THE ECB TRIM AND THE REVISED STANDARDISED APPROACH: FORWARD-LOOKING THEMES IN CREDIT RISK MANAGEMENT. June 2016

Transcription

1 THE ECB TRIM AND THE REVISED STANDARDISED APPROACH: FORWARD-LOOKING THEMES IN CREDIT RISK MANAGEMENT

2 Regulatory framework Pillar I to BRRD Capital ratios Supervisory Framework Classification RWA Supervisory Validation CRR Compliance Actuals Forecast IRB Framework SREP Base Scenario Stress Scenario Supervisory Stress Tests Risks to Capital Pillar I Pillar II BRRD Institution Capital Adequacy Recovery Scenario Resolution Severity Page 2

3 Capital Adequacy and Provisioning Basel III, Basel IV and IFRS9 CRR/BCBS CRD4/ SREP EBA RTS /Guidelines ECB IRB Validation framework BCBS IRB2.0 +Sovereign Review BCBS STD 3.0 BCBS Capital Floors Stress testing Note CRM GLs/RTS on Definition/Materiality of GLs on PD/LGD/ELBE estimation Default RTS on AIRB Assessment Methodology ICAAP Final BCBS Revision QIS Final BCBS Revision Calibration Final BCBS Revision EBA SREP GL applicable EBA/SREP ST Target review of Internal Models CRR alignment with BCBS finalisation of Basel IV Phase-in of Capital Buffers IRB Model Permission/Roll-Out under CP 2014/36 standards SREP ST EBA/SREP ST IFRS9-based projections IRB RWA under Basel IV Standards STD RWA under Basel IV Standards IRB RWA floored by Basel IV STD Final Basel III regime SREP ST Future of IRB Approach in scope of current CRR Kick-off of 3- year cycles of Re- Validation /Approval TBD Convergence of the CRR to BCBS Basel IV Conjoint with whole Basel IV Pillar I overhaul EBA/ECB 2016 stress tests leading to SREP Capital actions IFRS9 Staging Impairment Implementation Implementation Validation /Audit Validation /Audit Go-live Requirement for scenario sensitivity IRB/ICAAPstyle governance Scheduled/Indutry practices CRR transition to Basel IV Basel IV regime for credit risk Page 3

4 The IRB Approach A re-stated forward-looking view EBA CP 2014/36 re-states the requirement for a forward-looking long-run calibration of IRB parameters aimed at achieving stable risk estimates through stress. Risk Parameters Downturn LGD vs Stress LGDPit Downturn LGD/EAD calibration No more Lehman? Unconditional PIT Through-The- Cycle vs Long- Run Stressed PD long-run calibration Forward-looking long-run calibration Long-Run Average Reporting Date Back to pre-crisis levels? Coverage of full economic cycle 10 Historical IRB data 15 Scenario Mean reversion Year Page 4

5 The IRB Approach harmonised in the TRIM-led medium-term path IRB model impact CRR/EBA PD LGD RWA/EL-Shortfall impact CP 2014/32 Past-due Materiality Threshold GL 2015/15 Implementation of CRR default definition Implement new Definition of Default on books Conjoint re-calibrate all AIRB models: backward adjustment based on re-shape of historical default (definition and thresholds) (aggregate adjustments are envisaged and permitted) PD LGD/RW harmonised rules for Retail facility-level Default RWA/EL- Shortfall Required increase in Default book and PD Acknowledged Anticonservative impact on LGD and RW for performing book Acknowledged anticonservative impact on LGD for the Default Book Overall net effect on capital requirements expected to be conservative CP 2014/36 Risk Quantification + Stress tests used in assessment of capital adequacy Grade-level long-run calibration to yield stable PDs throughout a full cycle, including a stress period Review of guarantor rating models LGD re-calculation on pooled multiple default events including all incomplete workouts from PD sample In-default LGD review and fine tuning PD LGD/ELBE RWA/EL- Shortfall Further revised PDs for IRB rating systems reviewed against stress test impacts LGD and LGD in default review directional with latest 5-year restructuring/workout performance Overall net effect on capital requirements expected to be conservative Review of conservatism factors (e.g. model risk) Intrinsically conservative Page 5

6 The IRB Approach by the definition of Default The review of the Definition of Default has a two-fold impact on Book and parameters. An estimation of the overall impact is underway at the EBA with the QIS in scope of final Guidelines. IRB Risk Parameters Expected Loss PD LGD EL 100% 50% 35% 2.5% 7% 5% Performing Book Default Book Page 6

