The European Banking Authority (EBA) has published a consultation paper regarding draft Regulatory Technical Standards (RTS) on the specification of the nature, severity and duration of an economic downturn in accordance with Articles 181(3)(a) and 182(4)(a) of the Capital Requirements Regulation (CRR).
Articles 181(3)(a) and 182(4)(a) of the CRR provide that institutions shall use the loss given default (LGD) and conversion factor (CF) estimates that are appropriate for an economic downturn if those are more conservative than the respective long-run average. In this regard, Article 181(3)(a) and Article 182(4)(a) of the CRR mandate the EBA to specify the downturn conditions, namely the nature, severity and duration of an economic downturn, according to which institutions shall estimate respectively the downturn LGDs and conversion factors.
The draft RTS specify the three characteristics of the economic downturn, namely its nature, severity and duration but they do not cover the methods used by institutions to reflect these downturn conditions into downturn LGD and CF estimates.
The draft RTS provide a further element in the EBA’s review of the internal ratings based approach and, together with the EBA guidance on estimating downturn LGD provided in the Guidelines on PD estimation, LGD estimation and the treatment of defaulted assets, it aims to reduce unjustified variability in capital requirements.
The deadline for comments on the consultation is 29 May 2017. The feedback from the consultation will be analysed and the EBA will subsequently discuss the final draft RTS to be submitted to the European Commission for endorsement.
View EBA consults on specification of an economic downturn, 1 March 2017