Final and translated into the EU official languages
These Guidelines on Credit Risk Mitigation (CRM) in the context of the advanced internal rating-based (A-IRB) approach, aim to eliminate the remaining significant differences in approaches in the area of CRM, which are either due to different supervisory practices or bank-specific choices These Guidelines complement the EBA Report on CRM, which focused on the standardised approach (SA) and the foundation-IRB approach (F-IRB).
The European Banking Authority (EBA) launched today a consultation on its Guidelines on Credit Risk Mitigation in the context of the advanced internal rating-based (A-IRB) approach, aim to eliminate the remaining significant differences in approaches in the area of credit risk mitigation (CRM), which are either due to different supervisory practices or bank-specific choices. These draft Guidelines complement the EBA Report on CRM, which focused on the standardised approach (SA) and the foundation-IRB approach (F-IRB). The consultation runs until 25 May 2019.
The Guidelines provide guidance on the application of the CRM provisions currently laid down in the Capital Requirements Regulation (CRR) applicable to institutions using the A-IRB Approach. In particular, they clarify the eligibility requirements for different CRM techniques, namely funded and unfunded credit protection (e.g. collateral and guarantees), available to institutions.
For funded credit protection, the Guidelines provide a mapping to the eligibility requirements of legal certainty and collateral valuation applicable to institutions using the SA and the A-IRB approach. The Guidelines also clarify how institutions may recognise the effects of different CRM techniques for capital requirement purposes. In particular, for unfunded credit protection they clarify the set of compliant approaches that are available to institutions to recognise the effects of the credit protection by adjusting their risk parameter estimates, i.e. the probability of default (PD) or the loss given default (LGD). Moreover, the Guidelines clarify whether exposure values or LGD estimates are to be adjusted to recognise different forms of funded credit protection, namely netting and collateral.
Responses 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 25 May 2019 2019.
A public hearing will take place at the EBA premises in Paris on 15 April 2019 from 14:00 to 16:00 CET time.
The EBA has developed the draft 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 European Banking Authority (EBA) published today its final Guidelines on credit risk mitigation (CRM) in the context of the advanced internal ratings-based (A-IRB) approach. These Guidelines, which are part of the EBA's regulatory review of the IRB approach, aim to eliminate the remaining significant differences in approaches in the area of CRM, which are due to either different supervisory practices or bank-specific choices. These Guidelines complement the EBA Report on CRM, which focuses on the standardised approach (SA) and the foundation-IRB approach (F-IRB).
The Guidelines clarify the application of the CRM provisions currently laid down in the Capital Requirements Regulation (CRR) applicable to institutions using the A-IRB Approach. In particular, they clarify the eligibility requirements for different CRM techniques, namely funded and unfunded credit protection (e.g. collateral and guarantees), available to institutions.
For funded credit protection, the Guidelines provide a mapping to the eligibility requirements of legal certainty and collateral valuation applicable to institutions using the standardised approach (SA) and the foundation internal ratings-based (F-IRB) approach. Specific guidance is also provided on other than immovable physical collateral for which the assessment of legal certainty is particularly challenging.
The Guidelines also clarify how institutions may recognise the effects of different CRM techniques for capital requirement purposes. In particular, for unfunded credit protection they clarify the set of compliant approaches that are available to institutions to recognise the effects of the credit protection by adjusting their risk parameter estimates. Moreover, the Guidelines clarify how to recognise the effects of funded credit protection based on netting.
These Guidelines are complementary to the EBA Guidelines on the PD estimation, LGD estimation and the treatment of defaulted exposures, which clarify how to adjust LGD estimates to recognise the effects of collateral (i.e. funded credit protection other than netting).
The EBA has granted one extra year, until 1 January 2022, to the final implementation date of these Guidelines to align with the proposal of the EBA progress Report on the IRB roadmap.
These Guidelines have been drafted in accordance with Article 16 of Regulation (EU) No 1093/2010 (EBA Founding Regulation), which mandates the Authority to issue guidelines addressed to all competent authorities or all financial institutions and issue recommendations to one or more competent authorities or to one or more financial institutions, with a view to establishing consistent, efficient and effective supervisory practices within the European System of Financial Supervision (ESFS), and to ensuring the common, uniform and consistent application of Union law.
The Guidelines will apply as of 1 January 2022, at the latest, but earlier implementation is encouraged. Institutions should engage with their competent authorities at an early stage in order to determine an adequate implementation plan, including the timeline for the supervisory assessment and approval of material model changes, where necessary.
The European Banking Authority (EBA) published today an Opinion on the treatment of credit insurance in the prudential framework, in response to the extensive feedback received in its public consultations on draft Guidelines on credit risk mitigation for institutions applying the Internal Ratings-Based Approach (IRB Approach) with own estimates of Loss Given Default (LGD). In this Opinion the EBA calls for the implementation of the final Basel III framework as agreed by the Basel Committee on Banking Supervision.
