Discussion Paper on draft Regulatory Standards on Prudent Valuation

This discussion paper presents some preliminary views of the European Banking Authority (EBA) on the application of prudent valuation requirements to all positions that are measured at fair value, as provided for under Articles 31 and 100 of the draft Capital Requirements Regulation (CRR).  It also sets the EBA’s preliminary view on how valuation adjustments could in practice be applied by institutions in a consistent manner.

The inputs gathered from stakeholders will assist the EBA in the development of draft regulatory standards (RTS) on how these prudent valuation requirements should be applied. These RTS will also cover the analysis of the costs and benefits that the legal requirements will imply.

Background and process

Articles 31 and 100 of the fifth Council compromise version text from 11 May 2012 (the latest available version) of the draft CRR require institutions to apply prudent valuation standards to all positions that are measured at fair value when calculating the amount of their own funds. Any additional value adjustments necessary to reduce the fair value of those positions to the relevant prudent value, as calculated in accordance with the relevant accounting standards, should be deducted from common equity tier 1 capital.

The draft CRR mandates the EBA with the task of developing RTS to provide more details on how the standards set out in Article 100 should be applied. In particular, Article 100 lays out a number of valuation adjustments that should be considered when calculating a prudent valuation. The intended effect of these adjustments is to set valuations at a level that achieves an appropriate degree of certainty that the valuation used for regulatory purposes is not higher than the true realisable value. With this aim in mind, this paper considers the possibility of defining what the ‘appropriate degree of certainty’ or level of confidence is that the requirements wish to achieve in the adjusted valuation.

Consultation process

The EBA invites comments on the issues raised in this discussion paper (DP).

All interested stakeholders are requested to send their comments to the EBA by e-mail to DP-2012-03@eba.europa.eu by 13 January 2013, including the reference to ‘EBA/DP/2012/3’ in the subject field. Answers should be sent preferably both in PDF and Word formats.

Please note that comments submitted after the deadline, or sent to another e-mail address, will not be processed.

All contributions received will be published on the EBA’s website following the close of the consultation, unless requested otherwise.