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    EBA Proposes to Amend Standards on Benchmarking of Internal Models

    December 17, 2020

    EBA proposed the draft implementing technical standards that amend the Regulation 2016/2070 on the benchmarking of internal models. EBA is proposing to amend the benchmarking of credit risk, market risk, and IFRS 9 models to include some new elements for the 2022 exercise. For credit risk, EBA is proposing to include additional information on the level of conservatism embedded in the Internal Ratings-Based (IRB) risk parameters. For market risk, EBA is proposing to include new sensitivities related to the sensitivities-based method, in line with the new Fundamental Review of the Trading Book (FRTB) framework. For the IFRS 9 exercise, EBA is proposing to include updated templates with the collection of additional IFRS 9 parameters. The deadline for the submission of comments is February 15, 2021.

    Article 78 of the Capital Requirements Directive (CRD IV) requires competent authorities to conduct an annual assessment of the quality of internal approaches used for the calculation of own funds requirements. To assist competent authorities in this assessment, EBA calculates and distributes benchmark values against which individual institutions’ risk parameters can be compared. These benchmark values are based on data submitted by institutions, as laid out in the Regulation 2016/2070, which specifies the benchmarking portfolios, templates, and definitions to be used as part of the annual benchmarking exercises. For the 2022 benchmarking exercise, the changes proposed in the consultation paper includes the following:

    • Credit risk. EBA is proposing changes for the purpose of understanding the level of conservatism incorporated in the risk estimates (probability of default and loss given default) and the risk-weighted assets via supervisor add-ons and via the margin of conservatism. In addition, EBA is proposing certain enhancements to the existing data requirements.
    • Market Risk. EBA is proposing to extend the data collection to sensitivities-based method, thus extending the existing reporting framework to the instruments and portfolio in the benchmarking. Moreover, a series of minor updates to the list of instruments have been proposed to keep the list of instruments updated, without changing the overall structure of the portfolios, with respect to the previous exercises.
    • IFRS 9 templates. EBA is proposing to introduce new data points in the technical standards for the 2022 supervisory benchmarking exercise. The new data points are mainly related to the loss given default (LGD) risk parameter, with other minor adjustments introduced in relation to the forecast of future economic conditions.

    The EBA benchmarking exercise forms the basis for supervisory assessment and horizontal analysis of internal models. It ensures consistent monitoring of the impact of the several different supervisory and regulatory measures, with the aim of harmonizing capital requirements in  EU. The Annexes presented in the draft technical standards either replace or are added to the existing set of templates to create a consolidated version of the updated draft technical standards package. The draft technical standards will be submitted to EC for endorsement before being published in the Official Journal of the European Union. The technical standards will apply 20 days after publication in the Official Journal of the European Union


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    Comment Due Date: February 15, 2021

    Keywords: Europe, EU, Banking, Implementing Technical Standards, Benchmarking Exercise, CRD IV, Credit Risk, Market Risk, IFRS 9, Reporting, FRTB, Internal Model, Basel, EBA

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