EBA published an assessment of the current credit risk mitigation framework

19 March 2018

The European Banking Authority (EBA) published today a Report, which assesses the current Credit Risk Mitigation (CRM) framework, as part of its work on the review of the IRB approach. This Report is part of the 4th and last phase of the EBA's roadmap on the IRB approach, which also includes a review of supervisory practices, a harmonised definition of default and clarifications on modelling approaches to be used by institutions. 
 
The Report clarifies the application to the different credit risk approaches of the provisions currently laid down in the Capital Requirements Regulation (CRR) regarding CRM. In order to do so, the EBA carried out a mapping of such provisions for the techniques, eligibility and methods of the CRM available to institutions under the Standardised Approach (SA) and the Foundation-IRB (F-IRB) Approach. The mapping is supplemented by a quantitative overview of the institutions' use of the CRM framework, as well as a series of policy proposals for the consideration of the Commission, with a view to ensuring a proper and harmonised application of the current CRR provisions on the CRM framework through the necessary amendments to the Regulation.
 
One of the aspects highlighted in the Report, for the consideration of the Commission, is the limited guidance provided in the current CRR provisions on CRM under the Advanced-IRB (A-IRB) Approach. Also in line with the feedback received from the industry, the EBA has committed to provide further guidance on the application of CRM provisions to institutions using the A-IRB Approach. A set of guidelines detailing the use of current CRM provisions for A-IRB banks would be particularly useful to help eliminate the remaining significant differences in approaches in the area of CRM either due to different supervisory practices or bank-specific choices.
 
The Report also re-iterates the EBA's position regarding the three mandates for technical standards in the area of credit risk mitigation (CRM) identified in the CRR. These include the Regulatory Technical Standards (RTS) on the recognition of conditional guarantees, the RTS on liquid assets and the RTS on the internal models approach for master netting agreements. More precisely, the EBA believes that these three mandates only cover specific aspects of the regulatory framework, which are not expected to have a significant impact on the calculation of capital requirements for credit risk by institutions nor on their rating systems. Fulfilling these three mandates, instead of undertaking an analysis of the overall CRM framework, would run the risk of having disproportionate regulation with limited benefits.
 
Specifically on the RTS on liquid assets mandate, the EBA recommends this be deleted from the CRR, while on the other two RTS, the EBA will be continuously monitoring the need to deliver on these mandates also in light of international developments in this regulatory area.
 

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Franca Rosa Congiu

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