Solvency Regulation (Solvency Ordinance - SolvV)

Deutsche Bundesbank B 10 Ordinance on the Adequate Equity Capital of Institutions, Institutional Groups, Financial Holding Groups and Mixed Financial Holding Groups (Solvency Ordinance – SolvV) Of 6 December 2013 Reading version Non-official text January 2014

2 Reading version Status: 1.1.2014 Non-official text Ordinance on the Adequate Equity Capital of Institutions, Institutional Groups, Financial Holding Groups and Mixed Financial Holding Groups (Solvency Ordinance – SolvV)1 Of 6 December 2013 Based on Section 10 Paragraph 1 Sentence 1 and 3 of the Banking Act (Kreditwesengesetz), which was newly revised by Article 1 Number 21 of the Act of 28 August 2013 (BGBl. I p. 3395), and based on Section 10a Paragraph 7 Sentence 1 and 3 of the Banking Act, which was newly revised by Article 1 Number 22 of the Act of 28 August 2013 (BGBl. I p. 3395), each in consultation with the Deutsche Bundesbank and after hearing the peak associations of institutions, the Federal Ministry of Finance ordains:

1 This Ordinance serves to implement Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (OJ L 176 of 27.6.2013, p. 338) as well as the adaptation of supervisory law to 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 646/2012 (OJ L 176 of 27.6.2013, p. 1).

3 Table of Contents Part 1 General Provisions § 1 Scope of Application § 2 Applications and Notifications Part 2 Further Provisions on the Equity Capital Requirements for Institutions and Groups Chapter 1 Internal Approaches Section 1 General Provisions § 3 Checks when using an approved approach for determining minimum capital requirements § 4 Measures in case of deficiencies in risk capture or non-compliance with requirements when using an approved approach for determining minimum capital requirements § 5 Calculations and reports for supervisory benchmarking when applying internal approaches § 6 Supervisory benchmarking of internal approaches Section 2 Supplementary Provisions on the IRB Approach § 7 IRB Approach Eligibility Checks for Internal Rating Systems and Counterparty Risk Models § 8 Timeframe for the Implementation of the IRB Approach § 9 Requirements for the Implementation of the IRB Approach § 10 IRB Approach Thresholds; Supervisory Reference Point § 11 Calculation of the Coverage Ratio § 12 IRB Approach Positions to be Considered in the Numerator for the Coverage Ratio § 13 Positions to be Considered in the Denominator for the Coverage Ratio; Population for the Coverage Ratio § 14 Phasing-out Business Area; New Business; Existing Business to be Considered § 15 Permanent Exemption from the Application of the IRB Approach for Taxable Churches and Religious Societies § 16 Materiality Threshold for 90-Day Past Due § 17 Eligible Types of Holdings for the Exemption from the Application of the IRB Approach until 31 December 2017

4 Section 3 Supplementary Provisions on the IMM § 18 IMM Eligibility Check Section 4 Supplementary Provisions on Internal Classification Procedures § 19 Eligibility Checks for Internal Classification Procedures Section 5 Supplementary Provisions on Operational Risks § 20 AMA Eligibility Check Section 6 Supplementary Provisions on Internal Models for Market Risks § 21 Internal Models Eligibility Check Chapter 2 Specifications for the Determination of the Loan-to-Value Ratio § 22 Specifications for the Determination of the Loan-to-Value Ratio of Real Estate Chapter 3 Further Provisions on the Transition Rules for Capital Requirements § 23 Percentages for Capital Ratios Part 3 Further Provisions on the Determination of Own Funds Chapter 1 Further Provisions on the Transition Rules for the Determination of Own Funds § 24 Percentages for the Consideration of Unrealized Losses on Assets or Liabilities Valued at Fair Value Shown in the Balance Sheet § 25 Percentages for the Consideration of Unrealized Gains on Assets or Liabilities Valued at Fair Value Shown in the Balance Sheet § 26 Percentages for Deductions from Core Tier 1 Capital, Additional Tier 1 Capital and Tier 2 Capital § 27 Percentages for the Recognition of Instruments and Positions Not Classified as Minority Holdings in Consolidated Core Tier 1 Capital § 28 Factors for the Recognition of Minority Holdings and Qualified Additional Tier 1 Capital as well as Tier 2 Capital § 29 Percentages for Deductions after Articles 32 to 36, 56 and 66 of Regulation (EU) No 575/2013

