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Calculating Aggregate Risk Weight for Private Banks

Calculation of the Aggregate Risk Weight for CRR Credit Institutions Assigned to the Compensation Scheme of German Private Banks

The credit institutions under the Capital Requirements Regulation (CRR credit institutions) are obliged to secure their deposits in accordance with the German Deposit Guarantee Act by belonging to a deposit guarantee system. The following relates to Entschädigungseinrichtung deutscher Banken GmbH (EdB), the Compensation Scheme of German Private Banks.

The following information does not replace legal advice and is completely non-binding. The compilation serves only to provide a quicker introduction to this complex subject from the perspective of private banks. An unofficial translation of the Compensation Scheme Funding Regulation is provided by the Association of German Banks for information purposes only. The original German text is binding in all respects. The following is not applicable to the calculation of the aggregate risk weight for CRR credit institutions assigned to the Compensation Scheme of the Association of German Public Banks.

This applies only to CRR credit institutions within the meaning of Section 1 (3d) sentence 1 of the German Banking Act. According to Section 1 (3d) sentence 1 of the German Banking Act, CRR credit institutions are credit institutions within the meaning of Article 4 (1) number 1 of Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 (OJ L 176/1 of 27 June 2013).

“The Regulation on the Funding of the Compensation Scheme of German Private Banks and the Compensation Scheme of the Association of German Public Banks” (Compensation Scheme Funding Regulation) is the “Verordnung über die Finanzierung der Entschädigungseinrichtung deutscher Banken GmbH und der Entschädigungseinrichtung des Bundesverbandes Öffentlicher Banken Deutschlands GmbH” (Entschädigungseinrichtungs-Finanzierungsverordnung, EntschFinV). This Regulation applies to the Compensation Scheme of German Private Banks and the Compensation Scheme of the Association of German Public Banks (compensation schemes), as well as CRR credit institutions within the meaning of Section 1 of the Deposit Guarantee Act that are assigned to a compensation scheme.

This Regulation sets out the further details of the funding of the compensation schemes and further provisions on the methods for calculating contributions, and the calculation and collection of contributions and payments, The following is about these rules with an eye on private banks.

Section 19(2) to (4) of the Deposit Guarantee Act

(2) Contributions to deposit guarantee schemes shall be based on the amount of covered deposits of the CRR credit institutions that are members of the deposit guarantee scheme and the degree of risk incurred by the respective CRR credit institution.

(3) A deposit guarantee scheme may, with the approval of BaFin, use its own risk-based methods to calculate the risk-based contributions. The calculation of the contributions concerned shall be proportional to the risk of the CRR credit institutions that are members of the deposit guarantee scheme and shall take due account of the risk profiles of the various business models. The own risk-based methods for calculating the contributions may also take into account the asset side of the balance sheet and risk indicators such as capital adequacy, asset quality and liquidity.

(4) Lower contributions may be provided for in the case of CRR credit institutions that belong to low-risk sectors or for members of an institutional protection scheme that is not recognised as a deposit guarantee scheme.

A CRR credit institution’s annual contribution shall be calculated in such a way that the sum of all annual contributions reaches at least a certain annual target level. The annual contribution for CRR credit institutions assigned to the Compensation Scheme of German Private Banks shall be at least 20,000 €. In addition to the annual contribution, a flatrate surcharge may be levied to cover the administrative and other costs incurred by the compensation scheme in the course of its activities. The surcharge for CRR credit institutions assigned to the Compensation Scheme of German Privat Banks shall not exceed 12,500 € plus in each case 0.5% of the CRR credit institution’s annual contribution. The surcharge shall be fixed together with the respective annual contribution and shown separately in the contribution notice. The compensation scheme may also levy a surcharge for contribution assessment years in which no annual contribution is levied.

The compensation scheme sets an annual target level in each contribution assessment year. Deposit guarantee schemes shall have adequate financial means that are proportionate to their existing and potential liabilities (available financial means). They shall put in place adequate systems to determine their potential liabilities. The deposit guarantee schemes shall ensure that, by the end of 3 July 2024, their available financial means shall at least reach a target level of 0.8% of the amount of the covered deposits. If the available financial means fall short of the target level, the deposit guarantee schemes shall ensure that the collection of contributions shall resume until the target level is reached again. If, after the target level has been reached for the first time, the available financial means have been reduced to less than two-thirds of the target level, the contributions shall be set at a level allowing the target level to be reached again within six years.

The compensation scheme may raise or lower the annual target level to reflect developments in the business cycle. When it does so, the respective phase of the business cycle and the potential impact of pro-cyclical contributions on the CRR credit institutions’ financial position shall be taken into account. The annual target level may be raised by means of a flat-rate surcharge if this appears necessary in view of a forecasted growth in covered deposits until the target level is reached.

Annual Contribution

The annual contribution shall be calculated by applying the following formula:

Ci = max. {MCi; (CR x ARWi x CDi x µ)}

Where:

Ci = annual contribution from CRR credit institution
MCi = minimum contribution of 20,000 €
CR = contribution rate
ARWi = aggregate risk weight for CRR credit institution
CDi = covered deposits of CRR credit institution
µ = adjustment coefficient

The annual contribution shall be either the minimum contribution MCi or the result of the formula CR x ARWi x CDi x µ, whichever is higher.

