1. When assessing whether the institution’s internal model is implemented with integrity as required by Article 325bi(1) of Regulation (EU) No 575/2013 in relation to the back-testing referred to in Article 325bj(3), point (b), of that Regulation, competent authorities shall verify whether, as part of such back-testing programmes, the institution:
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(a)
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runs the back-testing programme referred to in paragraph 2 or another internal back-testing programme that enables the institution to identify the contribution of modellable and non-modellable risk factors to the back-testing results;
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(b)
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applies direct expected shortfall back-testing approaches to its portfolios.
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For the purposes of point (b), competent authorities shall verify how the institution motivates the choice of the applied direct expected shortfall back-testing methodology, and analyse whether that methodology is conceptually sound.
The institution may use the back-testing programmes referred to in the first subparagraph as an element to detect and monitor potential deficiencies in the calculation of the excepted shortfall measures. Where a competent authority decides on the permission to use the internal model approach to compute the own funds requirement for market risk in accordance with Article 325az, those back-testing programmes shall not supersede the outcomes of the regulatory back-testing referred to in Article 325bf of Regulation (EU) No 575/2013 and the profit and loss attribution requirements referred to in Article 325bg of that Regulation.