EBA欧洲银行-Public-hearing-on-RTS-on-economic-downturn-04-April-2017_17页_1mb

EBA Draft RTS on Economic Downturn

Core Content

The European Banking Authority (EBA) has published a Draft Regulatory Technical Standard (RTS) on the specification of the nature, severity, and duration of an economic downturn. This document is part of a broader regulatory review of the Internal Ratings-Based (IRB) Approach, which was initiated in February 2016.

The RTS aims to provide a harmonised and consistent methodology for banks to assess and apply economic downturn conditions when calculating risk weights and loss given default (LGD) under the Capital Requirements Regulation (CRR). It outlines the model component approach, which defines economic downturns based on the interplay of economic factors influencing realised losses or drawings.

Main Policy Options

The EBA outlines three main approaches to downturn LGD estimation:

1. Model Component Approach – The primary method proposed in the RTS, which evaluates the relevance of economic factors at the model component level. It requires a dependence analysis between economic factors and model components and is based on the worst value of relevant economic factors.

2. Amendments to the Downturn Adjustment Section of the GLs – These amendments clarify how prudential LGD should be computed using the realised or estimated values of model components during downturn periods. They also introduce a margin of conservatism when economic downturn conditions are based on qualitative dependencies or when the worst economic factor is not sufficiently severe.

3. Alternative Simpler Approaches – The EBA seeks feedback on two simpler methods to reduce implementation costs and increase flexibility:

   • Reference Value Approach – Simplifies the identification of economic downturns by removing references to model components. It uses a non-binding reference value to guide institutions, with the condition that if the calculated LGD is lower than the reference value, the reference value should be used unless justified otherwise.

   • Supervisory Add-on Approach – Based on the Loss Given Default at Liquidation (LGD_LRA), it adds a calibrated supervisory add-on to reflect realised losses. Two options are considered:

     • Distributional Approach – The add-on captures the tail of the distribution of observed losses.
     • Fixed Add-on Approach – Uses a fixed add-on rate (either +5% or +10% over the base rate), with the downturn discounting rate (DR) incorporating the time-in-default component. The add-on can be calibrated at the collateral type level to align with Basel LGD floors.

Key Information

• Expected Timelines:

  • Consultation Paper published: 1 March 2017
  • End of consultation period: 29 May 2017
  • Analysis of responses: 3rd quarter 2017
  • Final RTS expected: 4th quarter 2017
  • Implementation by: end-2020

• Interactions with Basel Work:

  • The EBA is actively involved in the Basel review of the internal models framework and is aligning timelines and requirements.
  • It will take into account interactions with the Basel guidelines on PD and LGD estimation, as well as the treatment of defaulted assets when finalising the RTS.

• Consultation Structure:

  • The EBA has organised a Q&A session covering three main topics:
    1. Draft RTS on the nature, severity, and duration of economic downturn
    2. Amendments to the downturn adjustment section of the GLs
    3. Alternative simpler approaches to downturn LGD estimates

Summary of EBA's Review of the IRB Approach

The EBA's work on the IRB Approach is divided into four phases, with the following current status: