In column 010 of templates C08.01 and C08.02 and column 080 of template C09.02, is the obligor PD reported before CRM effects and floors or after CRM effects and floors which is used in the RWA calculation reported?
The field is titled – Internal rating system / PD assigned to the obligor grade or pool % The ITS adopted by the European commission dated 16 April 2014 states: The PD assigned to the obligor grade or pool to be provisions laid down in Article 180 of the CRR. For each individual grade or pool, the PD assigned to the specific grade or pool shall be reported. All reported risk parameters shall be derived from the risk parameters used in the internal rating system approved by the respective competent authority. It is neither intended nor desirable to have a supervisory master scale. If the reporting institution applies a unique rating system or is able to report according to an internal scale, this scale is used. In this instance we have interpreted ‘obligor’ to mean the original customer before credit risk mitigation effects and the PD to be that assigned to the obligor within the rating system. This is supported by the following: • Response provided in the EBA FAQ-on-ITS-on-reporting issuance dated 15 March 2013 where a definition of obligor was provided (please see below). Please see instructions to column 300 - The number of obligors shall be calculated based on groups of connected clients according to art. 4 (46) CRR. • Column 300 provides additional support to this interpretation in stating; As this column deals with an element of the structure of the rating system, it relates to the original exposures pre conversion factor assigned to each obligor grade or pool without taking into account the effect of the CRM technique (in particular redistribution effects). • Column 010 is before column 020 Original exposure pre conversion factors, and not grouped with elements of the RWA calculation (after the exposure value) such as the weighted average LGD % in column 230 and 240. Instructions for column 020 state institutions report the exposure value before taking into account value adjustments provisions, effects due to credit risk mitigation techniques or credit conversion factors. • Unlike the weighted average LGD % (which clearly states this value is after all CRM impacts and applicable floors), the Internal rating system / PD assigned to the obligor grade or pool % makes no mention of CRM effects or floors either explicitly or by reference to a CRR Article. • Column 070/080 Total inflows and outflows is where the effects of PD substitution (credit risk mitigation) would be reflected on the exposure and where relevant the PD. • Within our internal rating system approved by our competent authority our obligors can receive a rating below the floor. The applicable 0.03% floor is applied for RWA calculation purposes only.
According to Q&A 2013_558 in column 010 of template C 08.01 and C 08.02 of Annex I of Regulation (EU) No 680/2014 (ITS on Reporting), the PD assigned after application of the regulatory floor (e.g. 0.03 %) shall be reported. This applies to PDs assigned to individual obligor grades or pools as well as to the exposure weighted average PDs, where required.
Q&A 2013_564, which includes an example of the calculation of exposure weighted average PDs, clarifies that the PD reported in column 010 is the PD after application of CRM techniques (substitution effects).