EBA Publishes Standards on the Specification of an Economic Downturn
EBA published the final draft regulatory technical standards specifying the nature, severity, and duration of an economic downturn. EBA is in the process of finalizing the related guidelines on the estimation of loss given default (LGD) appropriate for conditions of an economic downturn. The draft standards will be submitted to EC for endorsement, before being published in the Official Journal of the European Union. The technical standards will apply from January 01, 2021, as this will allow institutions to prepare for the implementation of technical standards and to integrate the approach into existing modeling practices.
These standards complete the EBA's regulatory review of the internal ratings-based (IRB) approach, with the objective of restoring the trust of market participants in internal models by reducing the unjustified variability in the resulting risk-weighted exposure amounts. The final draft regulatory technical standards set out the notion of economic downturn to be taken into account when estimating the LGD and the conversion factors. Given the specificities of the types of exposures covered by a rating system, the economic downturn should be identified separately for each rating system. However, as a rating system may cover exposures from different businesses, sectors, and geographical areas, the notion of an economic downturn included in these technical standards may comprise several disjunctive downturn periods.
In addition, the final draft standards specify the nature of an economic downturn via macroeconomic or credit-related factors (economic factors) that are explanatory variables or indicators for the business cycle of the considered type of exposure. The severity of an economic downturn is specified by the set of the most severe observations on the economic factors constituting the nature of an economic downturn, based on historical values of these factors over the last 20 years. The duration of an economic downturn is determined by the duration of the identified downturn periods and is generally specified as the twelve-month period where the most severe values are observed. However, some flexibility is embedded in the draft policy to ensure that the severity and duration are appropriately specified.
Related Links
Keywords: Europe, EU, Banking, IRB Approach, Regulatory Technical Standards, LGD Estimation, Economic Downturn, EBA
Previous Article
IAIS Publishes Papers on the Use of Digital Technology in InsuranceRelated Articles
OSFI Issues Phase2 Consultation on Climate Scenario Exercise for Banks
The Office of the Superintendent of Financial Institutions (OSFI) recently announced a consultation on the second phase of the Standardized Climate Scenario Exercise (SCSE) for banks and other financial institutions it regulates in Canada.
BIS and Central Banks Experiment with GenAI to Assess Climate Risks
A recent report from the Bank for International Settlements (BIS) Innovation Hub details Project Gaia, a collaboration between the BIS Innovation Hub Eurosystem Center and certain central banks in Europe
Nearly 25% G-SIBs Commit to Adopting TNFD Nature-Related Disclosures
Nature-related risks are increasing in severity and frequency, affecting businesses, capital providers, financial systems, and economies.
Singapore to Mandate Climate Disclosures from FY2025
Singapore recently took a significant step toward turning climate ambition into action, with the introduction of mandatory climate-related disclosures for listed and large non-listed companies
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
EBA Proposes Standards Related to Standardized Credit Risk Approach
The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.