EBA Publishes Standards Related to Credit Risk Approaches Under CRR
The European Banking Authority (EBA) published its final report on the draft regulatory technical standards specifying the types of factors and conditions to be considered to assess appropriateness of risk-weights and of minimum loss given default (LGD) values for exposures secured by immovable property. The key elements for the assessment of risk-weights are the loss experience and the loss expectation related to the exposures secured by immovable property within the respective member state. The final standards cover specifications for institutions applying the standardized approach as well as for institutions applying the internal ratings-based approach, as referred to in the revised Capital Requirements Regulation (CRR 2).
For institutions applying the standardized approach, these final draft regulatory technical standards specify the types of factors to be considered during the appropriateness assessment of risk-weights on the basis of the loss experience of exposures secured by immovable property and forward-looking immovable property market developments. These standards delineate the types of factors to be taken into account in the determination of the loss expectation. For institutions applying the internal ratings-based approach to retail exposures secured by residential or commercial immovable property, these draft standards provide three conditions to be considered when assessing the appropriateness of minimum LGD values. The standards emphasize the systemic risk approach of such an appropriateness assessment due to the
- Existing approval, validation, and close monitoring of rating systems under the internal ratings-based approach by competent authorities
- Requirements for institutions to use LGD estimates that are appropriate for an economic downturn if these are more conservative than the long-run average LGD, which is further specified in regulatory technical standards and EBA guidelines
For both assessments, proper coordination and cooperation between the competent and the designated authority are key to strengthening the identification of risks and to avoiding overlaps, double-counting of risk, and duplicative actions by authorities. These regulatory standards will support relevant authorities across the member states in European Union in carrying out their periodical assessments by striking the right balance between ensuring coherence and harmonization of their assessments and preserving the necessary flexibility. In their assessments, relevant authorities should consider whether minimum LGD values cover the sources of systemic risks beyond economic downturn considerations and idiosyncratic risks. The types of factors or the conditions that relevant authorities shall consider during such assessments must rely on the latest data available to them.
These draft regulatory technical standards, along with an ESRB recommendation, are meant to provide a framework for the relevant authority when setting higher risk-weights than those set out in Article 125(1) or 126(1) of the CRR2 and when setting higher minimum LGD values than those referred to in Article 164(4) of the CRR2. The aforementioned recommendation refers to a recommendation that ESRB may, in close cooperation with EBA, issue to provide guidance to the relevant authorities on factors that could adversely affect the current or future financial stability of the activating member state and on indicative benchmarks that the relevant authority has to take into account when determining higher risk-weights or minimum LGD values. When considering any changes to risk-weights or minimum LGD values, the relevant authority should also be aware of the direct linkages to other parts of the regulation, including the impact of such changes on the calculation of large exposure values, liquidity and capital ratios, reporting requirements, and other macro-prudential measures.
Related Links
Keywords: Europe, EU, Banking, LGD, Loss Given Default, Regulatory Technical Standards, CRR, Credit Risk, Standardized Approach, IRB Approach, RWA, Regulatory Capital, Basel, EBA
Featured Experts

María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer

Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.

Patrycja Oleksza
Applies proficiency and knowledge to regulatory capital and reporting analysis and coordinates business and product strategies in the banking technology area
Previous Article
CMA Issues Update on Governance of Open Banking EcosystemRelated Articles
ISSB Sustainability Standards Expected to Become Global Baseline
The finalization of the two sustainability disclosure standards—IFRS S1 and IFRS S2—is expected to be a significant step forward in the harmonization of sustainability disclosures worldwide.
IOSCO, BIS, and FSB to Intensify Focus on Decentralized Finance
Decentralized finance (DeFi) is expected to increase in prominence, finding traction in use cases such as lending, trading, and investing, without the intermediation of traditional financial institutions.
BCBS Assesses NSFR and Large Exposures Rules in US
The Basel Committee on Banking Supervision (BCBS) published reports that assessed the overall implementation of the net stable funding ratio (NSFR) and the large exposures rules in the U.S.
Global Agencies Focus on ESG Data, Climate Litigation and Nature Risks
At the global level, supervisory efforts are increasingly focused on addressing climate risks via better quality data and innovative use of technologies such as generative artificial intelligence (AI) and blockchain.
ISSB Standards Shine Spotlight on Comparability of ESG Disclosures
The finalization of the IFRS sustainability disclosure standards in late June 2023 has brought to the forefront the themes of the harmonization of sustainability disclosures
EBA Issues Several Regulatory and Reporting Updates for Banks
The European Banking Authority (EBA) recently issued several regulatory publications impacting the banking sector.
BCBS Proposes to Revise Core Principles for Banking Supervision
The Basel Committee on Banking Supervision (BCBS) launched a consultation on revisions to the core principles for effective banking supervision, with the comment period ending on October 06, 2023.
US Proposes Final Basel Rules, Transition Period to Start in July 2025
The U.S. banking agencies (FDIC, FED, and OCC) recently proposed rules implementing the final Basel III reforms, also known as the Basel III Endgame.
FSB Report Outlines Next Steps for Climate Risk Roadmap
The Financial Stability Board (FSB) recently published the second annual progress report on the July 2021 roadmap to address climate-related financial risks.
EBA Plans on Ad-hoc ESG Data Collection and Climate Scenario Exercise
The recognition of climate change as a systemic risk to the global economy has further intensified regulatory and supervisory focus on monitoring of the environmental, social, and governance (ESG) risks.