Article 182
Requirements specific to own-conversion factor estimates
1.
In quantifying the risk parameters to be associated with rating grades or pools, institutions shall apply the following requirements specific to own-conversion factor estimates:
(a)
institutions shall estimate conversion factors by facility grade or pool on the basis of the average realised conversion factors by facility grade or pool using the default weighted average resulting from all observed defaults within the data sources;
(b)
institutions shall use conversion factor estimates that are appropriate for an economic downturn if those are more conservative than the long-run average. To the extent a rating system is expected to deliver realised conversion factors at a constant level by grade or pool over time, institutions shall make adjustments to their estimates of risk parameters by grade or pool to limit the capital impact of an economic downturn;
(c)
institutions’ IRB-CCF shall reflect the possibility of additional drawings by the obligor up to and after the time a default event is triggered;
(d)
in arriving at estimates of conversion factors institutions shall consider their specific policies and strategies adopted in respect of account monitoring and payment processing. Institutions shall also consider their ability and willingness to prevent further drawings in circumstances short of payment default, such as covenant violations or other technical default events;
(e)
institutions shall have adequate systems and procedures in place to monitor facility amounts, current outstandings against committed lines and changes in outstandings per obligor and per grade. The institution shall be able to monitor outstanding balances on a daily basis;
(f)
if institutions use different estimates of conversion factors for the calculation of risk-weighted exposure amounts and internal purposes it shall be documented and be reasonable;
(g)
institutions’ IRB-CCF shall be estimated using a 12-month fixed-horizon approach;
(h)
institutions’ IRB-CCF shall be based on reference data that reflect the obligor, facility and bank management practice characteristics of the exposures to which the estimates are applied.
For the purposes of the first subparagraph, point (a), where institutions observe a negative realised conversion factor on their default observations, the realised conversion factor on those observations shall be equal to zero for the purpose of quantification of their IRB-CCF. Institutions may use the information of the negative realised conversion factor in the process of model development for the purpose of risk differentiation.
For the purposes of the first subparagraph, point (c), IRB-CCF shall incorporate a greater margin of conservatism where a stronger positive correlation can reasonably be expected between the default frequency and the magnitude of the conversion factor.
For the purposes of the first subparagraph, point (g), each default shall be linked to relevant obligor and facility characteristics at the fixed reference date defined as 12 months prior to the date of default.
1a.
For the purposes of paragraph 1, point (h), IRB-CCF applied to particular exposures shall not be based on data that comingle the effects of disparate characteristics or data from exposures that exhibit materially different risk characteristics. IRB-CCF shall be based on appropriately homogenous segments. For that purpose, the following practices shall only be allowed on the basis of a detailed scrutiny and justification by an institution:
(a)
SME/mid-market underlying data being applied to large corporate obligors;
(b)
data from commitments with a small unused limit availability being applied to facilities with a large unused limit availability;
(c)
data from delinquent obligors or blocked for further drawdowns at the reference date being applied to obligors with no known delinquency or relevant restrictions;
(d)
data that have been affected by changes in the obligors’ mix of borrowing and other credit-related products over the observation period unless those data have been effectively adjusted by removing the effects of the changes in the product mix.
1b.
For the purposes of paragraph 1a, point (d), institutions shall demonstrate to the competent authorities that they have a detailed understanding of the impact of changes in customer product mix on the exposures reference data sets and associated IRB-CCF, and that the impact is immaterial or has been effectively mitigated within their estimation process. In that regard, the following shall not be deemed appropriate:
(a)
setting floors or caps to CCF or exposure value observations, with the exception of the realised conversion factor equal to zero, in accordance with paragraph 1, second subparagraph;
(b)
using obligor-level estimates that do not fully cover the relevant product transformation options or that inappropriately combine products with very different characteristics;
(c)
adjusting only material observations affected by product transformation;
(d)
excluding observations affected by product profile transformation.
1c.
Institutions shall ensure that their IRB-CCF are effectively quarantined from the potential effects of region of instability caused by a facility being close to being fully drawn at the reference date.
1d.
2.
For exposures to corporates, institutions, central governments and central banks, and regional governments, local authorities and public sector entities, estimates of conversion factors shall be based on data over a minimum of five years, increasing by one year each year after implementation until a minimum of seven years is reached, for at least one data source. If the available observation period spans a longer period for any source, and the data are relevant, that longer period shall be used.
3.
For retail exposures, institutions may reflect future drawings either in their conversion factors or in their LGD estimates.
For retail exposures, estimates of conversion factors shall be based on data over a minimum of five years. Subject to the permission of competent authorities, institutions may use, when they implement the IRB Approach, relevant data covering a period of two years. The period to be covered shall be increased by one year each year until relevant data cover at least five years.
4.
EBA shall develop draft regulatory technical standards to specify the following:
(a)
the nature, severity and duration of an economic downturn referred to in paragraph 1;
(b)
conditions according to which a competent authority may permit and institution to use relevant data covering a period of two years at the time an institution first implements the IRB Approach.
EBA shall submit those draft regulatory technical standards to the Commission by 31 December 2014.
Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.
5.
By 31 December 2026, EBA shall issue guidelines, in accordance with Article 16 of Regulation (EU) No 1093/2010, to specify the methodology that institutions are to apply in order to estimate IRB-CCF.