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    EBA Suggests Further Changes to Standards on IRB Assessment

    December 14, 2020

    EBA issued an opinion on the amendments proposed by EC to the final draft regulatory technical standards of EBA on the assessment methodology for internal ratings-based (IRB) approach. These standards specify the assessment methodology that competent authorities are expected to follow when assessing the compliance of credit institutions and investment firms with the requirements to use the IRB approach laid down in the Capital Requirements Regulation (CRR). EBA supports the EC progress in the adoption of these standards and provides, in the Annex to the opinion, a revised version of standards, incorporating changes where, it believes, the EC amendments do not reflect the agreed policy.

    EBA has identified a number of substantive changes in the EC's version of the technical standards compared to the final draft submitted in July 2016. The most important change is related to the flexibility for competent authorities to apply any other tests and verifications when assessing the institutions’ compliance with the IRB approach. EBA is concerned about the amendments of EC in this regard, as this could potentially hamper supervisory efforts to ensure harmonized use of IRB models. Other substantive changes identified by EBA relate to the assessment of the institutions’ validation of internal models, approaches toward grade assignment and risk parameter estimation, and any governance and procedural aspects required in the context of the IRB approach. In these areas also, EBA notes that the amendments change the policy that was developed and agreed by EBA. The opinion highlights a number of editorial and structural changes that are needed to ensure consistency if taking on board the changes proposed by EC. The other changes are considered of non-substantive nature. However, there are some points that EBA considers should be reviewed or improved. These are included in the opinion under section "Unintended consequences of the drafting changes." 

    In the past, EBA work on the comparability of risk-weighted exposures has demonstrated that significant differences in supervisory practices can contribute to non-risk-based differences in capital requirements for institutions using the IRB approach. Consequently, EBA fully supports the EC progress to adopt these technical standards. 

     

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    Keywords: Europe, EU, Banking, IRB Approach, Regulatory Capital, Basel, Supervisory Assessment, EC, EBA

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