EBA publishes final Guidelines on Credit Risk Mitigation for institutions applying the IRB approach with own estimates of LGDs

06 May 2020

The European Banking Authority (EBA) published today its final Guidelines on credit risk mitigation (CRM) in the context of the advanced internal ratings-based (A-IRB) approach. These Guidelines, which are part of the EBA's regulatory review of the IRB approach, aim to eliminate the remaining significant differences in approaches in the area of CRM, which are due to either different supervisory practices or bank-specific choices. These Guidelines complement the EBA Report on CRM, which focuses on the standardised approach (SA) and the foundation-IRB approach (F-IRB). 

The Guidelines clarify the application of the CRM provisions currently laid down in the Capital Requirements Regulation (CRR) applicable to institutions using the A-IRB Approach. In particular, they clarify the eligibility requirements for different CRM techniques, namely funded and unfunded credit protection (e.g. collateral and guarantees), available to institutions.

For funded credit protection, the Guidelines provide a mapping to the eligibility requirements of legal certainty and collateral valuation applicable to institutions using the standardised approach (SA) and the foundation internal ratings-based (F-IRB) approach. Specific guidance is also provided on other than immovable physical collateral for which the assessment of legal certainty is particularly challenging. 

The Guidelines also clarify how institutions may recognise the effects of different CRM techniques for capital requirement purposes. In particular, for unfunded credit protection they clarify the set of compliant approaches that are available to institutions to recognise the effects of the credit protection by adjusting their risk parameter estimates. Moreover, the Guidelines clarify how to recognise the effects of funded credit protection based on netting. 

These Guidelines are complementary to the EBA Guidelines on the PD estimation, LGD estimation and the treatment of defaulted exposures, which clarify how to adjust LGD estimates to recognise the effects of collateral (i.e. funded credit protection other than netting).

The EBA has granted one extra year, until 1 January 2022, to the final implementation date of these Guidelines to align with the proposal of the EBA progress Report on the IRB roadmap.

Legal basis, implementation and next steps

These Guidelines have been drafted in accordance with Article 16 of Regulation (EU) No 1093/2010 (EBA Founding Regulation), which mandates the Authority to issue guidelines addressed to all competent authorities or all financial institutions and issue recommendations to one or more competent authorities or to one or more financial institutions, with a view to establishing consistent, efficient and effective supervisory practices within the European System of Financial Supervision (ESFS), and to ensuring the common, uniform and consistent application of Union law.

The Guidelines will apply as of 1 January 2022, at the latest, but earlier implementation is encouraged. Institutions should engage with their competent authorities at an early stage in order to determine an adequate implementation plan, including the timeline for the supervisory assessment and approval of material model changes, where necessary.

 

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Franca Rosa Congiu

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