below the lower or above the upper boundary.