Question ID
2020_5254
Legal act
Regulation (EU) No 575/2013 (CRR)
Topic
Credit risk
Article
182
Paragraph
1
Subparagraph
a
COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations
Not applicable
Article/Paragraph
not applicable
Type of submitter
Consultancy firm
Subject matter
Estimation of long-run averages (LRA) parameter for conversion factor (CCF)
Question
Are there 2 available options for the calculation of LRA CCF? Or what is the correct approach?
Background on the question
The question is important for the purpose of new IRB models development. In Article 182(1)(a) of Regulation (EU) No 575/2013 as amended by Regulation (EU) 2019/876 (CRR2) it is mentioned that for the purpose of long-run averages (LRA) estimation, institutions should 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. The approach described in CRR for CCF is similar to the approach described for LGD in Article 181(1)(a): institutions shall estimate LGDs by facility grade or pool on the basis of the average realised LGDs by facility grade or pool using all observed defaults within the data sources (default weighted average). However, it could also be argued that LRA CCF calculation approach should follow LRA PD approach: the average realised CCFs should be computed as the arithmetic average of the yearly averages of realised CCFs in that period. It is unclear which approach is correct or whether both alternatives are available.
Submission date
Rejected publishing date
Rationale for rejection

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Status
Rejected question