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    BaFin Issues Proposal on Own LGD Estimates Under IRB Approach

    October 25, 2021

    The Federal Financial Supervisory Authority of Germany (BaFin) published a draft circular that sets out further requirements for own estimates of loss given default (LGD) as part of the internal ratings-based (IRB) approach. With this circular, BaFin intends to adopt EBA guidelines on downturn LGD estimation as well as guidelines on credit risk mitigation for institutions applying the IRB approach with own estimates of LGDs. BaFin plans to incorporate the guidelines into its administrative practice and is requesting comments on the draft circular until November 19, 2021.

    EBA had published, in March 2019, the guidelines specifying how institutions should quantify the estimation of LGD appropriate for conditions of an economic downturn; these guidelines focus on requirements for quantification of the calibration target used for downturn LGD estimation. Then, in May 2020, EBA had published the guidelines on credit risk mitigation for institutions applying the advanced IRB approach, with own estimates of LGD; these 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. The guidelines on credit risk mitigation clarify the eligibility requirements for different credit risk mitigation techniques— namely funded and unfunded credit protection—available to institutions.

     

    Related Links (in English and German)

    Comment Due Date: November 19, 2021

    Keywords: Europe, Germany, Banking, IRB Approach, LGD, Credit Risk, Credit Risk Mitigation, Economic Downturn, CRR, Basel, Loss Given Default, Regulatory Capital, EBA, BaFin

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