Contribution Rate

The contribution rate is determined on a yearly basis by dividing the annual target level by the sum of covered deposits of all CRR credit institutions as at ultimo of the preceding year. The aggregate risk weight for the CRR credit institution shall be a percentage calculated on the basis of several risk indicators.

The compensation scheme shall use the adjustment coefficient to adjust the sum of the annual contributions of all CRR credit institutions that would be produced by calculating the annual contributions on the basis of the contribution rate, the aggregate risk weight and the covered deposits of each CRR credit institution using the formula Ci = CR x ARWi x CDi (unadjusted annual contributions) to the annual target level. The adjustment coefficient shall be calculated by applying the following formula:

µ = Annual target level / Sum of unadjusted annual contributions

The compensation scheme shall be entitled to lower or raise the adjustment coefficient if this is necessary due to developments in the business cycle and the pro-cyclical impact of the annual contributions.

Credit Quality Grade

The aggregate risk weight for CRR credit institutions assigned to the Compensation Scheme of German Private Banks shall be calculated on the basis of a credit quality grade. The credit quality grade shall be based on a risk assessment of the CRR credit institution by the Compensation Scheme of German Private Banks using risk categories and risk indicators.

For each credit quality grade, the aggregate risk weight shall be as follows:

Credit Quality GradeAggregate Risk Weight
050 %
175 %
290 %
3100 %
4110 %
5125 %
6140 %
7160 %
8180 %
9200 %

By way of derogation from the above mentioned stipulations, an aggregate risk weight of 110% shall apply to newly established CRR credit institutions until and including completion of the second full financial year. In addition to paying the annual contribution, CRR credit institutions newly assigned to a compensation scheme shall be required to make a one-off payment. The one-off payment shall be 0.2% of the covered deposits held by the CRR credit institution on 31 December of the preceding year, but at least 25,000 €. The one-off payment shall be due when the notice concerning the payment has been announced.

The Compensation Scheme of German Private Banks shall base its assessment of the CRR credit institution’s risk on the following risk categories:

  1. capital,
  2. liquidity and funding,
  3. asset quality,
  4. business model and management, and
  5. potential losses for the compensation scheme.

The CRR credit institutions shall be required to confirm to the compensation scheme the factual and arithmetical accuracy of the information they report. The compensation scheme may verify the accuracy of such notification.

Obligation to Submit Documentation and Proof

CRR credit institutions shall deliver to the compensation scheme by 30 June of the respective contribution assessment year the following information and documents for calculation of the annual contribution:

  1. the annual financial statements (annual accounts) for the financial year ending before 1 March of the respective contribution assessment year and for the preceding year,
  2. notifications as regards asset encumbrance, single data point model and validation rules as at the balance sheet date of the financial year ending before 1 March of the respective contribution assessment year and as at the balance sheet date of the preceding year,
  3. the overview template for own funds, as at the balance sheet date of the financial year ending before 1 March of the respective contribution assessment year and as at the balance sheet date of the preceding year,
  4. the completed reporting template for the financial information as at the balance sheet date of the financial year ending before 1 March of the respective contribution assessment year and as at the balance sheet date of the preceding year,
  5. the completed compensation scheme questionnaire to gather additional information as at the balance sheet date of the financial year ending before 1 March of the respective contribution assessment year and as at the balance sheet date of the preceding year,
  6. the statement of assets and liabilities, together with a statement of income and expenses, and for branches of undertakings domiciled abroad the notes thereon, and
  7. for the purpose of preparing the risk assessment, all current credit ratings relating to them or the credit ratings obtained for submission to the compensation scheme.

The documents specified above must bear an unconditional audit certificate issued by the auditor. Annual financial statements or a statement of assets and liabilities bearing a conditional audit certificate shall only be taken into account by the compensation scheme if the objections made by the auditor do not relate to the risk indicators and risk categories on which the risk assessment is based.

Risk Categories and Risk Indicators

The following risk categories and risk indicators shall be incorporated into the risk assessment with the following weighting (source):

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Description of the Risk Indicators

1.1 Leverage ratio in accordance with Implementing Regulation (EU) No 680/2014, template C 47.00, row 340, column 010.

1.2 Common equity Tier 1 ratio in accordance with Implementing Regulation (EU) No 680/2014, template C 03.00, row 010, column 010. If the waiver pursuant to Section 2a of the Banking Act in conjunction with Article 7 of Regulation (EU)
No 575/2013 is applied, the group-level ratio shall be used. For CRR credit institutions which are covered by the provisions of Section 53c, number 2 of the Banking Act, the ratio of the banking group shall be used.

2.1 LCR in accordance with Implementing Regulation (EU) No 680/2014, template C 76.00. If the waiver pursuant to Section 2a of the Banking Act in conjunction with Article 8 of Regulation (EU) No 575/2013 is applied, the ratio at group level shall be used.

