EBA欧洲银行-EBA-BS-2011-165-28CP-on-GL-IRC29-FINAL_26页_613kb

EBA Consultation Paper on Draft Guidelines on the Incremental Default and Migration Risk Charge (IRC)

Core Content

The EBA Consultation Paper on the Draft Guidelines on the Incremental Default and Migration Risk Charge (IRC) outlines the regulatory approach for incorporating IRC into the capital requirements for credit institutions and investment firms. The paper is part of the process to align with the Capital Requirements Directive (CRD III), which was amended by Directive 2010/76/EU and entered into force on 31 December 2011. The objective is to ensure a level playing field and convergence in supervisory practices across the EU.

Main Objectives of the Guidelines

• Achieve a common understanding among competent authorities on IRC modelling to enhance convergence.
• Provide guidance on the compliance of IRC models with CRD III.
• Increase transparency for credit institutions when implementing IRC into market risk capital calculations and risk management.
• Ensure a level playing field among credit institutions in the application of IRC.

Key Information

I. Responding to the Consultation

• The EBA invites comments on all matters in the paper.
• Comments should be sent by email to CP49@eba.europa.eu by 15.01.2012, with the reference EBA CP 49.
• All contributions will be published unless confidentially requested.
• Confidential responses must be clearly indicated and are subject to the EBA's document access rules.

II. Executive Summary

• The IRC is intended to complement the value-at-risk (VaR) framework by capturing default risk and migration risk in the trading book.
• The Basel Committee introduced the IRC in 2009 to address the limitations of the VaR model in capturing credit risk in illiquid products.
• The EBA is tasked with developing guidelines to ensure consistent application of the IRC across EU institutions.
• The guidelines are not a comprehensive rulebook but are meant to complement the CRD III provisions.

III. Background and Rationale

• The 2005 Basel Committee and IOSCO Agreement introduced the need for an IRC to capture credit risk that was not reflected in VaR.
• The 2007 guidelines on IRC were expanded to include migration risk, especially after the 2008 financial crisis.
• The 2009 revisions to the Basel II framework included the introduction of the Stressed VaR and IRC.
• The EBA is tasked with monitoring and guiding the application of IRC models to ensure consistency and convergence.

IV. Draft EBA Guidelines on the IRC

Title I: Subject Matter, Scope and Definitions

• Subject matter: The guidelines aim to provide a common understanding of IRC across EU competent authorities.
• Scope: Applies to institutions using the Internal Model Approach (IMA) for calculating capital requirements for specific interest risk.
• Definitions: Applies to credit institutions and investment firms as defined in Directives 2006/48/EC and 2006/49/EC.

Title II: Requirements regarding Institutions' IRC Modelling

A. Scope of Application

• Positions subject to IRC: Includes long and short positions in specific interest rate risk, except for securitisations and n-th-to-default credit derivatives.
• Excluded positions: Securitisation positions and n-th-to-default credit derivatives.
• Special cases:
  • Equity and equity derivatives: May be included if jointly managed and procedures for joint credit and equity risk are in place.
  • Own debt positions: Long positions are subject to migration risk; short positions are also included but default risk is not modelled.
  • Permanent partial use: Exclusions from IRC must be justified and documented to ensure conservatism.

B. Individual Modelling

• Soundness standard: A 1-year capital horizon and 99.9% confidence interval are used.
• Qualitative criteria: All assumptions, estimation techniques, and proxies must be thoroughly documented and justified.
• Source of ratings: Institutions may use internal or external ratings. Internal ratings must align with IRB methodology.
• PDs and LGDs: Institutions may use approved IRB data or compute PDs and LGDs using IRB methodology. Market-based PDs (risk-neutral) are not acceptable for rating migration or default models.
• Rating hierarchy: Institutions must establish a documented hierarchy of rating sources and map them to a common scale.

C. Interdependence

• Correlation between default and migration events: Must be included in models and based on consistent assumptions.
• Copula assumptions: Should be validated, even when data is scarce. The impact of different copula assumptions must be tested.
• Systemic risk factors: May be used to model issuer ability-to-pay. Systemic factors should not be refreshed between liquidity horizons.
• Portfolio concentration: Must be reflected in models, especially where there are lack of diversification or large exposures to specific issuers.

D. Migration Matrices

• Transition matrices: Based on historical migration data from internal or external sources.
• Use of external data: Preferred when internal data is sparse.
• Validation: Required to ensure robustness, especially for higher rating categories.
• Historical observation period: A minimum of 5 years is required.
• Adjustments: Transition matrices must be adjusted if "NR" or other absorbing states are present, and these adjustments must be documented.
• Shorter horizons: If used, approximations are required, and assumptions must be justified and back-tested.

E. Constant Level of Risk Assumption over the One-Year Capital Horizon

• Institutions must rebalance or roll-over positions at the end of each liquidity horizon to maintain the same level of risk.
• An alternative approach is to use a one-year constant position assumption, where all positions are treated as subject to an instantaneous shock.
• This assumption must be clearly justified and documented.

F. General Matters

• Validation process: Must be thoroughly documented and include back-testing of assumptions.
• Use test: Ensures that IRC models are used appropriately and meet all requirements.
• Documentation: Required for all aspects of IRC models, including parameters and assumptions.
• Alternative IRC approaches: Institutions using non-compliant models must be guided on how to adjust them.
• Frequency of calculation: Minimum frequency requirements are outlined to ensure timely and accurate risk assessment.

Conclusion

The EBA's Draft Guidelines on the IRC aim to enhance regulatory consistency, improve risk management practices, and increase transparency in the capital calculation process for credit institutions and investment firms. These guidelines are expected to be implemented by national competent authorities within six months of their publication and are designed to complement the CRD III framework.