EBA欧洲银行-EBA-BS-2012-79GL-on-IRC-_46页_712kb

EBA Guidelines on the Incremental Default and Migration Risk Charge (IRC)

Core Content

The EBA Guidelines on the Incremental Default and Migration Risk Charge (IRC), published in May 2012, are designed to ensure consistency and transparency in the application of the IRC across the European Union. These guidelines are based on the amendments to the Capital Requirements Directive (CRD III) and aim to complement the regulatory capital framework by addressing weaknesses in the risk management of credit institutions, particularly in relation to credit risk in the trading book.

The IRC is intended to capture incremental default risk and migration risk for unsecuritised credit products, providing a more robust capital requirement framework. The guidelines do not aim to be a comprehensive set of rules but rather offer additional clarity and direction for the application of the IRC, especially in the context of the Internal Model Approach (IMA).

Main Objectives

• Achieve a common understanding among competent authorities on IRC modelling to enhance supervisory convergence.
• Provide guidance on the compliance of IRC models with the CRD.
• Increase transparency for credit institutions in their risk management practices.
• Ensure a level playing field among institutions in terms of capital requirements.

Key Information and Requirements

I. Scope of Application

• Institutions subject to IRC are those using the IMA to calculate capital requirements for specific interest rate risk in the trading book.
• Excluded positions include securitisations, n-th-to-default credit derivatives, and certain correlation trading portfolio (CTP) positions.
• Included positions:
  • Bonds issued by central governments (sovereigns).
  • Structured bonds, credit-linked notes, or similar debt instruments that do not embed securitisation or n-th-to-default credit derivatives.
  • Money market loans.
  • Equity and equity derivatives, provided they are jointly managed and procedures for joint credit and equity risk are in place.
  • Own debt positions, where only migration risk is considered.

II. Individual Modelling

• Soundness standard for IRC models is a 1-year capital horizon and a 99.9% confidence interval.
• Documentation of all assumptions, estimation techniques, and proxy methods is required.
• Ratings can be internal or external, but must be consistent with IRB methodologies.
• Rating hierarchy must be documented, and ratings should be mapped into a common master scale.
• PDs and LGDs can be sourced from internal or external data, with the latter being acceptable if consistent with IRB standards.
• Risk-neutral PDs are not acceptable for observed PDs, unless corrected and validated against historical data.

III. Interdependence

• Correlation between default and migration events should be included in models and documented.
• Copula assumptions must be justified and based on historical tail events.
• Systemic risk factors can be used in combination with idiosyncratic factors, but the model must be conservative and adequately reflect interdependence.
• Transition matrices for rating migration should be based on historical data, with a minimum of 5 years. External sources are preferred when internal data is limited.
• Adjustments to transition matrices may be necessary if certain states (e.g., 'NR' or 'absorbing states') are included.
• Liquidity horizons and constant risk assumption are central to the IRC model, requiring rebalancing or rolling over positions to maintain consistent risk levels.

IV. P&L Valuation and Liquidity Horizon

• Rating changes should be translated into market price impacts and P&L calculations.
• Liquidity horizon must be defined and monitored, with key factors including the nature of the instruments and the institution's risk appetite.
• P&L valuation should reflect current market conditions, with losses calculated as of today, not considering the timing of events.

V. Validation and Implementation

• Validation of IRC models is required, with a focus on robustness, accuracy, and statistical consistency.
• Use tests must be conducted to ensure the model is applied correctly.
• Documentation is essential, covering all aspects of the model, including assumptions, data sources, and validation results.
• Frequency of calculation must be specified and aligned with the model's requirements.
• Non-compliant models should be addressed through appropriate adjustments or alternative approaches.
• Notification requirements mandate that competent authorities notify the EBA by 16.07.2012 whether they intend to comply with the guidelines or provide reasons for non-compliance.

Implementation and Compliance

• The guidelines are expected to be implemented within six months of their publication.
• Competent authorities must ensure effective compliance with the guidelines.
• The EBA Regulation (Article 16) requires competent authorities to incorporate these guidelines into their supervisory procedures.

Conclusion

The EBA Guidelines on the IRC are a critical step in aligning the regulatory capital framework with the evolving risk landscape in the trading book. They aim to ensure consistency, transparency, and robustness in the application of the IRC, while promoting a level playing field across EU institutions. The guidelines emphasize the importance of proper documentation, validation, and the use of appropriate models and data sources to capture credit risk accurately.