European Banking Authority Consults on Guidelines on Credit Risk Mitigation

The European Banking Authority has published a consultation paper concerning proposed guidelines on credit risk mitigation for firms using the advanced internal ratings based approach with own estimates for loss given default. The consultation follows the EBA's report on the CRM framework, published in March 2018, which should be read in conjunction with the consultation paper. Responses to the consultation should be submitted by May 25, 2019. The EBA notes that its work on technical advice for implementing Basel III may involve some changes to the CRM framework and that responses to this consultation will feed into that workstream. Likewise, the development of the final CRM guidelines will take into account that work.

CRM is a technique used by firms to reduce the credit risk associated with exposures that the firm continues to hold and applies, among other things, to collateral and some hedging instruments. The use of CRM techniques can attract a reduction in capital requirements for a firm. The proposed guidelines are intended to harmonize the approaches to CRM within the A-IRB under the Capital Requirements Regulation because different approaches have been adopted in Member States and by banks themselves, resulting in different own funds requirements for banks across the EU. The draft guidelines would apply to firms using the A-IRB approach, in particular those firms using LGD estimates. The draft guidelines set out the recognition of unfunded and funded credit protection and are intended to apply from January 1, 2021.

View the consultation paper.

View details of the report on the CRM Framework.

View the 2016 IRB Roadmap.
 
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