5 § 30 Percentage for the Adjustment after Article 36 Paragraph 1 Letter i and Article 49 Paragraphs 1 and 3 of Regulation (EU) No 575/2013 § 31 Percentages for the Limitation of Grandfathered Instruments of Core Tier 1 Capital, Additional Tier 1 Capital and Tier 2 Capital after Article 484 Paragraphs 3 to 5 of Regulation (EU) No 575/2013 Chapter 2 Treatment of Holdings Valued Using the Equity Method in Groups § 32 Treatment of Holdings Valued Using the Equity Method When Applying the Procedure under Section 10a Paragraph 5 of the Banking Act Part 4 Further Provisions on the Anti-Cyclical Capital Buffer and the Combined Capital Buffer Requirement Chapter 1 Anti-Cyclical Capital Buffer § 33 Determination of the Rate for the Domestic Anti-Cyclical Capital Buffer § 34 Publication of the Rate § 35 Additional Publications for Rates in Third Countries § 36 Relevant Risk Positions Chapter 2 Combined Capital Buffer Requirement § 37 Maximum Distributable Amount Part 5 Transitional and Final Provisions § 38 Transitional Provisions § 39 Entry into Force, Repeal

6 Part 1 General Provisions § 1 Scope of Application (1) Sections 3 to 23 of this Ordinance are to be applied by those institutions and groups that must comply with the provisions of Articles 92 to 386 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 646/2012 (OJ L 176 of 27.6.2013, p. 1) in addition to the provisions of Regulation (EU) No 575/2013 or the Banking Act. (2) Sections 24 to 31 of this Ordinance are to be applied by those institutions and groups that must comply with the provisions of Articles 25 to 91 of Regulation (EU) No 575/2013 in addition to the provisions of Regulation (EU) No 575/2013 or the Banking Act. (3) Section 32 of this Ordinance is to be applied by those institutions and groups that must comply with the provisions of Articles 11 to 91 of Regulation (EU) No 575/2013 in addition to the provisions of Regulation (EU) No 575/2013 or the Banking Act. (4) Sections 33 to 37 of this Ordinance are to be applied by those institutions and groups that must comply with the provisions of Sections 10c to 10i of the Banking Act.

§ 2 Applications and Notifications (1) Applications on which the Federal Financial Supervisory Authority (BaFin) is to decide as the competent authority under Regulation (EU) No 575/2013 are to be submitted in writing to BaFin, subject to deviating provisions. (2) Notifications under Regulation (EU) No 575/2013 for which BaFin is the competent authority are to be submitted to BaFin and in copy to the Deutsche Bundesbank. (3) Reports that must be submitted to BaFin as the competent authority on a regular basis under Regulation (EU) No 575/2013 are to be submitted via the Deutsche Bundesbank.

7 Part 2 Further Provisions on the Equity Capital Requirements for Institutions and Groups Chapter 1 Internal Approaches Section 1 General Provisions § 3 Checks when using an approved approach for determining minimum capital requirements (1) If BaFin has granted an institution permission to use an approach for determining minimum capital requirements, the use of which requires permission from the competent authority under Articles 92 to 386 of Regulation (EU) No 575/2013 (approved approach for determining minimum capital requirements), it must regularly check whether the requirements for this approach are met under this Ordinance and under Regulation (EU) No 575/2013. The check takes place at least every three years. In addition, BaFin checks in the context of follow-up inspections whether identified deficiencies have been remedied and conditions have been met. (2) BaFin may carry out the eligibility check for the permission to use an approach, as well as the regular check and the follow-up inspections, on the basis of an inspection under Section 44 Paragraph 1 Sentence 2 of the Banking Act. The inspection under Section 44 Paragraph 1 Sentence 2 of the Banking Act is usually carried out by the Deutsche Bundesbank. (3) In the course of the check, BaFin takes into account in particular changes in the institution's business activities and the application of this approved approach for determining minimum capital requirements to new products. It also checks whether the institution uses mature and current techniques and practices for this approach. (4) In the course of the check, BaFin takes into account the analyses and benchmarks of the European Banking Authority.

