On November 16, 2018, the European Banking Authority published final draft Regulatory Technical Standards on the specification of the nature, severity and duration of an economic downturn in accordance with the Capital Requirements Regulation. The aim of the RTS is to ensure that institutions using the Internal Ratings- Based approach to calculating capital requirements can use a well-defined and common specification of the nature, duration and severity of an economic downturn for portfolios relating to comparable types of exposure.
The nature of the economic downturn is defined as a set of relevant economic factors and its severity is specified via the most severe values observed on the relevant economic factors over a given historical period. The duration of an economic downturn is specified using the concept of a "downturn period," namely the period of time where the peaks or troughs, which relate to the most severe values of one or several economic factors, are observed.
The EBA has submitted the final draft RTS to the European Commission for endorsement. Once adopted, the RTS are expected to apply directly across the EU from January 1, 2021.
The EBA is in the process of finalizing related Guidelines on the estimation of loss given default (LGD) appropriate for conditions of an economic downturn. Once finalized, those Guidelines will also apply from January 1, 2021.
The final draft RTS is available at: http://www.eba.europa.eu/documents/10180/2459703/EBA+BS+2018+xxx+%28Final+draft+RTS+on
+economic+downturn%29_final+%28002%29.pdf .
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.