Changes from report parliamentary committee draft to plenary report

Added(90) Article 180 is amended as follows:

Added(a) paragraph 1 is amended as follows:

Added(i) the introductory sentence is replaced by the following:

Added‘In quantifying the risk parameters to be associated with rating grades or pools, institutions shall apply the following requirements specific to PD estimation to exposures to corporates, institutions and central governments and central banks:’;

Added(ii) point (h) is replaced by the following:

Added‘(h) irrespective of whether an institution is using external, internal, or pooled data sources, or a combination of the three, for its PD estimation, the length of the underlying historical observation period used shall be at least five years for at least one source.’;

Added(iii) the following point (i) is added:

Added‘(i) irrespective of the method used to estimate PD, institutions shall estimate a PD for each rating grade based on the observed historical average one-year default rate that is a simple average based on number of obligors (count weighted) and other approaches, including exposure-weighted averages, shall not be permitted.’;

Added(iv) the following subparagraph is added:

Added‘For the purposes of point (h), where the available observation period spans a longer period for any source, and this data is relevant, this longer period shall be used. The data shall be a representative mix of good and bad years relevant for the type of exposures. Subject to the permission of competent authorities, institutions which have not received the permission of the competent authority pursuant to Article 143 to use own estimates of LGDs or to use IRB-CCF, may use, when they implement the IRB Approach, relevant data covering a period of two years. The period to be covered shall increase by one year each year until relevant data cover a period of five years.’;

Added(b) paragraph 2 is amended as follows:

Added(i) point (a) is replaced by the following:

Added‘(a) institutions shall estimate PDs by obligor or facility grade or pool from long run averages of one-year default rates, and default rates shall be calculated at facility level only where the definition of default is applied at individual credit facility level pursuant to Article 178(1), second subparagraph;’

Added(ii) point (e) is replaced by the following:

Added‘(e) irrespective of whether an institution is using external, internal or pooled data sources, or a combination of the three, for its PD estimation, the length of the underlying historical observation period used shall be at least five years for at least one source.’;

Added(iii) the following subparagraph is added:

Added‘For the purposes of point (e), where the available observation spans a longer period for any source, and where those data are relevant, such longer period shall be used. The data shall be a representative mix of good and bad years of the economic cycle relevant for the type of exposures. The PD, for each rating grade, shall be based on the observed historical average one-year default rate that is a simple average based on the number of obligors (count weighted), or based on the number of facilities only where the definition of default is applied at individual credit facility level pursuant to Article 178(1), second subparagraph, and other approaches, including exposure-weighted averages, shall not be permitted. Subject to the permission of the competent authorities, institutions may use, when they implement the IRB Approach, relevant data covering a period of two years. The period to be covered shall increase by one year each year until relevant data cover a period of five years.’;

Added(c) paragraph 3 is replaced by the following:

Added‘EBA shall develop draft regulatory technical standards to specify the methodologies in accordance with which competent authorities shall assess the methodology of an institution for estimating PD pursuant to Article 143.

AddedEBA shall submit those draft regulatory technical standards to the Commission by 31 December 2025.

AddedPower is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.’;

Added(91) Article 181 is amended as follows:

Added(a) paragraph 1 is amended as follows:

Added(i) points (c) to (g) are replaced by the following:

Added‘(c) an institution shall consider the extent of any dependence between, on the one hand, the risk of the obligor and, on the other hand, that of funded credit protection, other than master netting agreements and on-balance sheet netting of loans and deposits, or its provider.;

Added(d) currency mismatches between the underlying obligation and the funded credit protection other than master netting agreements and on-balance sheet netting of loans and deposits shall be treated conservatively in the institution's assessment of LGD;’

Added(e) to the extent that LGD estimates take into account the existence of funded credit protection other than master netting agreements and on-balance sheet netting of loans and deposits, those estimates shall not solely be based on the estimated market value of the funded credit protection.;

Added(f) to the extent that LGD estimates take into account the existence of funded credit protection other than master netting agreements and on-balance sheet netting of loans and deposits, institutions shall establish internal requirements for the management, legal certainty and risk management of that funded credit protection, and those requirements shall be generally consistent with those set out in Chapter 4, Section 3;

Added(g) to the extent that an institution recognises funded credit protection other than master netting agreements and on-balance sheet netting of loans and deposits for determining the exposure value for counterparty credit risk in accordance with Chapter 6, Section 5 or 6, any amount expected to be recovered from this funded credit protection shall not be taken into account in the LGD estimates;’;

Added(ii) point (i) is replaced by the following:

Added‘(i) to the extent that fees for late payments, imposed on the obligor before the time of default, have been capitalised in the institution's income statement, they shall be added to the institution's measure of exposure and loss;’;

Added▌

Added(iv) the following subparagraphs are added:

Added‘For the purposes of point (a), institutions shall adequately take into account recoveries realised in the course of the relevant recovery processes from any form of FCP as well as from UFCP not falling under the definition of Article 142, point (10).

