Response to discussion on the simplification and assessment of the credit risk framework
Q4. Which other clarifications do you consider necessary to apply the new ECAI framework?
It is clarified that the use of “derived” ex-government support ratings is not permitted, as eligible ECAI credit assessments must be issued by credit rating agencies (CRAs) as stand-alone products in accordance with the CRA Regulation.
However, at present only Fitch Ratings appears to provide such ex-government support ratings. This creates a risk that these ratings will not be sufficiently available in the market by the time the framework becomes applicable.
As a result, institutions may face significant constraints in obtaining eligible ratings for exposures to institutions that do not benefit from the exemption under Article 138(g) CRR. This could in turn lead to unintended increases in capital requirements, for instance for derivative exposures to otherwise creditworthy but unrated counterparties. A more pragmatic approach could therefore be considered, in particular as regards the strict requirement that such ratings be issued as stand-alone products by CRAs.
Q6. Do you consider that the integration of environmental and social risks into the credit risk framework could be further enhanced without undermining its simplicity? Which areas, if any, would you prioritise for further work or clarification?
It is clarified that the use of “derived” ex-government support ratings is not permitted, as eligible ECAI credit assessments must be issued by credit rating agencies (CRAs) as stand-alone products in accordance with the CRA Regulation.
However, at present only Fitch Ratings appears to provide such ex-government support ratings. This creates a risk that these ratings will not be sufficiently available in the market by the time the framework becomes applicable.
As a result, institutions may face significant constraints in obtaining eligible ratings for exposures to institutions that do not benefit from the exemption under Article 138(g) CRR. This could in turn lead to unintended increases in capital requirements, for instance for derivative exposures to otherwise creditworthy but unrated counterparties. A more pragmatic approach could therefore be considered, in particular as regards the strict requirement that such ratings be issued as stand-alone products by CRAs.
Q8. Which requirements should apply in the application phase of continuous models (e.g. overrides)?
We would like to highlight several concerns regarding the discussion on harmonising testing requirements for continuous and discrete rating models.
From our point of view, the discussion paper appears to take a rather critical view of continuous models. However, the use of discrete rating scales inherently involves a certain degree of arbitrariness, particularly with regard to the number, width and location of rating classes.
This raises several issues in the context of the objectives of comparability and simplification:
- The comparability of model outcomes across institutions would not necessarily improve through the use of discrete scales, as model outcomes depend on the specific definition of rating classes, which may differ across institutions.
- Similarly, the level of risk-weighted exposure amounts (RWEA) may depend on the design of rating classes. Such dependencies do not arise in the same way for continuous models.
- For institutions currently using continuous models, a discretisation of model outputs would likely require recalibration or at least a comprehensive review of existing calibration functions. In our understanding, such changes could qualify as material model changes within the meaning of Annex I, Part II, Section 1.2(d) of Commission Delegated Regulation (EU) No 529/2014. To avoid disproportionate implementation costs, it would therefore be important to clarify that such adjustments would only require prior notification to the competent authority, rather than a full model approval procedure. Otherwise, the transition could lead to significant implementation efforts for both institutions and supervisory authorities.
- At the same time, mapping model outputs to discrete rating grades solely for the purpose of backtesting would not raise comparable concerns and could represent a pragmatic solution.
Q10. Should a consistent and single facility definition be applied across all risk parameters?
The proposal to harmonise the definition of “facility” (C8) does not appear to provide clear simplification benefits. Default risk and loss risk are driven by different risk factors, which are often most appropriately captured at different levels (e.g. obligor level versus transaction level). A mandatory harmonisation of the estimation level could therefore reduce modelling flexibility without providing clear benefits.
Q11. Are adjustments proposed in the representativeness requirement for the CCF parameter also suited for PD and LGD risk parameters? Which amendments would be needed to accommodate PD and LGD specificities?
With regard to representativeness requirements applicable to PD estimation, we consider the existing regulatory framework to be adequate and sufficiently robust. Extending the representativeness requirements currently applied to the CCF parameter to PD and LGD estimation does not appear necessary from a risk measurement perspective. Such an extension could introduce additional modelling and documentation requirements, while the benefits in terms of improved risk measurement appear limited. We would therefore not see a need to extend representativeness requirements beyond the current framework.
Q13. Should these simplifications be pursued? Do you have any preferred approaches with respect to these simplifications?
3.2.1 Simplified approach for Margin of Conservatism
MoC categories A and B
Fallback solutions can only be considered effective simplifications if they are readily applicable and do not implicitly create new benchmarks or supervisory expectations for more advanced modelling approaches.
One approach that could provide a practical simplification would be the introduction of materiality thresholds. For example, it could be considered that no MoC needs to be determined where a data deficiency affects only a very small share of the calibration sample (e.g. below 1%). Such thresholds could reduce unnecessary modelling complexity while maintaining an appropriately prudent framework.
MoC category C in low default portfolios
For low default portfolios, highly standardised approaches are often not well suited to the statistical characteristics of the available data and may result in excessively conservative or difficult-to-interpret outcomes.
The benchmarking approach used by the ECB derives an 80% or 90% quantile of the long-run average default rate based on the volatility of annual default rates under the assumption of a normal distribution. However, such approaches may present several methodological limitations:
- the number of observations underlying annual default rates is not sufficiently reflected;
- short-term spikes in observed default rates can significantly distort the measured volatility;
- the assumption of a normal distribution may not adequately reflect the statistical properties of default rate dynamics in low default portfolios.
In this context, institutions should be able to consider the results of analyses related to the likely range of variability of one-year default rates, where these provide a more appropriate methodological basis.
Moreover, with a 20-year historical observation period, the interpretation of an 80% quantile implies that in another 20-year observation period the default rate would remain below this threshold with a probability of 80%. In practice, however, institutions are subject to regular monitoring, validation and recalibration processes, ensuring that parameter estimates are updated continuously.
Purely quantile-based approaches may therefore effectively reflect extreme scenarios rather than realistic parameter estimates, potentially leading to an undue degree of conservatism.
3.2.5 Apply the fixed IRB-CCF derogation to a larger scope
The discussion paper refers to the draft guidelines on Credit Conversion Factor estimation under Article 182(5) CRR (EBA/CP/2025/10 Draft Guidelines on CCF Estimation) in a manner that appears to assume their final adoption. These draft guidelines introduce significantly more complex and operationally demanding requirements, which should be carefully considered in the context of simplification.
In particular:
- The application of the Standardised Approach CCF (SA-CCF) is linked to the use of Foundation IRB LGD estimates. From our perspective, this coupling is problematic. Allowing institutions to fall back to SA-CCF independently of the LGD approach would represent a meaningful simplification. While this option already exists for non-revolving exposures, we do not see a conceptual reason why it should not also be available for revolving exposures.
- The discussion paper and draft guidelines appear to introduce situations where a minimum CCF of 100% should be applied instead of SA-CCF values. Such an approach appears difficult to reconcile with the provisions of the Capital Requirements Regulation and may lead to disproportionately conservative outcomes.
- The proposals would require institutions to model potential future credit decisions, for example for fully drawn credit lines or potential increases in credit limits. This effectively implies that institutions would need to hold capital for credit risks that have not yet been assumed.
Such modelling assumptions would also be unsuitable for many other modelling purposes, meaning that institutions might need to develop separate models for internal risk management purposes, which would increase rather than reduce modelling complexity.