TITLE VII

PRUDENTIAL SUPERVISION
CHAPTER 2

Review Processes
Section II

Arrangements, processes and mechanisms of institutions
Sub-Section 2

Technical criteria concerning the organisation and treatment of risks

Credit and counterparty risk
Article 79
Competent authorities shall ensure that:
1. credit-granting is based on sound and well-defined criteria and that the process for approving, amending, renewing, and re-financing credits is clearly established;
2. institutions have internal methodologies that enable them to assess the credit risk of exposures to individual obligors, securities or securitisation positions and credit risk at the portfolio level. In particular, internal methodologies shall not rely solely or mechanistically on external credit ratings. Where own funds requirements are based on a rating by an External Credit Assessment Institution (ECAI) or based on the fact that an exposure is unrated, this shall not exempt institutions from additionally considering other relevant information for assessing their allocation of internal capital;
3. the ongoing administration and monitoring of the various credit risk-bearing portfolios and exposures of institutions, including for identifying and managing problem credits and for making adequate value adjustments and provisions, is operated through effective systems;
4. diversification of credit portfolios is adequate given an institution's target markets and overall credit strategy.