2.2 Net stable funding ratio (NSFR). The Net Stable Funding Ratio disclosure standards published by the Basel Committee on Banking Supervision on 22 June 2015 require the mandatory disclosure of the NSFR for reporting periods after 1
January 2018. From 2019, the NSFR shall receive a weighting of 9% in accordance with Implementing Regulation (EU) No 680/2014. If the waiver pursuant to Section 2a of the Banking Act in conjunction with Article 8 of Regulation (EU)
No 575/2013 is applied, the ratio at group level shall be used.

3.1 Non-performing loans ratio in accordance with the Financial and Internal Capital Adequacy Information Regulation (Finanz- und Risikotragfähigkeitsinformationenverordnung), templates for financial information pursuant to Section 25(1), sentence 1 of the Banking Act. Delinquent loans (excluding loans for which specific loan loss provisions have been established) less collateral provided for these loans plus loans for which specificoan loss provisions have been established before the deduction of specific loan loss provisions less collateral provided for these loans proportional to the amount of total loans.

4.1 Ratio of risk-weighted assets (RWAs) to total assets RWAs: total risk exposure amount in accordance with Implementing Regulation (EU) No 680/2014,
template C 02.00, row 010, column 010. Total assets according to the annual financial statements prepared in accordance with point III. If the waiver pursuant to Section 2a of the Banking Act in conjunction with Article 7 of Regulation (EU) No 575/2013 is applied, the group-level ratio shall be used. For CRR credit institutions which are covered by the provisions of Section 53c, umber 2 of the Banking Act, the ratio of the banking group shall be used.

4.2 Return on average assets: Net income according to item 19 of the profit and loss account form in accordance with the Accounting Regulation for Credit Institutions (Kreditinstituts-Rechnungslegungsverordnung), adjusted for increases or reductions in the contingency reserves pursuant to Section 340f of the Commercial Code (Handelsgesetzbuch) and in the special reserve pursuant to Section 340g of the Commercial Code. Average total assets shall be the arithmetic mean of the total assets as reported in the annual financial statements and the total assets as reported in the annual financial statements for the year preceding the annual financial statements of the previous year.

4.3 Rating: The rating shall be based on quantitative and qualitative macroeconomic and microeconomic aspects. Assessment levels shall comprise the market environment, assets, financial and earnings situation, business model and strategy, and the corporate structure and management of the CRR credit institution. In addition, the risk situation shall be evaluated.

Basis for Calculating the Risk Indicators

The basis for calculating the risk indicators shall be the assets, financial and earnings situation of the CRR credit institution at the end of the last business year ending before 1 March of the respective contribution assessment year. The financial data shall be based on the annual financial statements of the CRR credit institution or the corresponding statement of assets and liabilities, together with a statement of income and expenses and notes.

Calculation of the Credit Quality Grade

The credit quality grade shall be calculated as follows:

  1. The risk indicators shall be calculated in accordance with column 3 of the table.
  2. The risk indicator value thus calculated shall determine the level of the individual risk score (IRS) of a risk indicator. The IRSs shall lie between 0 for “very low risk” and 100 for “very high risk”.
  3. The IRS of each risk indicator shall be multiplied by the corresponding weighting in column 2 of the table. The weighted IRSs shall be aggregated and, on the basis of the total, assigned a credit quality grade between 0 for “highest credit quality” and 9 for “lowest credit quality”.

Ratings-based Risk Assessment

Ratings-based risk assessment shall be based solely on current credit ratings issued by a recognised credit rating company in the form of full ratings with a forecast period of one year. Current credit ratings means ratings which the CRR credit institution or a third party has commissioned with respect to the creditworthiness of the CRR credit institution and are valid on 31 May of the respective contribution assessment year. Current credit ratings for CRR credit institutions within the meaning of Section 53(1), sentence 1 of the Banking Act (Kreditwesengesetz) shall also include ratings issued with respect to the creditworthiness of their undertaking abroad.

Recognised credit rating companies means companies which

  1. are registered as credit rating agencies,
  2. are certified as credit rating agencies and
  3. have at least five years’ experience as credit rating agencies performing the credit-rating of CRR credit institutions or at least ten years’ experience as credit rating agencies performing credit assessments of CRR credit institutions for deposit guarantee schemes.

The CRR credit institutions shall, on request, furnish the Compensation Scheme of German Private Banks with suitable proof that the conditions specified have been fulfilled.

The Compensation Scheme of German Private Banks shall map a rating score class to each credit assessment category used by a recognised credit rating company. The Compensation Scheme of German Private Banks publishes the mapping of the rating score classes on its website.

The CRR credit institutions shall send the Compensation Scheme of German Private Banks all the current credit ratings relating to them to enable it to perform the risk assessment. Where CRR credit institutions do not have a current rating, they shall obtain one. This does not apply to CRR credit institutions which submit all the credit ratings for their undertaking domiciled abroad if these ratings meet set requirements.

References

Association of German Banks – The Deposit protection scheme

Auditing Association of German Banks – Minimising the Risks in the Interest of Deposit Protection

Compensation Scheme Funding Regulation

Deutsche Bundesbank – Deposit protection in Germany

European Banking Authority – Deposit Guarantee Schemes data

Federal Financial Supervisory Authority – Questions & answers on deposit protection and investor compensation