EBA欧洲银行-EBA-BS-2018-xxx-28Final-draft-RTS-on-economic-downturn29_final-2800229_37页_970kb

Summary of EBA/RTS/2018/04: Final Draft Regulatory Technical Standards on Economic Downturn Specification

Core Content

The EBA/RTS/2018/04 document outlines the Final Draft Regulatory Technical Standards (RTS) on the specification of the nature, severity, and duration of an economic downturn, in accordance with Articles 181(3)(a) and 182(4)(a) of Regulation (EU) No 575/2013 (CRR). The aim is to provide a harmonised and consistent definition of economic downturns for use in Loss Given Default (LGD) and Conversion Factor (CF) estimations, which are required to be more conservative than long-run averages under the Basel II framework.

The RTS are designed to be independent of the specific LGD or CF estimation methodologies used by institutions, and instead focus on the identification of downturn periods. These standards are part of a broader regulatory effort to ensure that risk-weighted assets (RWAs) are calculated in a consistent and comparable manner, reducing variability and improving the accuracy of capital requirements.

Main Points

1. Definition of Economic Downturn

• An economic downturn is defined by three key characteristics: nature, severity, and duration.
• The nature of an economic downturn is determined by relevant economic factors (e.g., GDP, unemployment, productivity index) that are explanatory variables or indicators of the business cycle for the type of exposure.
• The severity is defined as the most severe values observed for these economic factors over a historical period.
• The duration refers to the length of time during which these severe conditions occur, typically 12 months, but can be longer if the downturn is prolonged or if adjacent peaks/troughs are linked to the same economic condition.

2. Downturn Periods

• A downturn period is a 12-month period during which the most severe values of one or more economic factors are reached simultaneously or shortly after each other.
• If the most severe values are not simultaneous, but are caused by the same economic condition, the duration may be extended.
• Institutions must identify and update the downturn periods annually for each type of exposure.

3. Economic Factors

• The list of relevant economic factors is defined in Article 2 and includes factors like GDP, unemployment rate, and productivity index, depending on the type of exposure.
• Institutions must consider geographical and sectoral distribution of exposures when selecting economic factors.
• The RTS do not prescribe the estimation methodologies for LGD and CF under downturn conditions, but provide guidance in separate guidelines (GL).

4. Severity Calculation

• The severity of an economic downturn is determined by the worst 12-month average for each economic factor.
• If the severity is not observed over a 20-year period, institutions may use longer time series to ensure accuracy.
• The severity is based on observed historical values, not on the institution’s own loss experience.

5. Duration Considerations

• The duration of a downturn period is 12 months by default.
• It may be extended if:
  • The severities of different economic factors are correlated (Article 4(2)(b)), or
  • There are adjacent peaks/troughs due to the same economic condition (Article 4(2)(c)).
• The duration should not be unreasonably long, as it should reflect cyclical downturns, not structural changes.

6. Implementation and Timeline

• The draft RTS will be submitted to the Commission for endorsement before publication in the Official Journal of the European Union.
• The technical standards will apply from 1 January 2021, allowing institutions time to prepare and integrate the approach into their existing models.

Key Information

• Economic downturn is a multi-dimensional concept, defined by nature, severity, and duration.
• The RTS do not cover LGD and CF estimation methodologies, but provide guidance in separate GL.
• Downturn periods are identified based on historical data (typically 20 years) and economic factor performance.
• Institutions are required to review and update their downturn specifications annually.
• Harmonisation is a key objective, ensuring that similar exposures are treated consistently across institutions.

Structure of the RTS

Conclusion

These RTS aim to standardise the identification of economic downturns for use in LGD and CF estimations, ensuring consistency, comparability, and harmonisation across institutions. While the RTS define the parameters of a downturn, the impact on loss data is addressed in separate guidelines, which will be published later. The final implementation is set for 2021, giving institutions time to adapt.