4. For the purposes of paragraph 1, point (c), competent authorities shall:
(a)
obtain an overview of the risk factors chosen by the institution and verify:
(i)
whether the criteria ensure a sufficient level of coverage in the modellable risk factors’ types chosen compared to the full set of modellable risk factors to which the institution is exposed;
(ii)
whether the criteria are such that the threshold referred to in 325bc(2), point (a), of Regulation (EU) No 575/2013 is expected to be exceeded over time;
(iii)
whether the institution tests alternative subsets of modellable risk factors to ensure that its choice does not underestimate the own funds requirements;
(iv)
whether the institution, in its choice, favours the selection of risk factors for which data in the stress period exist over risk factors for which proxies are used, and where that is not the case, competent authorities shall assess the reason why the institution did not implement such a criterion, and whether a different choice would improve the quality of the unconstrained and partial expected shortfall measure.
(b)
verify whether, where the position has a maturity of less than 10 days, the effective liquidity horizon of all risk factors is set to 10 days, and that such position does not impact the calculation of
for
;
(c)
where the position has a maturity of Mat days, with
, verify whether:
(i)
all risk factors of that position with a liquidity horizon
have been assigned to an effective liquidity horizon that is the shortest liquidity horizon among the liquidity horizons provided in Table 1 of Article 325bc(1) of Regulation (EU) No 575/2013 that is greater than or equal to Mat;
(ii)
the position does not impact the calculation of
for all j corresponding to a liquidity horizon that is greater than the shortest liquidity horizon among the liquidity horizons provided in Table 1 of Article 325bc(1) of Regulation (EU) No 575/2013 that is greater than or equal to Mat;
(d)
verify whether, where the position has a maturity of Mat days, with
, the institution has assigned all risk factors of that position to an effective liquidity horizon corresponding to the liquidity horizon SubCatLH assigned to the risk factors;
(e)
verify whether, when computing
, the institution keeps constant those risk factors with an effective liquidity horizon that is lower than the liquidity horizon corresponding to the index j.
For the purposes of point (a)(ii), competent authority shall assess by which margin the institution exceeded the threshold in the previous quarters.
For the purposes of point (a)(iii), competent authorities may, where they deem insufficient the testing of alternative subsets carried out by the institution, require the institution to test alternative subsets and assess whether alternative choices lead to material differences in terms of own funds requirements.
