The European Banking Authority (EBA) has published a Consultation Paper on draft Regulatory Technical Standards (RTS) specifying conditions according to which competent authorities may permit institutions to use relevant data covering shorter time periods (data waiver permissions).
Articles 180, 181 and 182 of the Capital Requirements Regulation (CRR) require the EBA to develop draft RTS specifying the conditions according to which competent authorities may grant permission to institutions to use relevant data covering a period of two years rather than five years. It would cover probability of default, own-loss given default and own-conversion factor estimates for certain types of exposures in circumstances when they implement the internal rating based (IRB) approach.
In the Consultation Paper, the EBA recognises the increased uncertainty of the estimation of risk parameters that result from the use of a shorter data history. Therefore, to limit the potential implications for the calculation of own funds requirements, the EBA proposes to introduce limiting conditions for the use of the data waiver principally by excluding low-default portfolios as well as restricting the application of the data waiver to a limited proportion of assets. To further mitigate the risks associated with using shorter data series, the EBA’s proposals also highlight the importance of applying an appropriate margin of conservatism to parameter estimates as well as ensuring that there is an enhanced data vetting process. The EBA has also concluded that after five years of internal ratings based approach implementation, sufficient data history should already be available. Therefore permission for data waiver should not be allowed after five years have elapsed from the initial permission granted to an institution.
The deadline for comments on the Consultation Paper is 7 June 2014. The EBA is required to submit the draft RTS to the European Commission by 31 December 2014.
View Consultation Paper – Draft Regulatory Technical Standards specifying conditions according to which competent authorities may permit institutions to use relevant data covering shorter time period (data waiver permission), 7 March 2014