On 21 June 2022, the European Banking Authority (EBA) published four draft principles to support supervisory efforts in assessing the representativeness of COVID-19–impacted data for banks, using internal ratings based (IRB) models. These principles will be part of a supervisory handbook, which the EBA will publish later this year, with the objective to ensure a harmonised approach in the use of COVID-19 data, especially where the use of moratoria and other public measures may have led to changes in default rates.

The draft principles are based, in part, on the EBA guidelines on probability of default (PD) and loss given default (LGD), are as follows:

  • Principle 1: Clarifies that the guidance on the assessment of data representativeness laid down in the EBA guidelines on PD and LGD should be applied also in the case of COVID-19-impacted data.
  • Principle 2: Clarifies that a significant decrease in applied IRB risk parameters compared to the pre-crisis levels indicates a potential lack of representativeness and should be analysed in more depth.
  • Principle 3: Deals with the default and loss rates observed during the COVID-19  pandemic and clarified that in case of non-representativeness of such rates, a recalibration should be postponed to lower long run averages.
  • Principle 4: Tackles the validation and recalibration of downturn LGD in the context of the COBID-19 pandemic. The EBA recommends that potential recalibrations be postponed at least until the effects of the crisis have fully materialised in the observed loss rates.