EBA issued a consultation on the guidelines on credit risk mitigation for institutions applying the advanced internal rating-based (A-IRB) approach, with own estimates of loss given defaults (LGDs). The consultation runs until May 25, 2019. The consultation contains guidelines on the application of the credit risk mitigation provisions laid down in the Capital Requirements Regulation (CRR), which is applicable to institutions using the A-IRB approach. The guidelines clarify the eligibility requirements for different credit risk mitigation techniques, namely funded and unfunded credit protection (for example, 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 standardized approach and the A-IRB approach. The guidelines also clarify how institutions may recognize the effects of different credit risk mitigation techniques for capital requirement purposes. For unfunded credit protection, the guidelines clarify the set of compliant approaches that are available to institutions to recognize the effects of the credit protection by adjusting their risk parameter estimates—that is, the probability of default or the LGD. Moreover, the guidelines clarify whether exposure values or LGD estimates are to be adjusted to recognize different forms of funded credit protection, namely netting and collateral.
The aim of the guidelines is to eliminate the remaining significant differences in approaches in the area of credit risk mitigation, which are either due to different supervisory practices or bank-specific choices. These draft guidelines complement the EBA report on credit risk mitigation, which focused on the standardized approach and the foundation-IRB approach (F-IRB).
Comment Due Date: May 25, 2019
Keywords: Europe, EU, Banking, Credit Risk, Credit Risk Mitigation, IRB Approach, CRR, LGD, EBA
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