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EBA publishes credit risk and market risk updates

This week the European Banking Authority (EBA) published a couple of new documents focused on the approach financial institutions take to both credit risk and market risk.

Credit risk mitigation guidelines

Firstly, the EBA has published its final guidelines on credit risk mitigation (CRM) in the context of the advanced internal ratings-based (A-IRB) approach. These guidelines, which are part of the EBA’s regulatory review of the IRB approach, aim to eliminate the remaining significant differences in approaches in the area of CRM, which are due to either different supervisory practices or bank-specific choices. The EBA says these guidelines complement the EBA Report on CRM, which focuses on the standardised approach (SA) and the foundation-IRB approach (F-IRB). 

The guidelines clarify the application of the CRM provisions currently laid down in the Capital Requirements Regulation (CRR) applicable to institutions using the A-IRB Approach. In particular, they clarify the eligibility requirements for different CRM techniques, namely funded and unfunded credit protection (e.g. collateral and guarantees), available to institutions.

For funded credit protection, the guidelines provide a mapping to the eligibility requirements of legal certainty and collateral valuation applicable to institutions using the standardised approach (SA) and the foundation internal ratings-based (F-IRB) approach. Specific guidance is also provided on other than immovable physical collateral for which the assessment of legal certainty is particularly challenging. 

The guidelines also clarify how institutions may recognise the effects of different CRM techniques for capital requirement purposes. In particular, for unfunded credit protection they clarify the set of compliant approaches that are available to institutions to recognise the effects of the credit protection by adjusting their risk parameter estimates. Moreover, the guidelines clarify how to recognise the effects of funded credit protection based on netting. 

The EBA has granted one extra year, until 1 January 2022, to the final implementation date of these Guidelines to align with the proposal of the EBA progress Report on the IRB roadmap.

Market risk reporting requirements

This week the EBA has also published its final draft Implementing Technical Standards (ITS) on specific reporting requirements for market risk. These ITS introduce the first elements of the Fundamental Review of the Trading Book (FRTB) into the EU prudential framework by means of a reporting requirement. The ITS are expected to apply from September 2021.

The specific reporting requirements for market risk include a thresholds template, providing insights into the size of institutions’ trading books and the volume of their business subject to market risk, and a summary template, reflecting the own funds requirements under the alternative standardised approach for market risk (MKR-ASA). At a later stage, and in line with the mandate of Article 430b of the amended Capital Requirements Regulation (CRR), these reporting requirements will be complemented with details on the own funds requirements under the MKR-ASA and the alternative internal model approach.

As announced in EBA Statement on the application of the prudential framework on targeted aspects in the area of market risk in response to the COVID-19 outbreak, published on 22 April 2020, the reporting requirements are expected to apply from September 2021. Those reporting requirements will become part of version 3.1 of the EBA reporting framework.


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