7 The IRB Approach LGD Quantification LGD Quantification will be required to be consistent with PD quantification in terms of calibration sample. Incomplete Workouts are prescribed to be discounted, conservatively considering future net recoveries. LGD EAD «Textbook» LGD LGD Closed Defaults Incomplete Workouts Cure Workout IRB Sample cutoff IRB LGD EAD LGD EAD LGD LGD LGD for Incomplete Workouts Year Page 7

8 The IRB Approach and PD Quantification The calibration of PD models requires a long-run calibration covering a full economic cycle, including stress effects. Further guidance is to be released by the EBA and BCBS on calibration technicalities (e.g. grade-level vs. portfolio-level). Coverage of full economic cycle 12-M performance window DR T Stable IRB Calibration DR - n Sample Central Tendency Long-run Central Tendency DR 2 Long-run DR - DR -1 DR 1 IRB Sample cutoff Backward extrapolation Historical IRB data Stress Year Page 8

9 The IRB and Standardised Approaches as a bridge to Basel IV. Adjustments to CRR-consistent EBA guidelines/thinking is in line with IRB modelling fine-tuning advocated in the BCBS revision to the IRB Approach. The scale of final IRB Requirements will be impacted by final SA-based floors and finalisation of extra-modelling BCBS IRB Approach design % 3 Floors LDP removal 80% Basel I Floor Conservative harmonisation without raising overall capital requirements Range of Floor calibration under consideration by the BCBS* 60% New permanent SA Floor regime Further add-on to risksensitive harmonisation achieved with IRB modelling standardisation SA AS-IS IRBA AS-IS IRBA CRR/EBA Revised SA BCBS IRB2.0 Institution-specific impact Possible market-specific impact * BCBS Reducing variation in credit risk-weighted assets constraints on the use of internal model approaches, March Page 9

10 Regulatory framework Forward-looking credit risk management themes Harmonised stable capital requirements Pricing Forward- Looking provisioning Enhanced Capital Management Framework Basel Classification IFRS9 Fair-Value Accounting Early Warning Capital Allocation Segment/ Product Focus Credit Line Redesign Expected Lifetime ACPM Page 10

11 Thank You Page 11

12 Annex Page 12

13 The IRB Approach An upcoming path of conservative harmonisation The EBA 2013 study on the comparability of the risk estimates and capital requirements revealed significant discrepancies in risk estimates and capital requirements that do not stem from differences in the underlying risk profiles: The IRB framework has proven its validity as a risk sensitive method of measuring capital requirements, and it also encourages institutions to implement sound and sophisticated internal risk management practices; However, the very high degree of flexibility permitted under the approach has compromised comparability in capital requirements. Differences in definitions Differences in modelling choices Differences in supervisory assessment of models Differences in supervisory measures Weak comparability and consistency of model based risk-weighted assets Page 13

14 The IRB Approach regulated by short-term Regulation enhancements The EBA Technical Standards and Guidelines on the IRB Approach scheduled for release until mid 2017 are aimed at harmonising key drivers of RWA inhomogeneity as far as allowed by the CRR. Harmonised application within the CRR requirements Outstanding RTS Consultation IRB roll-out and Permanent Partial Use Definition of Default*: Past-Due Materiality threshold Implementation of the Default definition RTS on IRB Assessment Methodology Standard for the competent authorities in the assessment of compliance of minimum IRB requirements within CRR legislation. The ECB will review all supervised banks internal credit models. Benchmarking Future of the IRB Approach CRR scope The EBA plans to further harmonise risk estimates with the release of additional RTSs and Guidelines. The planned regulatory developments will impact: Definition of default PD and LGD calibration In Default LGD and ELBE Treatment of defaulted assets Scope of use of the IRB Approach * Due in July 2016, see EBA Press Newsletter,. Page 14

15 The IRB Approach and medium-term convergence to Basel IV IRB. Further key parts of the EBA agenda for improving comparability and reliability of internal models can be addressed in the medium term, withacrr review, to be in case undertaken in line with the finalisation of the BCBS proposals on the evolution of the IRB and Standardised approaches. CRR Review for Credit Risk Future of the IRB Approach CRR updates A more fundamental review of the IRB approach is also being considered, requiring a legislative change of the CRR The main issues to be addressed: LDP portfolios PPU Philosophy of rating models LGD calibration Internal approaches for Low-Default Portfolios deemed not more reliable than ECAI Ratings/Market valuations Remove the option to use the IRB approaches for certain (LDP) exposures; Where the IRB approaches remain available: adopt IRB-parameter floors further specification of parameter estimation practices BCBS constraints on the use of internal model approaches BCBS gradual and holistic review of Sovereign framework Page 15

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