The main concerns raised in the feedback received relate to LGD applied to the exposures to the insurance companies under the IRB Approach without the use of own estimates of LGD, especially in the context of the changes introduced in the final Basel III framework published by the Basel Committee on Banking Supervision (BCBS) in December 2017. These reforms disallow the use of own estimates of LGD for exposures to financial institutions, including insurance companies. As a result, the regulatory values of LGD have to be used also where the effects of credit insurance used as credit risk mitigation is recognised through substitution of risk parameters. This was commented as overly punitive given the higher seniority of claims from policy insurance over other claims towards insurance undertakings.
The analysis presented in the Opinion leads to the conclusion that there should not be a specific value of regulatory LGD for credit insurance claims. While higher seniority typically applies to claims from insurance policies, due to the specific structure of the balance sheets of the insurance undertakings, most of the claims in the unwinding proceedings would benefit from such priority. As a result, in case of failure of an insurance company the insurance policy holders may still suffer from significant losses, especially in the conditions of economic downturn. In particular, there is no evidence that these losses would be significantly lower than the currently applicable regulatory LGD values.
The Opinion points out that the final Basel III framework has been calibrated at the overall level and as such should be implemented in the EU in line with the international agreement. It is also stressed that specifying any preferential treatment for the claims on credit insurance policies would not be compliant with the final Basel III framework.
This Opinion is also submitted to the European Commission to inform its current work on the proposal for the revisions of the Capital Requirements Regulation (Regulation (EU) No 575/2013) in relation to the implementation of the final Basel III framework.
This Opinion has been drafted in accordance with Article 16a and Article 8(1)(a) of Regulation (EU) No 1093/2010. The EBA founding Regulation), which mandates the Authority to contribute to the establishment of high-quality common regulatory and supervisory standards and practices.
The European Banking Authority (EBA) launched today a consultation on its Guidelines on Credit Risk Mitigation in the context of the advanced internal rating-based (A-IRB) approach, aim to eliminate the remaining significant differences in approaches in the area of credit risk mitigation (CRM), which are either due to different supervisory practices or bank-specific choices. These draft Guidelines complement the EBA Report on CRM, which focused on the standardised approach (SA) and the foundation-IRB approach (F-IRB). The consultation runs until 25 May 2019.
The Guidelines provide guidance on the application of the CRM provisions currently laid down in the Capital Requirements Regulation (CRR) applicable to institutions using the A-IRB Approach. In particular, they clarify the eligibility requirements for different CRM techniques, namely funded and unfunded credit protection (e.g. collateral and guarantees), available to institutions.
For funded credit protection, the Guidelines provide a mapping to the eligibility requirements of legal certainty and collateral valuation applicable to institutions using the SA and the A-IRB approach. The Guidelines also clarify how institutions may recognise the effects of different CRM techniques for capital requirement purposes. In particular, for unfunded credit protection they clarify the set of compliant approaches that are available to institutions to recognise the effects of the credit protection by adjusting their risk parameter estimates, i.e. the probability of default (PD) or the loss given default (LGD). Moreover, the Guidelines clarify whether exposure values or LGD estimates are to be adjusted to recognise different forms of funded credit protection, namely netting and collateral.
Responses 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 25 May 2019 2019.
A public hearing will take place at the EBA premises in Paris on 15 April 2019 from 14:00 to 16:00 CET time.
The EBA has developed the draft 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 European Banking Authority (EBA) launched today a consultation on its Guidelines on Credit Risk Mitigation in the context of the advanced internal rating-based (A-IRB) approach, aim to eliminate the remaining significant differences in approaches in the area of credit risk mitigation (CRM), which are either due to different supervisory practices or bank-specific choices. These draft Guidelines complement the EBA Report on CRM, which focused on the standardised approach (SA) and the foundation-IRB approach (F-IRB). The consultation runs until 25 May 2019.
The Guidelines provide guidance on the application of the CRM provisions currently laid down in the Capital Requirements Regulation (CRR) applicable to institutions using the A-IRB Approach. In particular, they clarify the eligibility requirements for different CRM techniques, namely funded and unfunded credit protection (e.g. collateral and guarantees), available to institutions.
For funded credit protection, the Guidelines provide a mapping to the eligibility requirements of legal certainty and collateral valuation applicable to institutions using the SA and the A-IRB approach. The Guidelines also clarify how institutions may recognise the effects of different CRM techniques for capital requirement purposes. In particular, for unfunded credit protection they clarify the set of compliant approaches that are available to institutions to recognise the effects of the credit protection by adjusting their risk parameter estimates, i.e. the probability of default (PD) or the loss given default (LGD). Moreover, the Guidelines clarify whether exposure values or LGD estimates are to be adjusted to recognise different forms of funded credit protection, namely netting and collateral.
Consultation process
Responses 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 25 May 2019 2019.
A public hearing will take place at the EBA premises in Paris on 15 April 2019 from 14:00 to 16:00 Paris time.
The EBA has developed the draft 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.