EBA published an Opinion in response to the EC intention to amend the final draft regulatory technical standards on the specification of the nature, severity, and duration of an economic downturn under the Capital Requirements Regulation (CRR). These standards are to be taken into account for the estimation of loss given default (LGD) appropriate for an economic downturn and for the estimation of conversion factor (CF) appropriate for an economic downturn, where LGDs and CFs are estimated under the internal ratings-based (IRB) approach. According to EBA, several changes introduced by EC would alter the agreed policy. Therefore, EBA is suggesting certain changes with the aim of maintaining the agreed consensus of the originally submitted text.
The EBA Opinion identified three substantive changes introduced by EC:
- The first one is about the deletion of the requirement, which states that the economic indicators related to one downturn period should be significantly correlated. 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, EBA suggests some redrafting to clarify the relevant data sources.
- For the third substantive change, which is about removing the possibility of considering a shorter time series than 20 years for economic indicators related to an EU member state that joined EU less than 20 years ago, EBA agrees to EC, despite the substantive nature of the change.
In addition, EBA identified a number of non-substantive and drafting changes, which, in its view, may hamper the clarity of the text. EBA is, therefore, proposing alternative drafting suggestions. The non-substantive changes include redrafting of requirement to customize economic factors to the geographical areas and sectors and deletion of Article 5, which requires annual and, if appropriate, ad hoc review of downturn periods.
In November 2018, EBA had submitted, to EC, the final draft regulatory technical standards on the specification of the nature, severity, and duration of an economic downturn in accordance with the CRR (EU Regulation No 575/2013). In its letter of July 20, 2020, EC had informed EBA of its intention to endorse the draft standards with amendments and submitted to EBA a modified version of the regulatory technical standards, with its envisaged changes. EBA has now delivered this Opinion in accordance with Article 10(1), subparagraph 6, of Regulation No 1093/2010, which requires EBA to submit its response in the form of an opinion to amendments proposed by EC.
Keywords: Europe, EU, Banking, Credit Risk, CRR, Basel, Regulatory Capital, IRB Approach, EBA
Previous ArticleDNB Publishes Several Reporting Updates for Banks in August 2020
FCA is consulting on its approach to the authorization and supervision of international firms operating in UK.
MAS published amendments to Notice 637 on the risk-based capital adequacy requirements for reporting banks incorporated in Singapore.
FCA announced that it will move firms to RegData from Gabriel in the coming months in stages, based on the reporting requirements of firms.
APRA has concluded its review of the comprehensive plans of authorized deposit-taking institutions for the assessment and management of loans with repayment deferrals.
ESAs (EBA, EIOPA, and ESMA) published the first joint report that assesses risks in the financial sector since the outbreak of the COVID-19 pandemic.
BoE and HM Treasury confirmed that the COVID Corporate Financing Facility (CCFF) will close for new purchases of commercial paper, with effect from March 23, 2021.
ESAs launched a survey seeking feedback on the presentational aspects of product templates under the Sustainable Finance Disclosure Regulation (SFDR or Regulation 2019/2088).
ECB published input of the European System of Central Banks (ESCB) into the EBA feasibility report on reducing the reporting burden for banks in EU.
EC adopted a decision determining, for a limited period of time, that the regulatory framework applicable to central counterparties, or CCPs, in the UK and Northern Ireland is equivalent to the requirements laid down in the European Market Infrastructure Regulation (EMIR or Regulation 648/2012).
EBA has decided to phase out the guidelines on legislative and non-legislative moratoria of loan repayments, in accordance with the earlier specified end of September deadline.