EBA Guidelines on Credit Risk Mitigation Under Advanced IRB Approach
EBA finalized the guidelines on credit risk mitigation for institutions applying the advanced internal ratings-based (IRB) approach, with own estimates of loss given default (LGD). The guidelines clarify the application of the credit risk mitigation provisions, as laid down in the Capital Requirements Regulation (CRR) and applicable to institutions using the advanced IRB approach. They clarify the eligibility requirements for different credit risk mitigation techniques, namely funded and unfunded credit protection, available to institutions. The guidelines apply from January 01, 2022.
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 foundation IRB approach.
- Outline specifics on other than immovable physical collateral for which the assessment of legal certainty is particularly challenging
- Clarify how institutions may recognize the effects of different credit risk mitigation techniques for capital requirement purposes
For unfunded credit protection, the guidelines clarify:
- Set of compliant approaches that are available to institutions to recognize the effects of the credit protection by adjusting their risk parameter estimates
- How to recognize the effects of funded credit protection based on netting
The guidelines aim to eliminate the remaining significant differences in approaches in the area of credit risk mitigation, which are due to either different supervisory practices or bank-specific choices. The guidelines were subject to a three-month consultation period and have been developed in dialog with the industry, which provided significant input on the current practices. The guidelines complement the EBA report on credit risk mitigation, which focuses on the standardized approach and the foundation-IRB approach. These guidelines are complementary to the EBA guidelines on the probability of default (PD) estimation, LGD estimation, and the treatment of defaulted exposures, which clarify how to adjust LGD estimates to recognize the effects of collateral.
Related Links
Keywords: Europe, EU, Banking, Credit Risk, Credit Risk Mitigation, IRB Approach, CRR, LGD, EBA
Previous Article
APRA FAQs Clarify Regulatory Capital Approach for Loan DeferralsRelated Articles
ECB Finalizes Methodology to Assess CCR and A-CVA Risk of Banks
ECB finalized the guide on assessment methodology for the internal model method for calculating exposure to counterparty credit risk (CCR) and the advanced method for own funds requirements for credit valuation adjustment (A-CVA) risk.
EBA Provides Opinion on Definition of Credit Institution in CRR
EBA published an Opinion addressed to EC to raise awareness about the opportunity to clarify certain issues related to the definition of credit institution in the upcoming review of the Capital Requirements Directive and Regulation (CRD and CRR).
APRA Consults on Alignment of Daily Liquidity Report for Banks
APRA is consulting on updates to ARS 210.0, the reporting standard that sets out requirements for provision of information on liquidity and funding of an authorized deposit-taking institution.
FED Releases Scenarios for Second Round of Stress Tests on Banks
FED released hypothetical scenarios for a second round of stress tests for banks.
PRA Announces Update on Supervisory Benchmarking Portfolio Exercise
PRA published updates in relation to the 2021 Supervisory Benchmarking Portfolio exercise.
FED Revises and Extends Capital Assessment and Stress Testing Reports
FED adopted a proposal to extend for three years, with revision, the capital assessments and stress testing reports (FR Y-14A/Q/M; OMB No. 7100-0341).
HKMA Updates Policy Module for Non-Centrally Cleared OTC Derivatives
HKMA revised the Supervisory Policy Manual module CR-G-14 on margin and other risk mitigation standards for non-centrally cleared over-the-counter (OTC) derivatives transactions.
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.
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).
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.
