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    EBA Proposes Standards on Internal Model Benchmarking and ECAI Mapping

    December 17, 2021

    The European Banking Authority (EBA) launched a consultation on the amendment of the Implementing Regulation (2016/2070) for the 2023 benchmarking of internal approaches for credit risk and market risk; instructions for filling the associated templates accompany this consultation, which ends on February 18, 2022. EBA also proposed to amend the Implementing Regulation (2016/1801) on the mapping of credit assessments of External Credit Assessment Institutions (ECAIs) for securitization, the consultation period for which ends on January 31, 2022. EBA also published the individual draft mapping reports illustrating the application of the methodology for credit assessments of securitization instruments to produce the mappings. Both the proposals have been developed in accordance with the capital requirements regime in the European Union.

    Within the consultation on the implementing technical standards for the 2023 benchmarking of internal approaches, the credit risk internal ratings-based (IRB) and IFRS 9 templates have remained untouched, though new instruments have been included for the 2023 market risk exercise,. However, for the IRB relevant data collection, some clarifications in the instructions are proposed and some issues are discussed with a view to apply future amendments to the implementing technical standards. For credit risk there are no changes to the benchmark portfolios nor to the data fields to be reported for the benchmark portfolios. Minor clarifications are provided in the instructions in Annex IV on how to deal with changes in the definition of default (where this is relevant for a required data field). In addition, the consultation paper contains a more general question on the reporting of historical losses with a view on a potential update of the data requirements in a future update of the implementing technical standards. For market risk, to keep the exercise informative, the consultation paper is proposing to extend the data collection, to include new instruments and portfolios, in particular the instruments and portfolios that have lately been applied by the industry in a similar exercise. No changes have been made to the IFRS 9 templates. The Annexes presented in this draft implementing standards replace or are added to the existing set of templates to create a consolidated version of the updated draft technical standards package. The draft standards will be submitted to the European Commission 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. The EBA benchmarking exercise forms the basis for both supervisory assessment and horizontal analysis of internal models. It ensures a consistent monitoring of the impact of the several different supervisory and regulatory measures aiming at the harmonization of the capital requirements in the European Union. 

    The proposed changes to the draft implementing technical standards on the mapping of ECAIs’ credit assessments for securitization reflect the relevant amendments introduced by the new securitization framework as well as the mappings for two ECAIs that extended their credit assessments to cover securitizations. These draft standards specify the correspondence or "mapping" between credit ratings and credit quality steps (CQSs) that shall determine the allocation of appropriate risk-weights to credit ratings issued by ECAIs on securitizations where the Standardized Approach (SA) or the Internal Ratings Based (IRB) approach for securitizations are used. The Implementing Regulation is part of the European Union Single Rulebook for banking aimed at creating a safe and sound regulatory framework consistently applicable across the European Union. The Capital Requirements Regulation (CRR) amendments that were brought by the new securitization framework have made it necessary to update the mapping tables accordingly. Following the amendments to Chapter 5 of the CRR, a hierarchy of approaches was set out to calculate capital requirements for positions in a securitization, whereby institutions using the Securitization External Ratings Based Approach (SEC-ERBA) shall calculate risk-weighted exposure amounts based on the CQSs set out in the CRR. The amended Regulation reflects 18 CQSs for long-term external credit assessments, which ensures enhanced granularity and risk sensitivity with respect to the approaches previously considered in the Regulation. In addition, since the adoption of the Implementing Regulation, one additional ECAI has been established in the European Union with methodologies and processes in place for producing credit assessments for securitization instruments, two existing ECAIs have extended their credit assessments to cover securitizations,, and the European Securities and Markets Agency (ESMA) has withdrawn the registration of an ECAI. These changes have been reflected in the mapping tables accordingly. The final implementing technical standards will be subsequently submitted to the European Commission for endorsement before being published in the Official Journal of the European Union

     

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    Keywords: Europe, EU, Banking, CRD, CRR, Regulatory Capital, Basel, Internal Model Approach, Standardized Approach, Securitization Framework, Credit Risk, Market Risk, Implementing Technical Standards, ECAIs, IFRS 9, Supervisory Benchmarking, Credit Quality Steps, EBA

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