On 20th November 2017 the European Banking Authority (EBA) published its Guidelines on the estimation of risk parameters for non-defaulted exposures. This concerns namely of the probability of default (PD) and the loss given default (LGD), and includes also the treatment of defaulted exposures under the advanced IRB Approach.
The EBA guidelines represent the part of its task aimed to curb the sources of discrepancies in the area of modelling, particularly non-risk-based variability, given by large flexibility of the IRB Framework and different understanding of regulatory requirements. The guidelines thus focus on aligning terminology and definitions, in particular in relation to such as default rate or realised LGD, provide clarification of certain regulatory requirements and specify principles for the estimation of risk parameters, including those applicable to defaulted exposures. The requirements regarding the estimation of downturn LGD have not been included in the GL at this stage as they are still under development.
The guidelines are part of the full review of internal models for credit risk which should be implemented by end-2020. It is expected, however, that institutions immediately initiate preparations to implement the guidelines.
15-12-2017