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
Related Articles
EC Consults on PSD2 and Open Finance; EU Reaches Agreement on DORA
The European Commission (EC) published a public consultation on the review of revised payment services directive (PSD2) and open finance.
EC Mandates ESAs to Propose Amendments to SFDR Technical Standards
The European Commission (EC) has issued two letters mandating the European Supervisory Authorities (ESAs) to jointly propose amendments to the regulatory technical standards under Sustainable Finance Disclosure Regulation or SFDR.
EBA Examines Supervisory Practices, Issues Deposits Reporting Template
The European Banking Authority (EBA) published its annual report on convergence of supervisory practices for 2021. Additionally, following a request from the European Commission (EC),
US Agency Publications Address Basel, Reporting, and CECL Developments
The Farm Credit Administration published, in the Federal Register, the final rule on implementation of the Current Expected Credit Losses (CECL) methodology for allowances
SEC Extends Comment Period on Climate Risk Disclosures
The U.S. Securities and Exchange Commission (SEC) looks set to intensify focus on crypto-assets and cyber risk and extended the comment period on the proposed rules to enhance and standardize climate-related disclosures for investors.
APRA Reduces Committed Liquidity Facility, Issues Other Updates
The Australian Prudential Regulation Authority (APRA) announced reduction in the aggregate Committed Liquidity Facility and issued an update on the operational preparedness for zero and negative market interest rates.
CMF Consults on Basel Rules, Presents Roadmap to Address Climate Risks
The Commission for the Financial Market (CMF) in Chile published capital adequacy ratios (as of February 2022, January 2022, and December 2021) for 17 banks and for the banking system.
PRA Issues Statement on NPEs and Policy on Trading Activity Wind-Down
The Prudential Regulation Authority (PRA) issued a statement on the European Banking Authority (EBA) guidelines on management of non-performing exposures (NPEs) and forborne exposures.
EBA Updates Standards for 2023 Benchmarking of Internal Approaches
The European Banking Authority (EBA) updated the implementing technical standards that specify the data collection for the 2023 supervisory benchmarking exercise in relation to the internal approaches used in market risk, credit risk, and IFRS 9 accounting.
EIOPA Responds to Stakeholder Views on Blockchain in Insurance
The European Insurance and Occupational Pensions Authority (EIOPA) published a feedback statement on the responses received to the consultation on blockchain and smart contracts in insurance.
