Featured Product

    EBA Publishes Standards on the Specification of an Economic Downturn

    November 16, 2018

    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

    Related Articles
    News

    FSB Examines Financial Stability Aspects of Bigtech and Cloud Services

    FSB published two reports that consider the financial stability implications from the offering of financial services by bigtech firms and the adoption of cloud computing and data services across a range of functions at financial institutions.

    December 09, 2019 WebPage Regulatory News
    News

    APRA Specifies Capital Treatment of Equity Investments in ABGF

    APRA published a letter to the authorized deposit-taking institutions outlining the regulatory capital treatment of their equity investments in the Australian Business Growth Fund (ABGF).

    December 09, 2019 WebPage Regulatory News
    News

    EBA Publishes Action Plan on Sustainable Finance

    EBA published the Action Plan on sustainable finance for banks.

    December 06, 2019 WebPage Regulatory News
    News

    EBA Single Rulebook Q&A: Second Update for December 2019

    EBA updated the Single Rulebook question and answer (Q&A) tool with answers to three questions under the Capital Requirements Regulation (CRR) and the second Payment Services Directive (PSD 2).

    December 06, 2019 WebPage Regulatory News
    News

    APRA Publishes Proposal to Increase Transparency of Banking Data

    APRA proposed to substantially increase the volume and breadth of data it makes publicly available on authorized deposit-taking institutions, including banks, credit unions, and building societies.

    December 05, 2019 WebPage Regulatory News
    News

    ESMA Consults on Guide to Internal Controls for Credit Rating Agencies

    ESMA launched a consultation on the guidelines on internal controls for credit rating agencies (CRAs).

    December 05, 2019 WebPage Regulatory News
    News

    EU Finalizes Directive and Prudential Rules for Investment Firms

    EU published, in the Official Journal of the European Union, the Directive (2019/2034) and Regulation (2019/2033) on the prudential requirements and supervision of investment firms.

    December 05, 2019 WebPage Regulatory News
    News

    OSFI Revises Guideline on Principles for Management of Liquidity Risk

    OSFI finalized Guideline B-6 on the principles for the management of liquidity risk.

    December 05, 2019 WebPage Regulatory News
    News

    ESAs Publish Draft Amendments to Bilateral Margin Requirements

    ESAs published joint draft regulatory technical standards to amend the Delegated Regulation on the risk mitigation techniques for non-cleared over-the-counter (OTC) derivatives as well as a joint statement on the introduction of fallbacks in OTC derivative contracts and the requirement to exchange collateral.

    December 05, 2019 WebPage Regulatory News
    News

    RBNZ Releases Final Decisions Related to Capital Review for Banks

    RBNZ released a paper that sets out its final decisions following the comprehensive review of its capital framework for banks, known as the Capital Review.

    December 05, 2019 WebPage Regulatory News
    RESULTS 1 - 10 OF 4279