8 § 4 Measures in case of deficiencies in risk capture or non-compliance with requirements when using an approved approach for determining minimum capital requirements (1) If BaFin finds that the design of an approved approach for determining minimum capital requirements by the institution has significant deficiencies in risk capture, BaFin ensures that these deficiencies are remedied or takes appropriate measures suitable to mitigate the consequences resulting from the deficiencies. Suitable measures include in particular the setting of higher multiplication factors or additional capital requirements. (2) If, in the case of an internal model for market risks permitted by BaFin, the frequent occurrence of breaches mentioned in Article 366 of Regulation (EU) No 575/2013 indicates that the model is not or no longer precise enough, BaFin revokes the permission to use this internal model for market risks or orders appropriate measures to ensure that the model is improved immediately. (3) If an institution no longer meets all requirements for an approved approach for determining minimum capital requirements under this Ordinance and under Regulation (EU) No 575/2013, BaFin requires

1. from the institution a plan on how and within what timeframe timely return to compliance is to be ensured, or
2. that the institution demonstrates to BaFin's satisfaction that the effects of non-compliance with the requirements are insignificant, provided this is permissible under Regulation (EU) No 575/2013 for this approach. If the capital requirements are likely to be insufficient in the case of Sentence 1, BaFin orders additional capital requirements to the extent appropriate. (4) If, in BaFin's opinion, it is unlikely that a plan submitted by the institution under Paragraph 3 Sentence 1 Number 1 will lead to full compliance with the requirements or if the implementation period envisaged by the institution is unreasonably long, BaFin requires the plan to be improved. (5) If, in BaFin's opinion, it is unlikely that the institution will comply with the requirements within a reasonable period, and if the institution has not provided satisfactory proof of the insignificance of the effects of non-compliance with the requirements under Paragraph 3 Sentence 1 Number 2, provided this is permissible under Regulation (EU) No 575/2013 for this approach, BaFin must revoke the permission to use the approach by the institution
3. entirely or
4. restrict it to such areas where compliance with the requirements is given or can be achieved within a reasonable period, provided this is possible within the limits set by BaFin for the non-application of this approach.

9 In particular for risk-weighted exposure amounts under the Internal Ratings-Based Approach (IRB Approach) within the meaning of Article 107 Paragraph 1 of Regulation (EU) No 575/2013, BaFin may separately revoke consent under Article 143 Paragraph 2 of Regulation (EU) No 575/2013 for the use of the IRB Approach or for the use of own estimates of Loss Given Defaults (LGDs) within the meaning of Article 4 Paragraph 1 Number 55 of Regulation (EU) No 575/2013 or conversion factors for this type of credit risk position.

§ 5 Calculations and reports for supervisory benchmarking when applying internal approaches (1) An institution that determines its capital requirements on the basis of internal approaches must calculate and report its capital requirements once a year for those of its risk positions or positions that are contained in the reference portfolios of BaFin or the European Banking Authority concerning these internal approaches. This calculation and reporting obligation does not apply to the extent that the capital requirements are calculated using the Advanced Measurement Approach under Article 312 Paragraph 2 Sentence 1 of Regulation (EU) No 575/2013. (2) The calculations and reports under Paragraph 1 must be carried out separately for the status at the end of the calendar year and for each internal approach used by the institution. The results of these calculations must be reported separately for the reference portfolios of BaFin and the European Banking Authority to the Deutsche Bundesbank and to the European Banking Authority, together with an explanation of the methods used to determine the results, by the 30th business day after the end of a calendar year. In doing so, the technical implementing standards under Article 78 Paragraph 8 of Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (OJ L 176 of 27.6.2013, p. 338) must be taken into account. (3) BaFin may determine deviating calculation dates from Paragraph 1 Sentence 1 and Paragraph 2 Sentence 1 or deviating reporting deadlines from Paragraph 2 Sentence 2.

§ 6 Supervisory benchmarking of internal approaches (1) BaFin creates its own reference portfolios exclusively in coordination with the European Banking Authority. (2) BaFin uses the information reported by institutions under § 5 to monitor the range of risk-weighted exposure amounts and capital requirements for those risk positions or positions of a reference portfolio that result from the internal approaches of the reporting institutions. (3) BaFin evaluates the quality of these internal approaches at least annually, focusing in particular on

1. the internal approaches that show significant differences regarding the capital requirements for the same risk position or position,
2. the internal approaches that show a particularly high or low diversity, and
3. cases of significant and systematic underestimation of capital requirements. (4) If the monitoring under Paragraph 2 and the evaluation under Paragraph 3 show that the results of internal approaches of certain institutions deviate significantly from the results of the majority of institutions or that there are few commonalities among the internal approaches, resulting in a wide range of results, BaFin investigates the reasons for this. If it can be clearly established that the internal approach of an institution leads to an underestimation of capital requirements that cannot be attributed to differences in the underlying risks of the risk positions or positions, BaFin takes appropriate remedial measures. In its decision on the appropriateness of remedial measures, the objectives pursued by the use of internal approaches must be taken into account and it must be ensured that the remedial measures
4. do not lead to standardization or preferred methods,
5. do not create false incentives, and
6. do not cause herding behavior.

