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