EBA consults on guidelines on application of IRB approach

The EBA has published a consultation paper on its draft guidelines on the estimation of risk parameters for non-defaulted exposures, namely of the probability of default (PD) and the loss given default (LGD), and on the treatment of defaulted assets.

The draft guidelines are part of the review of the internal ratings-based (IRB) approach, aimed at reducing the variability in the outcomes of internal models while preserving the risk sensitivity of capital requirements.

The draft guidelines detail the estimation of PD and LGD parameters for non-defaulted exposures, including specification of main definitions, requirements for the data used and clarifications on modelling techniques. In case of defaulted assets, the guidelines provide clarification on the estimation of risk parameters such as best estimate of expected loss (ELBE) and LGD in-default based on the requirements specified for the LGD for non-defaulted exposures.

Additionally, the guidelines specify other aspects that are common to all risk parameters, such as the judgmental component when developing and applying internal models, the appropriate level of conservatism that should be included in risk parameters, as well as the need for regular reviews of the models.

Considering the material changes to numerous rating systems that the guidelines may entail, the EBA intends to implement the changes end-2020.

Comments are due by 10 February 2017.