The European Banking Authority (EBA) launches today a consultation on draft Regulatory Technical Standards (RTS) on the conditions according to which competent authorities (CAs) may grant institutions permission to use relevant data covering shorter time series (data waiver permission), when estimating risk parameters. These RTS will be part of the Single Rulebook aimed at enhancing regulatory harmonisation in the banking sector in the European Union. The consultation runs until 7 June 2014.
When using the Internal-Ratings-Based approach (IRB) to estimate risk parameters such as the probability of default (PD), the loss given default (LGD) and the conversion factor (CF), institutions may ask Competent Authorities (CA) to use shorter data series, namely data covering a period of minimum two years instead of the required five years.
The use of the waiver is a supervisory tool that may be used to encourage the migration of some institutions to the IRB approach, which is considered more risk-sensitive than the Standardised Approach. The proposed RTS specify the conditions to be met by institutions when asking authorities permission to apply this data waiver. In doing so the proposed RTS take into account the increased uncertainty on the estimation of risk parameters as a consequence of using a shorter data history.
In particular, the EBA is proposing to introduce some conditions that would exclude from the waiver low-default portfolios and that would limit its application to a small proportion of assets. In order to further mitigate the risks associated with shorter data series, the proposed RTS also highlight the importance of applying an appropriate margin of conservatism to parameter estimates, as well as ensuring an enhanced data vetting process. Finally, institutions should prove that relevant datasets covering longer time series are not available.
These RTS ensure the application of proportionality principles, as well as legal clarity. In this respect, the EBA underlined that the proposed data waiver not be perceived as having the effect to repeal data waiver permissions already in force.
Comments to this consultation can be sent to the EBA by clicking on the "send your comments" button on the consultation page. Please note that the deadline for the submission of comments is 7 June 2014.
All contributions received will be published following the close of the consultation, unless requested otherwise.
A public hearing will take place at the EBA premises on 27 May 2014 from 10:00 to 12:00 hours UK time.
The proposed draft RTS have been developed on the basis of Regulation of Regulation (EU) 575/2013 (Capital Requirements Regulation – CRR). The EBA is expected to submit these draft RTS to the European Commission for endorsement by 31 December 2014
- Banking Stakeholder Group
- French Banking Federation
- German Banking Industry Committee
- Irish Banking Federation
- Lloyds Banking Group