EBA publishes final Guidelines on Credit Risk Mitigation for institutions applying the IRB approach with own estimates of LGDs

The European Banking Authority (EBA) published at the beginning of May its final Guidelines on credit risk mitigation (CRM) in the context of the advanced internal ratings-based (A-IRB) approach. The EBA’s review of the IRB approach aims to reduce unjustified variability stemming from different supervisory and institution-specific practices, while preserving the higher risk sensitivity associated with internal models.

Consequently, these guidelines provide additional clarity on the application of the CRM approach for A-IRB institutions, focusing on clarifying the application of the current CRR provisions for the eligibility and methods of different CRM techniques, namely funded and unfunded credit protection, available to institutions under the A-IRB approach.

This article provides further insight on the eligibility requirements for funded/unfunded credit protection and the effects of credit risk mitigation.