These draft RTS and GLs 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.
Adopted and published on the Official Journal
These draft RTS and GLs 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 European Banking Authority (EBA) published today an Opinion in response to the European Commission’s intention to amend the EBAs final draft Regulatory Technical Standard (RTS) on the specification of the nature, severity and duration of an economic downturn. The EBA is of the view that the several changes introduced by the Commission would alter the agreed policy and, therefore, suggests changes with the aim of maintaining the agreed consensus of the originally submitted text.
The EBA’s Opinion identifies three substantive changes introduced by the European Commission. The first one is about the deletion of the requirement, which states that the economic indicators relating to one downturn period should be significantly correlated. The EBA is of the view that such requirement should be re-introduced. The second substantive change relates to the introduction of a proportionality principle for the cost of data (Recital 10 and Article 2), which alters the agreed policy. Here, the EBA suggests some redrafting to clarify the relevant data sources. Finally, for the third substantive change, which is about removing the possibility of considering a shorter time series than 20 years for economic indicators relating to an EU member state that joined the EU less than 20 years ago, the EBA agrees to Commission’s proposal despite the substantive nature of the change.
In addition, the EBA identifies a number of non-substantive and drafting changes, which, in its view, may unintendedly hamper the clarity of the text. The EBA is, therefore, proposing alternative drafting suggestions.
The EBA has delivered this Opinion in accordance with Article 10(1), subparagraph 6, of Regulation (EU) No 1093/2010, which requires the Authority to submit its response in the form of an opinion to amendments proposed by the European Commission.
The EBA had submitted its final draft RTS to the European Commission on 5 November 2018.
The European Banking Authority (EBA) published today its final Guidelines specifying how institutions should quantify the estimation of loss given default (LGD) appropriate for conditions of an economic downturn. In particular, the Guidelines focus on requirements for the quantification of the calibration target used for downturn LGD estimation. The Guidelines complete the EBA's broader work on the review of the IRB approach aiming at reducing the unjustified variability in the outcomes of internal models, while preserving the risk sensitivity of capital requirements.
Starting from the relevant downturn period(s) identified in accordance with the related Regulatory Technical Standard (RTS), the final Guidelines set out requirements for the appropriate quantification of the calibration target used for downturn LGD estimates and include three types of approaches:
Finally a reference value is put in place that acts as a non-binding challenger to the final downturn LGD estimation.
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 Guidelines will apply as of 1 January 2021, 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.
These Guidelines are an amendment to the Guidelines on PD, LGD estimation and treatment of defaulted assets (EBA/GL/2017/16) published on 20 November 2017.
The European Banking Authority (EBA) published today its final draft Regulatory Technical Standards (RTS) specifying the nature, severity and duration of an economic downturn. These RTS complete the EBA's regulatory review of the internal ratings-based (IRB) Approach, with the objective of restoring market participants' trust in internal models by reducing the unjustified variability in resulting risk weighted exposure amounts. The EBA is currently finalising the related Guidelines on the estimation of loss given default (LGD) appropriate for conditions of an economic downturn.
The final draft RTS set out the notion of economic downturn to be taken into account when estimating the LGD and the conversion factors (CF). Given the specificities of the types of exposures covered by a rating system, the economic downturn should be identified separately for each rating system. However, as a rating system may cover exposures from different businesses, sectors and geographical areas, the notion of an economic downturn included in these RTS may comprise several disjunctive downturn periods (e.g. where a rating system covers two sectors which experienced downturn conditions in different periods of time).
In addition, the final draft RTS specify the nature of an economic downturn via macroeconomic or credit-related factors (‘economic factors') that are explanatory variables or indicators for the business cycle of the considered type of exposure. The severity of an economic downturn is specified by the set of the most severe observations on the economic factors constituting the nature of an economic downturn, based on historical values of these factors over the last 20 years. The duration of an economic downturn is determined by the duration of the identified downturn periods and is generally specified as the 12-month period where the most severe values are observed. However, some flexibility is embedded in the draft policy to ensure that the severity and duration are appropriately specified.
Under the advanced IRB Approach, institutions determine their own funds requirements for credit risk taking into account their own LGD and CF estimates. According to Article 181(1)(b) of the Capital Requirements Regulation (CRR), institutions shall estimate LGDs that are appropriate for an economic downturn and according to Article 182 (1)(b) institutions shall estimate conversion factors that are appropriate for an economic downturn.
Therefore, the EBA is mandated in Articles 181(3)(a) and 182(4)(a) to develop these draft RTS specifying the nature, severity and duration of an economic downturn to be taken into account when estimating the LGD and CF.
These draft RTS will apply from 1 January 2021. It should be noted that the Guidelines on the estimation of the probability of default (PD) and LGD, which will be complemented by the Guidelines on downturn LGD estimation, will apply as well from 1 January 2021. An earlier implementation of the Guidelines on downturn LGD estimation is, however, encouraged and 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) launched today a public consultation on its draft Regulatory Technical Standards (RTS) specifying the nature, severity and duration of an economic downturn according to which institutions shall estimate the downturn loss given default (LGD) and conversion factor (CF). These draft RTS 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 29 May 2017.