Circular Letter No. CC/2020/00000068

Circular Letter No. CC/2020/00000068 Sent to: Credit Institutions. Mod. 40000375/T – 01/14 Subject: EBA Guidelines on Credit Risk Mitigation for institutions applying the IRB approach with own estimates of LGD (EBA/GL/2020/05)

The European Banking Authority (EBA) published, on May 6, 2020, the “EBA Guidelines on Credit Risk Mitigation for institutions applying the IRB approach with own estimates of LGD (EBA/GL/2020/05)”, which will enter into force on January 1, 2022 (1). These Guidelines can be consulted on the EBA’s respective website (2).

The aforementioned document contains guidelines for the application of risk mitigation techniques within the advanced approaches of the Internal Ratings-Based (IRB) method, in accordance with Part III, Title II, Chapter 3, Section 6 of Regulation (EU) No 575/2013, thus targeting institutions applying the IRB method using own estimates of Loss Given Default (LGD).

Credit institutions supervised by the Bank of Portugal that apply the IRB method in accordance with Part III, Title II, Chapter 3, Section 6 of Regulation (EU) No 575/2013 must adopt the necessary measures to comply with the aforementioned Guidelines from January 1, 2022.

The Bank of Portugal emphasizes the importance of institutions duly complying with the guidelines contained in the document in question, which must be followed and applied in the context of current legislation and regulation and, in particular, function as a complement to the provisions contained in the General Regime of Credit Institutions and Financial Societies regarding the matters in question.

(1) In the original text, these Guidelines had an entry into force deadline of January 1, 2021. However, in order to align with other regulatory products, the EBA granted a one-year delay for the implementation of changes in rating systems, moving it to January 1, 2022. (2) https://eba.europa.eu/sites/default/documents/files/document_library/Publications/Guidelines/2020/Guidelines%20on%20Credit%20Risk%20Mitigation%20for%20institutions%20applying%20the%20IRB%20approach%20with%20own%20estimates%20of%20LGDs/883366/Guidelines%20on%20CRM%20for%20A-IRB%20institutions.pdf