Section 2 Supplementary Provisions on the IRB Approach § 7 IRB Approach Eligibility Checks for Internal Rating Systems and Counterparty Risk Models (1) BaFin decides on the permission to use the IRB Approach under Article 143 Paragraph 2 and on the changes requiring permission under Article 143 Paragraph 3 of Regulation (EU) No 575/2013 (IRB Approach Eligibility Check) on the basis of an inspection under Section 44 Paragraph 1 Sentence 2 of the Banking Act. The inspection under Section 44 Paragraph 1 Sentence 2 of the Banking Act is usually carried out by the Deutsche Bundesbank. BaFin conducts IRB Approach Eligibility Checks only when the institution

1. with the rating systems registered for the IRB Approach Eligibility Check and the rating systems the institution is already permitted to use for the IRB Approach, has reached or exceeded the IRB Approach Entry Threshold under § 10 Paragraph 1,
2. for each of the rating systems and counterparty risk models registered for the IRB Approach Eligibility Check, has met the usage requirements under Article 144 Paragraph 1 Letter f of Regulation (EU) No 575/2013 and, in the case of a rating system, has met the experience requirements under Article 145 of Regulation (EU) No 575/2013 to an extent that enables full compliance with the experience requirements by the intended time of using the rating system,
3. for each of the rating systems and counterparty risk models registered for the IRB Approach Eligibility Check, has captured the new business under § 14 Paragraph 1 Sentence 2 Number 1 and at least a significant part of the existing business to be considered under § 14 Paragraph 2 with this rating system or counterparty risk model, and
4. can credibly demonstrate that it will comply with the usage prerequisites for the IRB Approach for the rating system or counterparty risk model at the time of use aimed for in the implementation plan.

11 (2) In the course of an IRB Approach Eligibility Check carried out after the institution has already been granted permission for the IRB Approach, BaFin also assesses whether the institution is adhering to the implementation plan approved with the permission for the IRB Approach. (3) In the case of significant changes to rating systems or counterparty risk models, an institution must coordinate with BaFin before using the changed rating system or counterparty risk model for the IRB Approach to determine whether BaFin shares the institution's assessment that it is not a material change requiring permission from BaFin under Article 143 Paragraph 3 Letter b of Regulation (EU) No 575/2013.

§ 8 Timeframe for the Implementation of the IRB Approach (1) The maximum permissible period for implementing the IRB Approach, to be determined by BaFin under Article 148 Paragraph 2 of Regulation (EU) No 575/2013, is always five years. It begins as soon as BaFin has permitted the institution to use the IRB Approach (IRB Approach Approval). (2) The period during which the ability to determine capital requirements using the Standardised Approach for Credit Risk (KSA) under Article 148 Paragraph 4 of Regulation (EU) No 575/2013 must be maintained begins with the IRB Approach Approval and ends with reaching the supervisory reference point under § 10 Paragraph 2 for the implementation of the IRB Approach. (3) If an institution has already received IRB Approach Approval on the basis of an implementation plan according to which it does not use own estimates of the LGD or conversion factor for all credit risk positions for which the institution uses the IRB Approach (IRB Approach Positions) that are not assigned to the retail exposure class under Article 147 Paragraph 2 Letter d of Regulation (EU) No 575/2013, and if the institution has already reached the IRB Approach Exit Threshold under § 10 Paragraph 3 on the basis of this implementation plan, then even in the case of a subsequent implementation plan according to which the institution uses own estimates of the LGD or conversion factor for such IRB Approach Positions, the period mentioned in Paragraph 2 is deemed to have already ended.

§ 9 Requirements for the Implementation of the IRB Approach (1) When implementing the IRB Approach, an institution must meet the requirements of Paragraphs 2 to 4; these requirements form the specifications of the requirements to be concretized under Article 148 Paragraph 3 Sentence 1 of Regulation (EU) No 575/2013. (2) For the credit risk positions of the institution,

1. the IRB Approach Entry Threshold must already be reached at the time of IRB Approach Approval,
2. the supervisory reference point for the implementation of the IRB Approach must be reached no later than after two and a half years,
3. the IRB Approach Exit Threshold must be reached by the end of the maximum permissible period for implementing the IRB Approach. (3) Thresholds once reached must continue to be met. (4) If an institution has already received IRB Approach Approval on the basis of an implementation plan according to which it uses IRB Approach Pos