AI Summary of Article 506c Credit risk - interaction between Common Equity Tier 1 capital reductions and credit risk parameters
By 31 December 2026, the European Banking Authority (EBA) is mandated to report to the European Commission on the alignment of current credit risk measurement with individual risk parameters. This includes an assessment of any adjustments related to the Internal Ratings-Based (IRB) shortfall or excess, as delineated in Article 159, as well as consistency regarding exposure valuation under Article 166 and Loss Given Default (LGD) estimations.
The EBA's report will examine the potential maximum economic loss from default events and the corresponding coverage through reductions in Common Equity Tier 1 capital. This encompasses accounting-related reductions, such as those derived from expected credit losses, fair value adjustments, and discounts on acquired exposures, alongside their regulatory deduction implications.
Article 506c Credit risk - interaction between Common Equity Tier 1 capital reductions and credit risk parameters
By 31 December 2026, EBA shall report to the Commission on the consistency between the current measurement of credit risk and the individual credit risk parameters and on the treatment of any adjustments for the purpose of the computation of the IRB shortfall or IRB excess as referred to in Article 159, and on its consistency with the determination of the exposure value in accordance with Article 166 and with the estimation of LGD.
That report shall consider the maximum possible economic loss arising from a default event along with its achieved coverage in terms of Common Equity Tier 1 capital reductions, taking into account any accounting-based Common Equity Tier 1 capital reductions, including from expected credit losses or fair value adjustments, and any discounts on received exposures, and their implications for regulatory deductions.