Featured Product

    EBA Finalizes Guidelines on Estimation of LGD Under Economic Downturn

    March 06, 2019

    EBA published the final guidelines specifying how institutions should quantify the estimation of loss given default (LGD) appropriate for conditions of an economic downturn. The guidelines focus on requirements for the quantification of the calibration target used for downturn LGD estimation. The guidelines will apply as of January 01, 2021, but earlier implementation is encouraged. These guidelines are an amendment to the guidelines on PD, LGD estimation, and treatment of defaulted assets (EBA/GL/2017/16), which were published on November 20, 2017.

    Starting from the relevant downturn period(s) identified in accordance with the related regulatory technical standard (RTS), the final guidelines set out requirements for the appropriate quantification of the calibration target used for downturn LGD estimates and include three types of approaches:

    • Type-1 approaches can be applied when banks have sufficient loss data for the identified downturn period. In this case, institutions are allowed some modeling flexibility, but subject to a harmonized and prescriptive impact assessment.
    • Type-2 approaches can be applied when banks do not have sufficient loss data for the identified downturn period. In this case, institutions are given the choice between two approaches, the so-called haircut, or extrapolation approaches This will harmonize the approaches used by banks.
    • Type-3 approaches can be applied in rare cases, where neither type-1 nor type-2 approaches can be used. In this case, banks have to apply a minimum margin of conservatism requirement of 15 percentage points on LGD estimates.

    Finally, a reference value is put in place that acts as a non-binding challenger to the final downturn LGD estimation. The guidelines complete the broader work of EBA on the review of the internal ratings-based (IRB) approach and aim to reduce the unjustified variability in the outcomes of internal models, while preserving the risk-sensitivity of capital requirements.

     

    Related Links

    Effective Date: January 01, 2021

    Keywords: Europe, EU, Banking, Credit Risk, IRB Approach, LGD, Economic Downturn, EBA

    Related Articles
    News

    EC Publishes Regulations Supplementing Investment Firms Directive

    The European Commission (EC) published three Delegated Regulations (2021/2153, 2021/2154, and 2021/2155) to supplement the Investment Firms Directive (IFD or Directive 2019/2034).

    December 07, 2021 WebPage Regulatory News
    News

    FSB Report Examines Trends in Non-Bank Intermediation in Americas

    The Financial Stability Board (FSB) published a report that presents results of the sixth non-bank financial intermediation monitoring exercise in the Americas.

    December 06, 2021 WebPage Regulatory News
    News

    BIS Discusses Regulatory Approach for Non-Bank Intermediation

    The Bank for International Settlements (BIS) published the December issue of the Quarterly Review, which analyzes the non-bank financial intermediation mechanisms that could undermine financial stability.

    December 06, 2021 WebPage Regulatory News
    News

    BoE Calls for Vendor Input for Data Collection Transformation Program

    The Bank of England (BoE) opened the Alternative Liquidity Facility, or ALF, for deposits from the participating UK-based Islamic banks for the first time.

    December 03, 2021 WebPage Regulatory News
    News

    APRA Sets LAC for D-SIBs, Proposes to Enhance Crisis Preparedness

    APRA issued a letter on the loss-absorbing capacity (LAC) requirements for domestic systemically important banks (D-SIBs) and published a discussion paper, along with the proposed the prudential standards on financial contingency planning (CPS 190) and resolution planning (CPS 900).

    December 02, 2021 WebPage Regulatory News
    News

    EBA Proposes Standards on Interest Rate Risk in the Banking Book

    The European Banking Authority (EBA) launched three consultations on technical aspects of the revised framework capturing interest rate risks for banking book (IRRBB) positions, with the comment period ending on April 04, 2022.

    December 02, 2021 WebPage Regulatory News
    News

    EC to Review Macro-Prudential Rules while ESRB Assesses Policy Stance

    The European Commission (EC) launched a call for evidence, until March 18, 2022, as part of a comprehensive review of the macro-prudential rules for the banking sector under the Capital Requirements Regulation (CRR) and Directive (CRD IV).

    December 01, 2021 WebPage Regulatory News
    News

    EBA Sets Out List of Banks for Mandatory Basel III Monitoring Exercise

    The European Banking Authority (EBA) published the sample of banks for the mandatory Basel III monitoring exercise, which will refer to the December 2021 data.

    December 01, 2021 WebPage Regulatory News
    News

    FED Revises Complex Institution Liquidity Monitoring Report for Banks

    The Board of Governors of the Federal Reserve System (FED) is adopting a proposal to revise and extend for three years the Complex Institution Liquidity Monitoring Report (FR 2052a) for banks.

    December 01, 2021 WebPage Regulatory News
    News

    FSB Sets Out Good Practices for Crisis Management Groups

    The Financial Stability Board (FSB) published a report that sets out good practices for crisis management groups.

    November 30, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 7758