Featured Product

    EBA Finalizes Guidelines on Estimation of LGD Under Economic Downturn

    March 06, 2019

    EBA published the final guidelines specifying how institutions should quantify the estimation of loss given default (LGD) appropriate for conditions of an economic downturn. The guidelines focus on requirements for the quantification of the calibration target used for downturn LGD estimation. The guidelines will apply as of January 01, 2021, but earlier implementation is encouraged. These guidelines are an amendment to the guidelines on PD, LGD estimation, and treatment of defaulted assets (EBA/GL/2017/16), which were published on November 20, 2017.

    Starting from the relevant downturn period(s) identified in accordance with the related regulatory technical standard (RTS), the final guidelines set out requirements for the appropriate quantification of the calibration target used for downturn LGD estimates and include three types of approaches:

    • Type-1 approaches can be applied when banks have sufficient loss data for the identified downturn period. In this case, institutions are allowed some modeling flexibility, but subject to a harmonized and prescriptive impact assessment.
    • Type-2 approaches can be applied when banks do not have sufficient loss data for the identified downturn period. In this case, institutions are given the choice between two approaches, the so-called haircut, or extrapolation approaches This will harmonize the approaches used by banks.
    • Type-3 approaches can be applied in rare cases, where neither type-1 nor type-2 approaches can be used. In this case, banks have to apply a minimum margin of conservatism requirement of 15 percentage points on LGD estimates.

    Finally, a reference value is put in place that acts as a non-binding challenger to the final downturn LGD estimation. The guidelines complete the broader work of EBA on the review of the internal ratings-based (IRB) approach and aim to reduce the unjustified variability in the outcomes of internal models, while preserving the risk-sensitivity of capital requirements.

     

    Related Links

    Effective Date: January 01, 2021

    Keywords: Europe, EU, Banking, Credit Risk, IRB Approach, LGD, Economic Downturn, EBA

    Related Articles
    News

    EBA Updates List of Validation Rules for Reporting by Banks

    EBA issued a revised list of validation rules with respect to the implementing technical standards on supervisory reporting.

    September 10, 2020 WebPage Regulatory News
    News

    EBA Responds to EC Call for Advice to Strengthen AML/CFT Framework

    EBA published its response to the call for advice of EC on ways to strengthen the EU legal framework on anti-money laundering and countering the financing of terrorism (AML/CFT).

    September 10, 2020 WebPage Regulatory News
    News

    NGFS Advocates Environmental Risk Analysis for Financial Sector

    NGFS published a paper on the overview of environmental risk analysis by financial institutions and an occasional paper on the case studies on environmental risk analysis methodologies.

    September 10, 2020 WebPage Regulatory News
    News

    MAS Issues Guidelines to Promote Senior Management Accountability

    MAS published the guidelines on individual accountability and conduct at financial institutions.

    September 10, 2020 WebPage Regulatory News
    News

    APRA Formalizes Capital Treatment and Reporting of COVID-19 Loans

    APRA published final versions of the prudential standard APS 220 on credit quality and the reporting standard ARS 923.2 on repayment deferrals.

    September 09, 2020 WebPage Regulatory News
    News

    SRB Chair Discusses Path to Harmonized Liquidation Regime for Banks

    SRB published two articles, with one article discussing the framework in place to safeguard financial stability amid crisis and the other article outlining the path to a harmonized and predictable liquidation regime.

    September 09, 2020 WebPage Regulatory News
    News

    FSB Workshop Discusses Preliminary Findings of Too-Big-To-Fail Reforms

    FSB hosted a virtual workshop as part of the consultation process for its evaluation of the too-big-to-fail reforms.

    September 09, 2020 WebPage Regulatory News
    News

    ECB Updates List of Supervised Entities in EU in September 2020

    ECB updated the list of supervised entities in EU, with the number of significant supervised entities being 115.

    September 08, 2020 WebPage Regulatory News
    News

    OSFI Identifies Focus Areas to Strengthen Third-Party Risk Management

    OSFI published the key findings of a study on third-party risk management.

    September 08, 2020 WebPage Regulatory News
    News

    FSB Extends Implementation Timeline for Framework on SFTs

    FSB is extending the implementation timeline, by one year, for the minimum haircut standards for non-centrally cleared securities financing transactions or SFTs.

    September 07, 2020 WebPage Regulatory News
    RESULTS 1 - 10 OF 5796