22 May 2018

EBA consults on standards on estimation and identification of an economic downturn in IRB modelling

This package is part of the EBA's broader work on the review of the IRB approach aiming at reducing the unjustified variability in the outcomes of internal models, while preserving the risk sensitivity of capital requirements.

Based on the feedback received in the first consultation these draft RTS now focus solely on the identification approach. To this end, the draft RTS require institutions to consider relevant macroeconomic and credit factors when specifying the nature of an economic downturn. In particular, the severity and duration of an economic downturn should be specified taking into account the time series for the identified relevant macroeconomic and credit factors.

The draft Guidelines has been developed to supplement the RTS and clarify how institutions should quantify LGD estimates appropriate for an economic downturn identified according to the draft RTS. To this end, the draft Guidelines focus on the methods institutions should use to quantify downturn LGD estimates. Several approaches are allowed and will be driven by the availability of loss data for the estimations. In situations with limited data availability, more prescriptive approaches are applied.

The RTS and the Guidelines together harmonise the modelling approach and, therefore, aim at creating a more level playing field across IRB institutions in this area. Specifically, the RTS ensure that an economic downturn for comparable portfolios are subject to the same economic downturn and the Guidelines provide guidance on downturn LGD estimation taking into account the specificities of the institutions' processes, underwriting standards and general response to adverse economic conditions. The approach followed in drafting the RTS and the Guidelines ensures the application of harmonised identification and LGD estimation methods.

Comments to these consultations can be sent to the EBA by 22 June 2018. A public hearing and workshop will then take place at the EBA premises on 29 May from 15:00 to 17:00 UK time.

Press release

RTS_and_GL on estimation and identification of an economic downturn in IRB_modelling

Public hearing

Model Validation

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