The European Banking Authority (EBA) published a report assessing the current Credit Risk Mitigation (CRM) framework. This is the fourth (and last) phase of the EBA’s supervisory roadmap of the internal rating-based (IRM) approach. The report includes also clarifications both on the definition and the modeling approaches of credit risk, untying along the review of the old supervisory practices.
The Report elucidates the application of the Capital Requirements Regulation (CRR) regarding CRM by mapping the techniques, eligibility and method that are available to the institutions both under the Standardized Approach and the Foundation-IRB approach. The report highlighted the need for further guidance in the application of the CRM procedure under the Advanced-IRB (A-IRB) Approach.
This need agrees with the feedback received from the industry: a set of guidelines detailing the use of current CRM provisions for A-IRB banks would be particularly useful to help eliminate the remaining significant differences in approaches in the area of CRM either due to different supervisory practices or bank-specific choices.
The mandates for technical standards in the CRM area include three different Regulatory Technical Standards (RTS): the recognition of conditional guarantees RTS, the liquid assets RTS and the internal models approach for master netting agreements RTS. The European Banking Authority states that such mandates cover only peculiar aspects of the regulatory framework, which are not expected to have a significant impact on the calculation of capital requirements for credit risk by institutions nor on their rating systems. Fulfilling these three mandates, instead of undertaking an analysis of the overall CRM framework, would run the risk of having disproportionate regulation with limited benefits.
Specifically on the RTS on liquid assets mandate, the EBA recommends this be deleted from the CRR, while on the other two RTS, the EBA will be continuously monitoring the need to deliver on these mandates also in light of international developments in this regulatory area.