EBA · 2023_6794 Rejected question

Consideration of default dependencies for MoC C quantification

Regulation
Regulation (EU) No 575/2013 (CRR)
Article
179, para. 1
Topic
Credit risk
Submitted by
Individual
Submitted
2023-05-09
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Question

Do financial institutions have to incorporate the variability of the macro-economic factor (of the Vasicek model) into the quantification of the MoC C? In other words, do financial institutions have to incorporate default dependencies between obligors into the MoC C quantification?

Background

The European banking regulation currently seeks to reduce the unjustified variability in estimates of risk parameters (and, ultimately, in own funds requirements) stemming from different modelling practices and interpretations of fundamental concepts across IRBA banks. Despite this objective of homogenization and despite the general nature of the MoC C, the EBA Guidelines on PD estimation, LGD estimation and the treatment of defaulted exposures do “not impose a fixed methodology, which might for example lead to disproportionate MoC for low default portfolios”. This lack of regulatory guidance on how to quantify the MoC C could give rise to unwarranted RWA variability.
No answer published yet.

Original source: European Banking Authority, Q&A ID 2023_6794

This Q&A is published by European Banking Authority and is non-binding. It does not constitute legal advice. Updated weekly from official ESA sources.

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