There are four steps to the CRM Calculation, whether at direct or look-through level:
| STEP 1 | Calculate the Credit Risk |
| STEP 2 | Map the Credit Risk to the unadjusted Credit Quality Step (CQS) |
| STEP 3 | Calculate the adjusted Credit Quality Step (CQS) to reflect the maturity or the recommended holding period. |
| STEP 4 | Convert the adjusted Credit Quality Steps to the CRM |
The method for calculating the MRM is set out in Delegated regulation 2017/653 at Annex II, Part 2.
STEP 1:
CALCULATE THE CREDIT RISK
Click here for details of how to perform the CRM Calculation Step 1.
The outcome of Step 1 is an “Credit Risk”.
STEP 2:
MAP THE CREDIT RISK TO THE UNADJUSTED CREDIT QUALITY STEP (CQS)
After the calculation of credit risk in accordance of Step 1, the credit risk is a assigned to unadjusted “Credit Quality Step.”
In the case of credit risks assessed on a look-through basis, the credit quality step assigned shall correspond to the weighted average credit quality steps of each relevant obligor for which a credit assessment needs to be undertaken, in proportion to the total assets they respectively represent.
| CREDIT RISK | (UNADJUSTED) CREDIT QUALITY STEP (CQS) |
|---|---|
| 0 | |
| 0-1 | 1 |
| 1-2 | 2 |
| 2-3 | 3 |
| 3-4 | 4 |
| 4-5 | 5 |
| 5-6 | 6 |
STEP 3:
CALCULATE THE ADJUSTED CREDIT QUALITY STEP (CQS) TO REFLECT THE MATURITY OR THE RECOMMENDED HOLDING PERIOD
The Credit Quality Step (CQS) calculated under Step 1 then needs to be adjusted according to the maturity or Recommended Holding Period (RHP) of the PRIIP, in the cases where the PRIIP does not have a maturity.
The detailed adjustments can be found in the table below, where you can see highlighted where the CQS is reduced in certain cases where the maturity or Recommended Holding Period (RHP) is less than 1 year and increased in certain cases where the maturity or Recommended Holding Period (RHP) is greater than 12 years.
| (UNADJUSTED) CREDIT QUALITY STEP (CQS) | ADJUSTED CQS, WHEN MATURITY OF PRIIP OR ITS RHP IS UP TO ONE YEAR | ADJUSTED CQS, WHEN MATURITY OF PRIIP OR ITS RHP IS 1 - 12 YEARS | ADJUSTED CQS, WHEN MATURITY OF PRIIP OR ITS RHP EXCEEDS 12 YEARS |
|---|---|---|---|
| 0 | 0 | 0 | 0 |
| 1 | 1 | 1 | 1 |
| 2 | 1 | 2 | 2 |
| 3 | 2 | 3 | 3 |
| 4 | 3 | 4 | 5 |
| 5 | 4 | 5 | 6 |
| 6 | 6 | 6 | 6 |
STEP 4:
CONVERT THE ADJUSTED CREDIT QUALITY STEPS TO THE CRM
The final step is that the adjusted credit quality step is converted into a credit risk measure according to the table below:
As can be seen, it is only for cases where the Adjusted Credit Quality Step is 0, that the CRM is different to the Adjusted CQS.
| ADJUSTED CREDIT QUALITY STEP (CQS) | CREDIT RISK MEASURE (CRM) |
|---|---|
| 0 | CRM1 |
| 1 | CRM1 |
| 2 | CRM2 |
| 3 | CRM3 |
| 4 | CRM4 |
| 5 | CRM5 |
| 6 | CRM6 |