CHAPTER IICRITERIA FOR THE VALUATION FOR THE PURPOSE OF ARTICLE 36(4)(a)

Article 7General principles

1.

The valuations for the purpose referred to in point (a) of Article 36(4) of Directive 2014/59/EU shall be based on fair and realistic assumptions and shall seek to ensure that losses under the appropriate scenario are fully recognised. Where such valuation is available, it shall inform the determination of the competent authority or of the resolution authority as appropriate, that an institution is ‘failing or likely to fail’ as referred to in Article 32(1)(a) of Directive 2014/59/EU. Based on existing supervisory guidance or other generally recognised sources setting out criteria conducive to the fair and realistic measurement of different types of assets and liabilities, the valuer may challenge the assumptions, data, methodologies and judgements on which the entity based its valuations for financial reporting obligations or for the calculation of regulatory capital and capital requirements and disregard them for the purposes of the valuation.

2.

The valuer shall determine the most appropriate valuation methodologies which may rely on the entity's internal models where the valuer deems it appropriate taking into account the nature of the entity's risk management framework and the quality of data and information available.

3.

The valuations shall be consistent with the applicable accounting and prudential regulatory framework.

Article 8Areas requiring particular attention in the valuation

The valuer shall particularly focus on areas subject to significant valuation uncertainty which have a significant impact on the overall valuation. For those areas the valuer shall provide the results of the valuation in the form of best point estimates and, where appropriate, value ranges, as laid down in Article 2(3). Those areas shall include:

  1. (a)

    loans or loan portfolios, the expected cash flows of which depend on a counterparty's ability, willingness or incentive to perform on its obligation, where those expectations are driven by assumptions relating to delinquency rates, probabilities of default, loss given default, or instrument characteristics, especially where evidenced by loss patterns for a portfolio of loans;

  2. (b)

    repossessed assets, the cash flows of which are affected by both the asset's fair value at the time the entity forecloses on the related security or lien, and the expected evolution of such value after foreclosure;

  3. (c)

    instruments measured at fair value where the determination of that fair value in accordance with accounting or prudential requirements on their marking to market or marking to model is no longer applicable or valid taking into account the circumstances;

  4. (d)

    goodwill and intangibles, where the impairment test may depend on subjective judgement, including as regards the reasonably attainable cash flow stream, discount rates, and the perimeter of cash generating units;

  5. (e)

    legal disputes and regulatory actions, the expected cash flows of which may be subject to varying degrees of uncertainty relating to their amount and/or timing;

  6. (f)

    items including pension assets and liabilities and deferred tax items.

Article 9Factors affecting the valuation

1.

The valuer shall take into account general factors that may affect the key assumptions on which the values of assets and liabilities in the areas referred to in Article 8 are based, including the following factors:

(a)

the economic and industry circumstances affecting the entity, including relevant market developments;

(b)

the entity's business model and changes in its strategy;

(c)

the entity's asset selection criteria, including loan underwriting policies;

(d)

circumstances and practices that are likely to lead to payment shocks;

(e)

circumstances affecting the parameters used to determine risk weighted assets for the calculation of minimum capital requirements;

(f)

the impact of the entity's financial structure on the capacity of the entity to retain assets for the expected holding period and the entity's ability to generate predictable cash flows;

(g)

general or entity-specific liquidity or funding concerns.

2.

The valuer shall clearly separate any material unrealised gains identified in the valuation process, to the extent that those gains have not been recognised in the valuation, and shall provide adequate information in the valuation report of the exceptional circumstances that have led to those gains.