Introduction

The concept of the Internal Ratings Based (IRB) Approach for credit risk was first introduced by Directives 2006/48/EC and 2006/49/EC of 14 June 2006 (known as the Capital Requirements Directive), later replaced by Regulation (EU) No 575/2013 (Capital Requirements Regulation - CRR) and Directive 2013/36/EU of 26 June 2013 (Capital Requirements Directive - CRD). The CRR introduced a number of mandates for the European Banking Authority (EBA) to develop technical standards and guidelines to supplement the basic legislation in order to ensure more harmonised application of the IRB requirements.

In this regard and in accordance with Article 502 of the CRR, the EBA published in December 2013 a set of five reports on the comparability and pro-cyclicality of capital requirements, presenting the results of a study conducted by the EBA on the comparability of risk estimates and capital requirements, including analysis of the factors that contribute to discrepancies among institutions. Based on the results, the EBA concluded that further guidance was needed, as current practices differed significantly across countries and institutions. Consequently, the EBA initiated work to provide further regulatory guidance, and these Guidelines on PD estimation, LGD estimation and the treatment of defaulted exposures (GL) are one of the resulting initiatives, specifically targeting the significant discrepancies identified in the methodologies underlying risk estimates.