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March 19, 2018

EBA published a report reviewing the Credit Risk Mitigation (CRM) framework in EU. EBA conducted this assessment as part of its work on the review of the internal ratings-based (IRB) approach. This report is part of the fourth and last phase of the EBA roadmap on the IRB approach, which also includes a review of supervisory practices, a harmonized definition of default, and clarifications on modeling approaches to be used by institutions.

The report clarifies the application of the Capital Requirements Regulation (CRR) provisions regarding CRM under different credit risk approaches. The report mapped relevant provisions to the corresponding credit risk approach, detailing the provisions for the techniques, eligibility, and methods of CRM available to institutions under the Standardized Approach (SA) and the Foundation-IRB Approach (F-IRB). The report provides a quantitative overview of the use of the CRM framework by institutions. Additionally, the report presents policy proposals for the consideration of EC, with a view to ensuring a proper and harmonized application of the current CRR provisions on the CRM framework through the necessary amendments to the Regulation. The report identifies the following key issues for consideration by EC:

  • Limited guidance is provided in the current CRR provisions on CRM under the Advanced-IRB (A-IRB) Approach. In line with the feedback received from the industry, EBA has committed to provide further guidance on the application of CRM provisions to institutions using the A-IRB Approach. 
  • The report re-iterates the position of EBA on the three mandates for technical standards in the area of CRM (identified in CRR): the regulatory technical standards (RTS) on recognition of conditional guarantees, the RTS on liquid assets, and the RTS on the internal models approach for master netting agreements. EBA believes that fulfilling these three mandates, instead of undertaking an analysis of the overall CRM framework, would run the risk of having disproportionate regulation with limited benefits. Furthermore, EBA recommends that the RTS on liquid assets mandate be deleted from the CRR while EBA will continuously monitor the need to deliver on the other two RTS mandates also, in light of international developments in this regulatory area.

 

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Keywords: Europe, EU, Banking, CRR, Credit Risk Mitigation, IRB Approach, SA Approach, EBA

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