Simplification and assessment of the credit risk framework

The European Banking Authority (EBA) Discussion Paper on the simplification and assessment of the EU credit risk framework examines the extent to which the current prudential framework could gain in simplicity, coherence and operational efficiency while preserving risk sensitivity and maintaining alignment with the Basel III framework.

Simplification and assessment of the credit risk framework

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Executive summary

The EBA Discussion Paper analyses potential simplifications in both the Standardized Approach and the Internal Ratings-Based (IRB) Approach. Under the Standardized Approach, it examines adjustments to the prudential treatment of real estate exposures and to the use of external credit assessments, including the possibility of using ratings without implicit government support.

Under the IRB Approach, the document considers consolidating currently fragmented regulatory documents and exploring optional alternative approaches in specific areas where gains in risk sensitivity may be limited. In particular, it discusses the treatment of the Margin of Conservatism (MoC), the direct and indirect costs of recovery processes, downturn estimation, loss given default (LGD) for defaulted assets, and the modelling of the credit conversion factor (CCF).

The feedback received will inform the EBA’s future regulatory work.

Main content

The Discussion Paper addresses the following key areas:

• Simplification under the Standardized Approach. The paper highlights the complexity of the prudential treatment of real estate exposures, which must balance the harmonization of the EU framework with national specificities. It questions the predictive value of the loss data collected under Article 430bis of the Capital Requirements Regulation (CRR), noting the need to harmonize its definition, clarify its use in prudential decisions and limit its application, given the limited comparability, interpretability and predictive capacity of a single indicator as currently defined. The document also explores pragmatic solutions for the use of external credit assessments, including the possibility of relying on ratings without implicit government support by using existing mappings to External Credit Assessment Institutions (ECAIs).
• Simplification under the IRB Approach. The document proposes consolidating and harmonizing the set of rules applicable to IRB models, which are currently dispersed across multiple regulatory documents, with the aim of improving the clarity, coherence and consistency of the framework without modifying the substantive prudential requirements. In this context, it reviews technical aspects such as the use of continuous rating scales, the definition of facility introduced by CRR III, and data representativeness requirements. It also examines how environmental and social risks could be integrated more systematically into risk differentiation and risk quantification processes, while assessing the potential impact on model complexity. In addition, it considers optional alternative approaches in certain areas of IRB estimation, such as MoC, the treatment of direct and indirect costs of recovery processes in LGD estimation, downturn estimation, LGD for defaulted assets, and CCF modelling. The goal is to reduce operational complexity where gains in risk sensitivity are limited, while maintaining appropriate prudential safeguards.

Download the technical note on the Simplification and assessment of the credit risk framework (also available in Spanish).