EC Amends Rule for Prudent Valuation Under CRR Amid COVID-19 Pandemic
EC published the Delegated Regulation 2020/866 with regard to regulatory technical standards for prudent valuation under the Capital Requirements Regulation or CRR. Regulation 2020/866 amends Regulation 2016/101, which supplements CRR (575/2013). In the light of extreme volatility in market prices and systemic shock due to the COVID-19 pandemic, amendments have been made to the formulae to be used for aggregating additional valuation adjustments (AVAs) under the Article 9(6), Article 10(7), and Article 11(7) of Regulation 2016/101. Regulation 2020/866 shall enter into force on the day following that of its publication in the Official Journal of the European Union.
Regulation 2016/101 provides that individual AVAs related to market price uncertainty, close-out costs, and model risk are to be determined with reference to a 90% level of certainty based on the applicable market conditions at the time of the calculation. Regulation 2016/101 also specifies an aggregation approach for the calculation of the total category level AVAs based on those individual AVAs; this approach takes account of overlaps among individual AVAs that occur in the aggregation of the categories of AVAs. The ongoing COVID-19 pandemic has triggered levels of extreme volatility throughout financial markets worldwide. It is, therefore, expected that individual AVAs computed at the level of valuation exposures will significantly increase in comparison with their levels in normal times. It is to be expected that due to the COVID-19 pandemic and the decisions of public authorities to halt economic activity in a large number of areas, the aggregation of significantly increased individual AVAs will have a disproportionate impact on the aggregated AVA amounts.
The rules for prudent valuation have, therefore, been revised so that, in addition to providing for an aggregation factor to be used under normal market conditions, they also provide that institutions should apply a higher aggregation factor for this period of extreme volatility in market prices and systemic shock due to the COVID-19 pandemic. The higher aggregation factor should only apply for the expected duration of extreme market volatility combined with systemic shock, which has been assessed to last until December 31, 2020. Therefore, the Annex of Regulation 2016/101 containing formulae to be used for the purpose of aggregating AVAs has been replaced by the Annex of Regulation 2020/866.
Related Links
Effective Date: June 26, 2020
Keywords: Europe, EU, Banking, COVID-19, Prudent Valuation, CRR, AVA, Regulation 2016/101, Regulation 2020/866, Basel, Regulatory Capital, EC
Featured Experts

María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer

Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.

Victor Calanog, Ph.D.
Leading economist; commercial real estate; performance forecasting, econometric infrastructure; data modeling; credit risk modeling; portfolio assessment; custom commercial real estate analysis; thought leader.
Related Articles
EBA Clarifies Use of COVID-19-Impacted Data for IRB Credit Risk Models
The European Banking Authority (EBA) published four draft principles to support supervisory efforts in assessing the representativeness of COVID-19-impacted data for banks using the internal ratings based (IRB) credit risk models.
BIS Hub Updates Work Program for 2022, Announces New Projects
The Bank for International Settlements (BIS) Innovation Hub updated its work program, announcing a set of projects across various centers.
US Senate Members Seek Details on SEC Proposed Climate Disclosure Rule
Certain members of the U.S. Senate Committee on Banking, Housing, and Urban Affairs issued a letter to the Securities and Exchange Commission (SEC)
EIOPA Consults on Review of Securitization Framework in Solvency II
The European Insurance and Occupational Pensions Authority (EIOPA) published a consultation paper on the advice on the review of the securitization prudential framework in Solvency II.
UK Authorities Issue Regulatory and Reporting Updates for Banks
The Prudential Regulation Authority (PRA) issued a statement on PRA buffer adjustment while the Bank of England (BoE) published a notice on the statistical reporting requirements for banks.
BaFin Consults on Resolvability Requirements for Resolution Planning
The Federal Financial Supervisory Authority of Germany (BaFin) proposed to amend the “Capital Investment Conduct And Organization Ordinance” and issued a draft circular on the minimum resolvability requirements for resolution planning.
EBA Consults on Certain Standards and Guidelines Under CRR and BRRD
The European Banking Authority (EBA) proposed guidelines, for the resolution authorities, on the publication of the write-down and conversion and bail-in exchange mechanic, with the comment period ending on September 07, 2022.
OJK Publishes Regulatory Updates for Financial Sector Entities
The Financial Services Authority of Indonesia (OJK) is strengthening cooperation with the Australian Prudential Regulation Authority (APRA) and the Japanese Financial Services Agency (JFSA)
EU Publishes Rules on DLT and Data Governance
The European Parliament and the Council published Regulation 2022/868 on European data governance (Data Governance Act).
EBA Publishes Phase 2 of Reporting Framework 3.2
The European Banking Authority (EBA) published phase 2 of its reporting framework 3.2. The technical package supports the implementation of the updated reporting framework by providing standard specifications