The credit risk chapter includes further clarifications on the management and quantification of climate-related and environmental risks within internal ratings-based models, building upon the generic expectations outlined in the general topics chapter. This includes:
Overrides: article 172 CRR
In cases where climate-related and environmental risk drivers are considered significant and not incorporated into the rating system, institutions should assess the appropriateness of applying a more cautious approach by overriding the final rating assignment output for the related facilities or obligors.
Structure of PD models: article 179(1)(a) CRR and paragraphs 57, 121-123 EBA Guidelines on PD and LGD Estimation
Estimates must be based on drivers of the risk parameters, including climate-related and environmental risk drivers affecting the PD (paragraph 57 EBA GL) and LGD (paragraph 121 EBA GL), where deemed relevant and material.
LGD reference dataset: paragraph 109 EBA Guidelines on PD and LGD Estimation
The RDS should contain all relevant information in relation to losses and recovery processes. This should also include climate-related and environmental information where considered relevant and material.
ELBE and LGD-in-default: paragraph 177 EBA Guidelines on PD and LGD Estimation
For the purpose of ELBE and LGD in-default estimation, institutions should analyse the potential risk drivers, not only until the moment of default but also after the date of default and until the date of termination of the recovery process. This should include climate-related and environmental risk drivers where those risk drivers are assessed as relevant and material.
Margin of Conservatism (MoC): paragraph 37 EBA Guidelines on PD and LGD Estimation
The MoC should consider any deficiencies stemming from missing or inaccurate information including, where relevant and material, any missing or inaccurate climate-related information considered in risk estimates.