Directive 2013/36/EU, known as CRD IV (Capital Requirements Directive IV), is a key element of EU efforts to strengthen financial stability and security. Article 79 specifies requirements for credit risk and counterparty default by requiring that lending must be based on sound, clearly defined criteria. In addition, the authorisation, amendment, extension and refinancing procedures for loans must be clearly defined.
A key requirement is that institutions must have internal methods in place to assess credit risk both at an individual level (for individual borrowers, securities or securitisation positions) and for the portfolio as a whole. It is important to note that these internal methods must not be based exclusively or automatically on external credit assessments, such as those of an External Credit Assessment Institution (ECAI). If capital requirements are based on the credit assessment of an ECAI or the fact that a risk position is unrated, this does not exempt institutions from the obligation to also consider other relevant information to assess the allocation of their internal capital.
Why is this important? The requirement emphasises the need for banks to carry out a comprehensive and independent risk assessment. If a bank relies solely on external ratings, this could lead to underestimation or non-recognition of credit risks. The use of internal methods ensures that banks develop a deeper understanding of their risk exposure and make adequate capital allocations. Read how our FinAPU SCRA tool can provide you with automated and complete support: Credit Risk Standard Approach, seamlessly and automated
