Question
According to the EBA Guidelines on PD and LGD estimation (EBA/GL/2017/16), the Margin of Conservatism (MoC) aims to address uncertainty arising from data and methodological deficiencies, changes in underwriting standards or risk appetite, and general estimation error. The Guidelines describe the three MoC categories (A, B, C) and the principles for quantification, but they do not explicitly refer to any link between MoC and the chosen rating philosophy (Point-in-Time vs Through-the-Cycle) or calibration philosophy. Could you please clarify whether the regulator expects the MoC concept to be aligned with the institution’s PIT/TTC philosophy, or whether MoC is entirely independent of the rating/calibration philosophy?
Background on the question
My current interpretation is that MoC is required in all cases, regardless of the chosen philosophy, because estimation uncertainty and data/methodological deficiencies can occur under any EBA-compliant approach. However, rating philosophy influences PD volatility and calibration, which may indirectly affect the magnitude of MoC. I would appreciate confirmation that MoC is not philosophy-specific but rather based solely on identified sources of uncertainty.
Answer
This question has been rejected because the issue it deals with is already explained or addressed in the regulatory framework, which is sufficiently clear and unambiguous. In particular, the Guidelines on PD and LGD estimation are explicit on the purpose and scope of MoC, therefore the question does not raise an issue of practical implementation that would require further clarification through the Q&A process. It simply reiterates what is already clear from the existing Level-3 framework.For further information on the purpose of this tool and on how to submit questions, please see “Additional background and guidance for asking questions”.