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    EBA Report Analyzes Member State Reliance on External Credit Ratings

    May 17, 2021

    EBA published a report that analyzes the extent to which the national law of member states relies on external credit ratings. The analysis identified no mechanistic reliance on external credit ratings. Furthermore, using the EBA supervisory reporting data, the report shows that the use of external credit ratings in the calculation of risk-weighted exposure amounts under the standardized approach and under the External Ratings Based Approach (SEC-ERBA) of the securitization framework is limited. In this report, EBA recommends removal of the mandate laid down in Article 161 (3) of the Capital Requirements Directive (CRD) to publish this bi-annual report.

    The said CRD mandate requires EBA, in cooperation with ESMA and EIOPA, to publish a bi-annual report on the reliance on external credit ratings in national law and how competent authorities meet their obligations under Article 77(1) and (3) and Article 79(b) CRD and the degree of supervisory convergence in that regard. The recommendation is made on the basis of the limited references to external credit ratings found in the national law of member states, along with developments in international regulation, namely the provisions to reduce mechanistic reliance on external credit ratings in the standardized approach of the credit risk framework in the final Basel III reforms and in the new securitization framework introduced in the Capital Requirements Regulation (CRR). In addition, the report stresses that the “enhanced due diligence” introduced in the final Basel III framework should be implemented in the EU framework. To collect the relevant information, in December 2020, EBA had launched a survey among EU banking supervisors, which showed that the national law of member states does not introduce mechanistic references to external credit ratings and that the CRD-related requirements to reduce reliance have been transposed into national legislation.

     

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    Keywords: Europe, EU, Banking, External Credit Ratings, CRD, CRR, Credit Risk, Standardized Approach, Securitization Framework, Basel, Regulatory Capital, SEC-ERBA, EBA

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