AFME: Draft EBA RTS on the specification of an economic downturn

25 May 2017

The Association for Financial Markets in Europe welcomes the opportunity to respond to the EBA’s consultation on the draft RTS on the specification of the nature, severity and duration of an economic downturn.

AFME very much welcomes the EBA’s efforts to harmonise the IRB framework by defining the nature, severity and duration of an economic downturn.

AFME recognises the complexity of such an exercise, particularly as there are likely to be diverging points of view on this technical issue, both within the regulatory community and industry.

Nevertheless, AFME wishes to stress that the importance of the choices that will be made with respect to downturn LGDs:

• The way downturn LGD will be defined has a linear impact on the level of banks’ RWAs as LGD is a multiplying coefficient of RWA;
• There will be knock-on effects on the starting point for modelling forward-looking LGDs and therefore on the level of banks’ provisions.

Therefore, while the issues raised in this consultation are of a technical and granular nature, the impacts of the outcome could be significant and should not be underestimated.

Moreover, the technical debate should also, to the extent possible, factor in (or not contradict) the Basel Committee’s expectations for greater model simplicity. Finally, the definition of downturn estimation methodologies must reflect the specificities of models applicable to critical portfolios such as banks, sovereigns and specialised lending exposures.

Full consultation response

© AFME