EBA · 2025_7634 Rejected question

Clarification on the relationship between Margin of Conservatism (MoC) and rating/calibration philosophy (PIT vs TTC) under EBA Guidelines on PD and LGD estimation (EBA/GL/2017/16)

Regulation
Regulation (EU) No 575/2013 (CRR)
Article
179, para. 1
Topic
Credit risk
Submitted by
Individual
Submitted
2025-11-26
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Question

According to the EBA Guidelines on PD and LGD estimation (EBA/GL/2017/16), the Margin of Conservatism (MoC) aims to address uncertainty arising from data and methodological deficiencies, changes in underwriting standards or risk appetite, and general estimation error. The Guidelines describe the three MoC categories (A, B, C) and the principles for quantification, but they do not explicitly refer to any link between MoC and the chosen rating philosophy (Point-in-Time vs Through-the-Cycle) or calibration philosophy. Could you please clarify whether the regulator expects the MoC concept to be aligned with the institution’s PIT/TTC philosophy, or whether MoC is entirely independent of the rating/calibration philosophy?

Background

My current interpretation is that MoC is required in all cases, regardless of the chosen philosophy, because estimation uncertainty and data/methodological deficiencies can occur under any EBA-compliant approach. However, rating philosophy influences PD volatility and calibration, which may indirectly affect the magnitude of MoC. I would appreciate confirmation that MoC is not philosophy-specific but rather based solely on identified sources of uncertainty.
No answer published yet.

Original source: European Banking Authority, Q&A ID 2025_7634

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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