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These draft RTS are part of the EBA's broader work on the review of the IRB approach aimed at reducing the unjustified variability in the outcomes of internal models, while preserving the risk sensitivity of capital requirements.
In particular, these draft RTS specify the three conditions - nature, severity and duration - of an economic downturn and propose a methodological approach to identify them. This approach assumes that downturn economic conditions are driven by macroeconomic and credit factors and should be analysed at the level of model components.
In line with the mandate laid down in the Capital Requirements Regulation (CRR), these draft RTS specify a methodological approach to identify the economic downturn conditions, but they do not cover the methods used by institutions to reflect such conditions into downturn LGD and CF estimates. The consultation paper is, therefore, proposing in a separate section a method to be used regarding the LGD parameter as a proposed amendment to the downturn adjustment section of the Guidelines on PD and LGD estimation and the treatment of defaulted assets.
Given the relatively high degree of prescriptiveness of the proposed model component approach, which is likely to require substantial resources both from institutions and supervisors when it comes to its implementation, the EBA is also seeking feedback on two simpler alternative approaches to formulate supervisory expectations towards downturn LGD estimation, namely the reference value approach and the supervisory add-on approach.
Comments to this consultation can be sent to the EBA by 29 May 2017. A public hearing will then take place at the EBA premises on 4 April 2017 from 14:00 to 16:00 UK time.