The European Banking Authority (EBA) launched today a consultation on its draft Guidelines on the estimation of risk parameters for non-defaulted exposures, namely of the probability of default (PD) and the loss given default (LGD), and on the treatment of defaulted assets. These draft Guidelines are part of the EBA’s broader work on the review of the IRB approach aimed at reducing the unjustified variability in the outcomes of internal models, while preserving the risk sensitivity of capital requirements. The consultation runs until 10 February 2017.
In particular, as to non-defaulted exposures, the draft Guidelines detail the estimation of PD and LGD parameters, including specification of main definitions, requirements for the data used and clarifications on modelling techniques. In case of defaulted assets, these Guidelines provide clarifications on the estimation of risk parameters such as best estimate of expected loss (ELBE) and LGD in-default based on the requirements specified for the LGD for non-defaulted exposures.
In addition, these Guidelines specify other aspects that are common to all risk parameters, such as the judgmental component when developing and applying internal models, the appropriate level of conservatism that should be included in risk parameters, as well as the need for regular reviews of the models so as to ensure the necessary changes are applied in case of their deteriorated performance.
Considering the material changes to numerous rating systems that these Guidelines may entail, the proposed time for their implementation is end-2020.
Comments to this consultation can be sent to the EBA by clicking on the "send your comments" button on the consultation page. Please note that the deadline for the submission of comments is 10 February 2017.
All contributions received will be published following the close of the consultation, unless requested otherwise. A public hearing and workshop will then take place at the EBA premises on 19 January 2017 from 10:00 to 16:00 UK time.
Legal basis and next steps
The EBA has developed these Guidelines on its own initiative in accordance with Article 16 of its founding Regulation, which mandates the Authority to issue guidelines and recommendations addressed to competent authorities or financial institutions with a view to establishing consistent, efficient and effective supervisory practices within the ESFS, and to ensuring the common, uniform and consistent application of Union law.
The EBA is planning to carry out a qualitative survey to assess the impact of the proposed requirements on the rating systems, the results of which will be taken into consideration when finalising these Guidelines.