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  • European Banking Authority Consults on Standards for Estimating and Identifying an Economic Downturn in IRB Modelling

    05/22/2018
    The European Banking Authority has launched two consultations on standards for estimation and identification of an economic downturn in Internal Ratings Based modelling.

    The first consultation sets out draft Regulatory Technical Standards on the specification of the nature, severity and duration of an economic downturn in accordance with the Capital Requirements Regulation. The nature of the economic downturn is defined as a set of relevant economic factors and its severity is specified via the most severe values observed on the relevant economic factors over a given historical period. The duration of an economic downturn is specified using the concept of a "downturn period", namely the period of time where the peaks or troughs, which relate to the most severe values of one or several economic factors, are observed. The aim of the RTS is to ensure that institutions using the IRB approach can use a well-defined and common specification of the nature, duration and severity of an economic downturn for portfolios relating to comparable types of exposure.

    The second consultation is on a set of draft Guidelines specifying how loss given default (LGD) estimates appropriate for an economic downturn - identified in accordance with the draft RTS on economic downturn - should be quantified, taking into account the specificities of institutions' processes, underwriting standards and general response to adverse economic conditions. The draft Guidelines will supplement the existing EBA Guidelines on Probability of Default, LGD estimation and treatment of defaulted assets.

    Comments on both consultations are invited by June 22, 2018.

    View the consultation on draft RTS.

    View the consultation on draft Guidelines.