Status: Will be live at 02/10/2017 00:00
IIF Response to EBA Guidelines on PD/LGD Estimation and Treatment of Defaulted Assets
Friday, February 10, 2017
The IIF continues to promote greater harmonization of credit risk modeling practices, parameters, and assumptions. Banks' internal models are critical for risk-sensitive signaling. EBA proposals will help improve RWA comparability. The IIF supports the EBA efforts to improve and harmonize those models, proposals, while also identifying some specific technical items that we feel warrant some further consideration, as follows:
- We suggest that the Guidelines be strengthened by providing a common measure for the degree to which models are of the point-in-time (PIT) nature.
- While we agree with the EBA's proposal for the discounting rate, we propose clarifications on what the discounting rate is meant to represent, how it should be calculated and updated, as well as some considerations regarding the fixed spread.
- The treatment of interest and fees after default is critical, and fees and interest should be treated separately from recovery of the outstanding principal. Interest payments should only be added as positive cash flow (if paid) and not negative in the economic loss calculation. Including interest as a negative component in the economic loss calculation would lead to a double discounting effect.
- In the case that the use of provisions for ELbe/BEEL is disallowed, we suggest a materiality threshold or proportionate treatment when the proportion of defaulted exposures to overall performing exposures is immaterial
- We propose the introduction of a materiality threshold, or a more proportionate treatment, for cases in which the margin of conservatism (MoC) only has a small impact on PD levels.
- On the issue of representativeness of data in LGD models, we note the potential for double or triple counting the effect of the MoC, and seek clarification on how calibration would work.