4.7. Calibration of the calculation method and its regular review

The DGS should calibrate the calculation method based on expert judgement, taking into consideration the characteristics of the national banking sector, and the degree of heterogeneity among member institutions. The calibration of the calculation method includes:

• a. the selection of risk indicators;
• b. the weighting of the risk indicators;
• c. the upper and lower boundaries of the IRS;
• d. the method for calculating the IRS;
• e. the thresholds of the ARW;
• f. the method for calculating the ARW;
• g. the application of optional modifications to the calculation formula.

The DGS should reflect in the contribution of each member institution, and hence in the calibration of the calculation method, an increased liability incurred by a DGS as a result of a member’s participati on related to:

• a. the likelihood of a DGS intervention;
• b. the potential losses for the DGS stemming from a DGS intervention, on a net basis after potential recoveries from the bankruptcy estate of the failed institution.

The DGS should align the incentives provided by the calculation method with prudential requirements.

The DGS should take into account national accounting and reporting practices.

The DGS should calibrate all elements of the calculation method to be consistent with relevant historical data. For this purpose, historical data should include: (i) data about institutions’ failures, DGS interventions, resolution action or measures by other public authorities to prevent the failure; and (ii) data about net losses or recovery rates of the DGS from such events.

The competent authority in cooperation with designated authority should regularly – at least every 5 years and before the regular 5-year review of these Guidelines – compare the results obtained in applying the calculation method with an appropriate benchmark for their risk assessment, for example with the risk assessment performed under the SREP. This comparison should be made in a holistic manner. The competent authority in cooperation with the designated authority should inform the EBA of the holistic outcome of this comparison and the discrepancies observed.

The DGS should review and, where necessary, recalibrate all the elements of the calculation method – at least every 5 years and following the regular 5-year review of these Guidelines – to ensure that the performance of the calculation method is sufficiently risk sensitive and that it provides for sufficient risk discrimination of its member institutions. Changes in data reporting, regulatory or institutional changes should also trigger checking and verifying the performance of the model.