CP10 (Full Document) - European Banking Authority

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etween institution and client evolves in adverse circumstances, when the client may decide to draw unused commitments. Careful consideration of these aspects should therefore be an integral part of the CF estimation and validation processes. 243. Another consequence of this is that any use institutions might make of data gathered from external sources or across different time periods must be performed with care (see section 3.3.5. on external vendor models and section 3.4.4. on data sources) 244. Since a given percentage variation in exposure values results in an equal percentage change in capital charges, any approximation and/or shortcut that the institution decides to adopt should form an important aspect of validation and assessment. Definitions 245. Although not explicitly stated, the CRD treats the exposure value as consisting of two positions: the amount currently drawn and an estimate of future drawdowns of committed but untapped credit. The potential future drawdowns are described in terms of the proportion of the undrawn amount and are known as Conversion Factors (CF). 246. The definition of Conversion Factor is given in Article 4(28). The definition can be analysed by examining its components: · CFs shall be estimated for current commitments. Institutions are required to hold capital for commitments that they have currently taken on. · The CF shall be expressed as a percentage of the undrawn amount of the commitment. 247. Some institutions plan to use rating systems that estimate a ratio expressed as a percentage of the total commitment (totallimit ratio), rather than as a percentage of the undrawn amount of the commitment. Using a totallimit ratio is not compliant with the requirements of the CRD. Thus, the momentum approach in its simplest form does not comply with the requirements of the CRD. However, institutions might apply to receive approval for CFs derived from the momentum approach if they take into account the measures highlighted below. · The CF shall be zero or higher. 248. Even though it is not explicitly stated in the CRD, it is clear from the definition that CFs shall be zero or higher. This implies that the exposure value for any facility shall be no less than the exposure value as defined in Annex VII, Part 3, Paragraphs 1 to 10. If additional drawings after the time of default are not reflected in the Page 58 of 123
LGD estimation, they have to be taken into account in the estimation of CF whatever the method chosen. Time horizon 249. The above definition of Conversion Factor requires institutions to estimate how much of the currently undrawn amount will be drawn by the time of default. Thus calculating the Conversion Factor involves observing and comparing (at least) two points in time: the present time and the time of default. Estimated Conversion Factors are derived from realised Conversion Factors for defaulted exposures in the RDS. The time of default and the drawn amount at default of the exposures in the RDS can be observed directly. 250. At this point a very brief outline of four different approaches to measuring realised CFs is provided. The list is not meant to be exhaustive and does not preclude any other approach. Institutions are encouraged to develop approaches that best fit their specific business. In particular, the following descriptions do not relieve institutions of their responsibility to conduct their own analysis of which of the approaches described below (if any) best fits their business, or whether other approaches might be more appropriate. Similarly, they do not restrict the views of supervisory bodies concerning other methods, nor are they intended to hinder the development of more advanced methods of CF estimation. 251. Institutions should ensure that the points in time chosen for the calculation of realised CF in the RDS are appropriate for a oneyear horizon for estimating CFs. This might require considering sets of different time intervals preceding the time of default. • Cohort approach. The observation period is subdivided into time windows. For the purpose of realised CF calculations, the drawn amount at default is related to the drawn/undrawn amount at the beginning of the time window. 252. When using this approach, the institution shall use a cohort period of one year unless it can prove that a different period would be more conservative and more appropriate. · Fixedhorizon approach. The drawn amount at default is related to the drawn/undrawn amount at a fixed time prior to default. This approach implies the simplifying assumption that all exposures that will default during the chosen horizon will default at the same point in time: the end of the fixed horizon. 253. When using this approach, the institution shall use a fixed horizon of one year unless it can prove that another period would be more conservative and more appropriate. Page 59 of 123
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CEBS CP 10 11 July 2005 Guidelines
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ANNEXES ...........................
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to use these approaches. 6. The gui
Page 7 and 8: IRB approach can be given only if t
Page 9 and 10: approaches for regulatory purposes
Page 11 and 12: purposes, when the group has submit
Page 13 and 14: efficient running of the process, u
Page 15 and 16: and/or 105 of the CRD, subject to t
Page 17 and 18: 58. Institutions intending to move
Page 19 and 20: translated, supervisors will organi
Page 21 and 22: 76. The issues that supervisors are
Page 23 and 24: holding company, the competent auth
Page 25 and 26: · A new approval process shall not
Page 27 and 28: · Institutions may not be ready to
Page 29 and 30: 2. Asking institutions to notify su
Page 31 and 32: 116. ‘Immaterial’ should refer
Page 33 and 34: 128. The EU Council has proposed th
Page 35 and 36: should start with inputs, and those
Page 37 and 38: to be only broadly compliant with t
Page 39 and 40: institutions to be able to identify
Page 41 and 42: differentiated if their loss rates
Page 43 and 44: payments are originating from the s
Page 45 and 46: any of its subsidiaries in full, wi
Page 47 and 48: 197. As a general rule, the rating
Page 49 and 50: · Their discounting method results
Page 51 and 52: grades. In this case, all of the re
Page 53 and 54: of challenges, including choosing t
Page 55 and 56: 228. In principle, supervisors do n
Page 57: prices on defaulted exposures, and
Page 61 and 62: The exposure value for the followin
Page 63 and 64: investigating the potential drivers
Page 65 and 66: advisable in some circumstances not
Page 67 and 68: terms) the proof of consistency wit
Page 69 and 70: 302. The information used in credit
Page 71 and 72: exposures to obligors or facilities
Page 73 and 74: Pooled data sets for good predictiv
Page 75 and 76: inputs to the IRB approach. Supervi
Page 77 and 78: used to quantify the risk parameter
Page 79 and 80: years for the economy as a whole, a
Page 81 and 82: · Institutions must be able to bri
Page 83 and 84: Benchmarking the outputs of interna
Page 85 and 86: model, and the internal use of the
Page 87 and 88: systems” (Annex VII, Part 4, Para
Page 89 and 90: · Examining reports from Internal
Page 91 and 92: organisational point of view (e.g.,
Page 93 and 94: conclusions are wellfounded. Inte
Page 95 and 96: 401. The role played by the CRC fun
Page 97 and 98: subsidiary, or by different subsidi
Page 99 and 100: way of a formal notification). The
Page 101 and 102: · The rollout plan should have a
Page 103 and 104: Principles and examples 1. The purp
Page 105 and 106: etween systems, recording of data t
Page 107 and 108: · The definition of an appropriate
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incorporate forwardlooking elemen
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· Approving proactive risk managem
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frequency and format of the interna
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· Development of internal processe
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· Understanding the extent and nat
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‣ If not, inform the other superv
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the decision. ‣ Agree on the proc
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