Credit risk – BaFin to adjust regulatory practice

Germany’s Federal Financial Supervisory Authority (BaFin) announced through circular 3/2019 (German) to adjust its regulatory practice by implementing two Guidelines of the European Banking Authority (EBA) and adopting respective EBA definitions. EBA Guidelines are reference points specifically for credit institutions and investment firms.

BaFin gave notice to adopt EBA’s “Guidelins on the application of the definition of default under Article 178 of Regulation (EU) No 575/2013” (Capital Requirements Regulation (CRR)) (EBA/GL/2016/07) with exception only to section 25 and 26 on exposures to central governments, local authorities and public sector entities. BaFin’s regulatory practice in thuis regard remains as is.

EBA’s “Guidelines on PD estimation, LGD estimation and the treatment of defaulted exposures” (EBA/GL/2017/16) will be adopted without any qualification. PD (Probability of Default) and LGD (Loss Given Default) are parameters to rate a financial institution’s capital requirements for their respective credit risk.

BaFin’s adoption will take effect in January 2021.