28. IRC approaches based on different parameters

An institution may use an approach to capturing incremental default and migration risks that does not comply with all the provisions of Annex II Paragraph 3 of Directive 2010/76/EU (referred to as a „not fully compliant IRC approach‟ in the remainder of this section):

• i. when this not fully compliant IRC approach is consistent with the institution‟s internal methodologies for identifying, measuring and managing risks;
• ii. and when the institution is able to demonstrate that its approach results in a capital requirement that is at least as high as if it was based on an approach in full compliance with all IRC requirements.

The institution should provide all necessary information concerning elements of the institution‟s IRC approach that are considered, either by the institution or by its supervisor, as not fully compliant.

On the basis of the information provided, the competent national supervisor should decide whether the IRC approach used – or planned to be used – by the institution should be considered as a non-compliant IRC approach or could be considered as a non-fully compliant IRC approach according to point 28.4 below. In particular, if an IRC approach is recognised as a non-compliant IRC approach, this would in principle entail the application of the standardised approach for specific risk to the positions covered by the non-compliant IRC approach.

In order to have its approach recognised as a non-fully compliant IRC approach, an institution should demonstrate, to the satisfaction of its supervisor, that the institution‟s IRC approach results in a capital requirement that is at least as high as if it were based on a fully compliant IRC approach.

The decision to recognise an institution‟s approach as a non-fully compliant approach is made by competent authorities.