The European Banking Authority (EBA) has just closed the consultation period for its guidelines about probability of default (PD) and loss given default (LGD) estimation and the treatment of defaulted assets by banks. Prometeia, the global leader in Risk Management software and solutions, has been among the contributors.
The EBA consultation is part of the work of regulators on a global scale to reduce the excessive variability of internal models for credit risk management, not correlated to the inherent risks of banks. With regard to the internal models, alongside the EBA discussion, a regulatory review by the ECB’s Single Supervisory Mechanism and the regulatory proposals of the Basel Committee on the so-called ‘output floors’ are ongoing (as yet not finalised).
The topic EBA is requesting proposals upon to practioners and researchers is a well-recognized issue for Italian banks, that are asking not to be penalised in terms of capital requirements in the event of massive sales of bad loans, as is currently occurring due to the degradation of the LGD parameter, used in the credit risk internal models of the intermediaries. The EBA guidelines, if definitively approved, may impose tighter calculations of the LGD as from 2020.
Prometeia believes that the impact of the EBA guidelines might be relevant, especially due to a few indications on how to treat the sale of bad loans in terms of equity. Hence, it would be apt to provide for adjustments in order to sterilise the effect of sales on the risk parameters: there is but one general reference to this aspect in the document drawn up by EBA. Given the potential impact of the guidelines on risk-weighted capital and assets, Prometeia has also flagged to the authority the possibility of an impact analysis on the effects of the proposed changes.
In addition to that, here is a summary of some of the most relevant points addressed by Prometeia in its feedback to the EBA consultation paper on PD estimation, LGD estimation and the treatment of defaulted assets:
This article was first published on Bobsguide.com.
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