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

BCBS and IOSCO Extend Implementation of Final Phase of Margin Rules

BCBS and IOSCO agree to one-year extension of the final implementation phase of the margin requirements for non centrally cleared derivatives.

July 23, 2019 WebPage Regulatory News
News

APRA Proposes Stronger Remuneration Requirements in Australia

APRA is proposing to strengthen prudential requirements for remuneration across all APRA-regulated entities in the banking, insurance, and superannuation industries by issuing CPS 511, a new prudential standard on remuneration.

July 23, 2019 WebPage Regulatory News
News

PRA Consults on Availability of Group Own Funds Under Solvency II

PRA published a consultation paper (CP16/19) that sets out its proposed approach to the determination of the availability of subordinated liabilities and preference shares in group own funds.

July 22, 2019 WebPage Regulatory News
News

EIOPA Consults on Methodological Principles for Insurer Stress Testing

EIOPA published a discussion paper on the methodological principles for stress testing the insurance sector in EU.

July 22, 2019 WebPage Regulatory News
News

US Agencies Adopt Rule to Exclude Community Banks from Volcker Rule

US Agencies (CFTC, FDIC, FED, OCC, and SEC) adopted a final rule to exclude community banks from the Volcker Rule, in line with amendments to certain sections of the Economic Growth, Regulatory Relief, and Consumer Protection (EGRRCP) Act.

July 22, 2019 WebPage Regulatory News
News

US Agencies Adopt Amendments to Simplify Regulatory Capital Rules

US Agencies (FDIC, FED, and OCC) adopted a final rule that reduces regulatory burden by simplifying several requirements in the regulatory capital rules for banks.

July 22, 2019 WebPage Regulatory News
News

IA of Hong Kong Delegates Inspection and Investigation Powers to HKMA

HKMA and IA of Hong Kong jointly issued a statement announcing the delegation of the inspection and investigation powers of IA to HKMA, pursuant to the statutory regulatory regime for insurance intermediaries under the Insurance Ordinance.

July 19, 2019 WebPage Regulatory News
News

FSB Extends Implementation Timeline for Policy Recommendations on SFTs

FSB announced adjustments to the implementation timelines for its recommendations on securities financing transactions (SFTs), specifically those related to the minimum haircut standards for non-centrally cleared SFTs.

July 19, 2019 WebPage Regulatory News
News

EBA Single Rulebook Q&A: Third Update for July 2019

EBA published answers to six questions under the Single Rulebook question and answer (Q&A) tool this week.

July 19, 2019 WebPage Regulatory News
News

EBA Report Assesses Regulatory Framework for Fintech Activities

EBA published the findings of its analysis on the regulatory framework applicable to fintech firms when accessing the market.

July 18, 2019 WebPage Regulatory News
RESULTS 1 - 10 OF 3494