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When using the Internal-Ratings-Based approach (IRB) to estimate risk parameters such as the probability of default (PD), the loss given default (LGD) and the conversion factor (CF), institutions may ask Competent Authorities (CA) to use shorter data series, namely data covering a period of minimum two years instead of the required five years.
The use of the waiver is a supervisory tool that may be used to encourage the migration of some institutions to the IRB approach, which is considered more risk-sensitive than the Standardised Approach. The proposed RTS specify the conditions to be met by institutions when asking authorities permission to apply this data waiver. In doing so the proposed RTS take into account the increased uncertainty on the estimation of risk parameters as a consequence of using a shorter data history.
In particular, the EBA is proposing to introduce some conditions that would exclude from the waiver low-default portfolios and that would limit its application to a small proportion of assets. In order to further mitigate the risks associated with shorter data series, the proposed RTS also highlight the importance of applying an appropriate margin of conservatism to parameter estimates, as well as ensuring an enhanced data vetting process. Finally, institutions should prove that relevant datasets covering longer time series are not available.
These RTS ensure the application of proportionality principles, as well as legal clarity. In this respect, the EBA underlined that the proposed data waiver not be perceived as having the effect to repeal data waiver permissions already in force.
Comments to this consultation can be sent to the EBA by 7 June 2014. A public hearing will take place at the EBA premises on 27 May 2014 from 10:00 to 12:00 hours UK time.