On November 20, 2017, the European Banking Authority published final Guidelines on the application of the Internal Ratings-Based approach, in particular, the estimation of risk parameters for non-defaulted exposures, namely of the probability of default (PD) and the loss given default (LGD), and on the treatment of defaulted assets. The Guidelines should be applied in conjunction with the requirements under the Capital Requirements Regulation and the final draft Regulatory Technical Standards on the assessment methodology for national regulators regarding compliance by firms with the requirements to use the IRB Approach.

The Guidelines aim to address concerns raised over the lack of comparability of capital requirements determined under the IRB approach across firms which the EBA raised in its Opinion and Report on the implementation of the regulatory review of the IRB approach to calculating risk-weighted exposure amounts for credit risk, published in February 2016.

The EBA also published a Report on IRB modelling practices used in the estimation of risk parameters for both non- defaulted and defaulted exposures. The Report provides an overview of the practices in IRB modelling as at January 2017 and an assessment of the expected impact that the Guidelines and related RTS will have on the models used by some firms. The EBA notes that the materiality of the changes must be assessed and treated under the RTS on the materiality of extensions and changes to IRB Approach and Advanced Measurement Approach. The Guidelines will apply from January 1, 2021.

The final Guidelines are available at: http://www.eba.europa.eu/documents/10180/2033363/Guidelines+on+PD+and+LGD+estimation+%28EBA-GL-2017-16%29.pdf , the EBA's Report on IRB modelling practices is available at:

http://www.eba.europa.eu/documents/10180/1720738/EBA+Report+on+IRB+modelling+practices.pdf , the final draft

RTS on the assessment methodology for national regulators regarding compliance by firms with the requirements to use the IRB Approach is available at: https://www.eba.europa.eu/documents/10180/1525916/Final+Draft+RTS+on+Assessment+Methodology+for+IRB.pdf/e8373cbc-cc4b-4dd9-83b5-93c9657a39f0 , the RTS on the materiality of extensions is available at: http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=OJ:JOL_2014_148_R_0008  and the EBA's Opinion and Report on the

implementation of the IRB approach is available at: http://www.eba.europa.eu/-/eba-sets-out-roadmap-for-the-implementation-of-the-regulatory-review-of-internal-models

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