S.L. 371.16 Art. 4Technical criteria for the supervisory review and evaluation.

(1) In addition to credit, market and operational risks, the review and evaluation performed by the competent authority in accordance with regulation 3 shall include at least:

(a) the results of the stress test carried out in accordance with Article 177 of the CRR by credit institutions applying an internal ratings based approach;

(b) the exposure to and management of concentration risk by credit institutions, including their compliance with the requirements set out in Part Four of the CRR and those on concentration risk in Article 81 of the CRD;

(c) the robustness, suitability and manner of application of the policies and procedures implemented by credit institutions for the management of the residual risk associated with the use of recognised credit risk mitigation techniques;

(d) the extent to which the own funds held by a credit institution in respect of assets which it has securitised are adequate having regard to the economic substance of the transaction, including the degree of risk transfer achieved;

(e) the exposure to, measurement and management of liquidity risk by credit institutions including the development of alternative scenario analyses, the management of risk mitigants (in particular the level, composition and quality of liquidity buffers) and effective contingency plans;

(f) the impact of diversification effects and how such effects are factored into the risk measurement system;

(g) the results of stress tests carried out by credit institutions using an internal model to calculate market risk own funds requirements under Part Three, Title IV, Chapter 5 of the CRR;

(h) the geographical location of credit institutions’ exposures;

(i) the business model of the credit institution.

(2) For the purposes of sub-regulation (1)(e), the competent authority shall regularly carry out a comprehensive assessment of the overall liquidity risk management by credit institutions and promote the development of sound internal methodologies. While conducting these reviews, the competent authority shall have regard to the role played by credit institutions in the financial markets. The competent authority shall also duly consider the potential impact of its decisions on the stability of the financial system in all other Member States concerned.

(3) The competent authority shall monitor whether a credit institution has provided implicit support to a securitisation. If a credit institution is found to have provided implicit support on more than one occasion the competent authority shall take appropriate measures reflective of the increased expectation that it will provide future support to its securitisation thus failing to achieve a significant transfer of risk.

(4) For the purposes of the determination to be made under regulation 3(3), the competent authority shall consider whether the valuation adjustments taken for positions or portfolios in the trading book, as set out in Article 105 of the CRR, enable the credit institution to sell or hedge out its positions within a short period without incurring material losses under normal market conditions.

(5) The review and evaluation performed by the competent authority shall include the exposure of credit institutions to the interest rate risk arising from non-trading book activities:

Provided that the supervisory powers shall be exercised at least in the following cases:

(a) where a credit institution’s economic value of equity as referred to in Article 84(1) of the CRD declines by more than 15% of its Tier 1 capital as a result of a sudden and unexpected change in interest rates as set out in any of the six supervisory shock scenarios applied to interest rates;

(b) where a credit institution’s net interest income as referred to in Article 84(1) of the CRD experiences a large decline as a result of a sudden and unexpected change in interest rates as set out in any of the two supervisory shock scenarios applied to interest rates: Provided further that, notwithstanding the first proviso to this sub-regulation, the competent authority shall not be obliged to exercise supervisory powers where it considers, based on the review and evaluation referred to in this sub-regulation, that the credit institution’s management of interest rate risk arising from non-trading book activities is adequate and that the credit institution is not excessively exposed to interest rate risk arising from non-trading book activities.

(5A) For the purposes of sub-regulation (5), the term "supervisory powers" means the powers referred to in regulation 9(1) or the power to specify modelling and parametric assumptions, other than those identified by the EBA pursuant to point (b) of paragraph 5a of Article 98 of the CRD, to be reflected by credit institutions in their calculation of the economic value of equity under Article 84(1) of the CRD.

(6) The review and evaluation performed by the competent authority shall include the exposure of credit institutions to the risk of excessive leverage as reflected by indicators of excessive leverage, including the leverage ratio determined in accordance with Article 429 of the CRR. In determining the adequacy of the leverage ratio of credit institutions and of the arrangements, strategies, processes and mechanisms implemented by credit institutions to manage the risk of excessive leverage, the competent authority shall take into account the business model of those credit institutions.

(7) The review and evaluation conducted by the competent authority shall include governance arrangements of credit institutions, their corporate culture and values, and the ability of directors to perform their duties. In conducting that review and evaluation, the competent authority shall, at least, have access to agendas and supporting documents for meetings of the board of directors and its committees, and the results of the internal or external evaluation of performance of the board of directors.