AddedFor the purposes of point (c), cases where there is a significant degree of dependence shall be addressed in a conservative manner.

AddedFor the purposes of point (e), LGD estimates shall take into account the effect of the potential inability of institutions to expeditiously gain control of their collateral and liquidate it.’;

Added(b) paragraph 2 is amended as follows:

Added(i) in the first subparagraph, point (b) is replaced by the following;:

Added‘(b) reflect future drawings either in their conversion factors or in their LGD estimates. In case institutions include future additional drawings in their conversion factors, these should be taken into account in the LGD in both numerator and denominator. In case institutions do not include future additional drawings in their conversion factors, these should be taken into account in the LGD numerator only;’;

Added(ii) the second subparagraph is replaced by the following:

Added‘For retail exposures, estimates of LGD shall be based on data over a minimum of five years. Subject to the permission of the competent authorities, institutions may use, when they implement the IRB Approach, relevant data covering a period of two years. The period to be covered shall be increased by one year each year until the data concerned cover a period of five years.’;

Added(c) the following paragraphs added:

Added‘4. EBA shall, in accordance with Article 16 of Regulation (EU) No 1093/2010, issue guidelines to clarify the treatment of any form of funded and unfunded credit protection for the purposes of paragraph 1, point (a), and for the purposes of the application of the LGD parameters;

Added4a. For the purpose of calculating loss in accordance with point 2 of Article 5 with regard to cases that return to non-default status, the EBA shall issue updated guidelines until 31 December 2025, in accordance with Article 16 of Regulation (EU) No 1093/2010, specifying how artificial cash flow should be treated and consider the possibility of institutions only discounting the artificial cash flow over the actual period of default.’;

Added(92) Article 182 is amended as follows:

Added(a) ▌paragraph 1 is amended as follows:

Added(i) point (c) is replaced by the following:

Added‘(c) institutions’ IRB-CCF shall reflect the possibility of additional drawings by the obligor up to and after the time a default event is triggered▌;’;

Added(ii) the following points (g) and (h) are added:

Added‘(g) institutions’ IRB-CCF shall be estimated using a 12-month fixed-horizon approach▌;

Added(h) institutions’ IRB-CCF shall be based on reference data that reflect the obligor, facility and bank management practice characteristics of the exposures to which the estimates are applied.

Added(iii) the following subparagraphs are added:

Added‘For the purposes of point (c), the IRB-CCF shall incorporate a larger margin of conservatism where a stronger positive correlation can reasonably be expected between the default frequency and the magnitude of the conversion factor.

AddedFor the purposes of point (g), ▌each ▌default▌ shall be linked to relevant obligor and facility characteristics at the fixed reference date defined as 12 months prior to the date of default▌.

AddedFor the purposes of point (h), IRB-CCF applied to particular exposures shall not be based on data that comingle the effects of disparate characteristics or data from exposures that exhibit materially different risk characteristics. IRB-CCF shall be based on appropriately homogenous segments. For that purpose, the following practices shall not be allowed or would request a detailed scrutiny and justification:

Added(a) SME/mid-market underlying data being applied to large corporate obligors;

Added(b) data from commitments with ‘small’ unused limit availability being applied to facilities with ‘large’ unused limit availability;

Added(c) data from delinquent obligors or blocked for further drawdowns at reference date being applied to obligors with no known delinquency or relevant restrictions;

Added(d) data that have been affected by changes in the obligors’ mix of borrowing and other credit-related products over the observation period unless those data have been effectively adjusted by removing the effects of the changes in the product mix.

AddedFor the purposes of the fourth subparagraph, point (d), institutions shall demonstrate to the competent authorities that they have a detailed understanding of the impact of changes in customer product mix on the exposures reference data sets and associated CCF estimates, and that the impact is immaterial or has been effectively mitigated within their estimation process. In that regard, the following shall not be deemed appropriate: