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
US Agencies Issue Several Regulatory and Reporting Updates
The Board of Governors of the Federal Reserve System (FED) adopted the final rule on Adjustable Interest Rate (LIBOR) Act.
ECB Issues Multiple Reports and Regulatory Updates for Banks
The European Central Bank (ECB) published an updated list of supervised entities, a report on the supervision of less significant institutions (LSIs), a statement on macro-prudential policy.
HKMA Keeps List of D-SIBs Unchanged, Makes Other Announcements
The Hong Kong Monetary Authority (HKMA) published a circular on the prudential treatment of crypto-asset exposures, an update on the status of transition to new interest rate benchmarks.
EU Issues FAQs on Taxonomy Regulation, Rules Under CRD, FICOD and SFDR
The European Commission (EC) adopted the standards addressing supervisory reporting of risk concentrations and intra-group transactions, benchmarking of internal approaches, and authorization of credit institutions.
CBIRC Revises Measures on Corporate Governance Supervision
The China Banking and Insurance Regulatory Commission (CBIRC) issued rules to manage the risk of off-balance sheet business of commercial banks and rules on corporate governance of financial institutions.
HKMA Publications Address Sustainability Issues in Financial Sector
The Hong Kong Monetary Authority (HKMA) made announcements to address sustainability issues in the financial sector.
EBA Updates Address Basel and NPL Requirements for Banks
The European Banking Authority (EBA) published regulatory standards on identification of a group of connected clients (GCC) as well as updated the lists of identified financial conglomerates.
ESMA Publishes 2022 ESEF XBRL Taxonomy and Conformance Suite
The General Board of the European Systemic Risk Board (ESRB), at its December meeting, issued an updated risk assessment via the quarterly risk dashboard and held discussions on key policy priorities to address the systemic risks in the European Union.
FCA Sets up ESG Committee, Imposes Penalties, and Issues Other Updates
The Financial Conduct Authority (FCA) is seeking comments, until December 21, 2022, on the draft guidance for firms to support existing mortgage borrowers.
FSB Reports Assess NBFI Sector and Progress on LIBOR Transition
The Financial Stability Board (FSB) published a report that assesses progress on the transition from the Interbank Offered Rates, or IBORs, to overnight risk-free rates as well as a report that assesses global trends in the non-bank financial intermediation (NBFI) sector.