EBA · 2024_7044 Rejected question

Interaction of the structure of the rating system and homogeneity requirements with conservatism in the application of risk parameters

Regulation
Regulation (EU) No 575/2013 (CRR)
Article
170, para. 1, 3.c
Topic
Credit risk
Submitted by
Credit institution
Submitted
2024-03-26
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Question

Considering a rating structure defined according to article 170 of CRR, would the consideration of conservatism in the application of risk parameters alter such structure? In particular, do homogeneity analyses need to be conducted before or after the consideration of the conservatism in the application of risk parameters described in section 8.1 of the EBA/GL/2017/16?

Background

Following the structure of the EBA/GL/2017/16, risk differentiation and risk quantification processes (including the quantification of margins of conservatism) lead to determine the structure of the rating system, including the assignment of exposures to grade or pools and the quantification of risk associated to such grades/pools. In addition, the EBA/GL/2017/16 consider an additional step, which is the consideration of conservatism in the application of risk parameters. The question is whether in this posterior step the structure of the rating system can be altered. For instance, consider the application of a 10% add-on on PDs whose underlying rating/score is outdated. Would this lead to the generation of additional grades/pools? If so, do homogeneity analyses need to be conducted over this potential new grading structure?
No answer published yet.

Original source: European Banking Authority, Q&A ID 2024_7044

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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