EBA Report Examines the Consistency of Internal Model Outcomes
EBA published two reports on the consistency of risk-weighted assets (RWAs) across all EU institutions authorized to use internal approaches for the calculation of capital requirements. The reports cover credit risk for high- and low-default portfolios (LDPs and HDPs) as well as market risk. The results confirm previous findings, with the majority of risk-weight variability explained by fundamentals.
Credit Risk Exercise. The credit risk report examines the drivers leading to the observed dispersion across banks' models. Results are broadly in line with previous exercises, with 50% of the difference in variability explained by the proportion of defaulted exposures in the portfolio and the portfolio mix. The remaining could be attributed to differences in collateralization and other institution-specific factors, such as risk strategy and management practices, idiosyncratic portfolio features, modeling assumptions, client structure, and supervisory practices. This confirms previous findings that RWA variability can be explained, to a large extent, by looking at some measurable features of exposures of institutions. The competent authorities performed an assessment of the internal models, which have been identified as outliers in this benchmarking exercise. Their monitoring activities are increasingly noticing issues identified by the EBA benchmarking exercise. The same conclusion holds for institutions' internal validations. This is reassuring and indicates that the increased regulatory and supervisory attention paid to internal models is contributing to the consistency of the RWA of internal models.
Market Risk Exercise. Compared to the previous exercise, the 2018 analysis shows a reduction in the dispersion in the initial market valuation (IMV) and risk measures. The persisting variability in the results mainly stems from different interpretations and heterogeneous market practices adopted by firms. Some of these issues have been addressed and the quality of the data has improved. From a risk-factor perspective, interest rate portfolios exhibit a lower level of dispersion than the other asset classes, which is most likely due to the use of more consistent practices and assumptions that are more homogeneous across the banks when modeling interest rate risk. This finding confirms the conclusions drawn in last year's analysis. In line with the previous exercises, a significant dispersion for all the risk measures is observed. More complex measures such as incremental risk charge (IRC) and all price risk (APR) show a higher level of dispersion. This report has provided input for competent authorities on areas that may require their further investigation, such as IMV variability for some credit spread products. Supervisors should pay attention to the materiality of risk factors not in VaR and, in particular, not encompassed in the IRC models.
EBA conducts the the benchmarking exercises annually. The exercises constitute a fundamental supervisory and convergence tool to address unwarranted inconsistencies and restoe trust in internal models. For credit risk internal models, EBA has followed its roadmap for the implementation of the regulatory review of internal models. The regulatory technical standards (RTS) on the assessment methodology for internal ratings-based approach are a key component of the EBA work to ensure consistency in models outputs and comparability of risk-weighted exposures. EBA guidelines on the definition of default and the estimation of Probability of Default (PD), Loss Given Default (LGD), and the treatment of defaulted assets are other components of this review. The exercises provide a regular supervisory tool based on benchmarks to support competent authorities' assessments of internal models and produce comparisons with EU peers.
Related Links
- Press Release
- Market Risk Benchmarking Report (PDF)
- Credit Risk Benchmarking Report (PDF)
- RTS on Assessment Methodology
- Guidelines on Estimation of PD, LGD, and Treatment of Defaulted Assets
Keywords: Europe, EU, Banking, Internal Models, 2018 Benchmarking Exercise, Benchmarking, Market Risk, Credit Risk, EBA
Previous Article
FASB Issues Q&A on Estimating Credit Loss ReservesRelated Articles
|
News
FSB to Evaluate Effects of Too-Big-To-Fail Reforms for Systemic BanksFSB is seeking feedback as part of its evaluation of the effects of the too-big-to-fail reforms for banks.
May 23, 2019
WebPage
Regulatory News
|
|
News
APRA Releases Minor Changes to Reporting Standards on SA-CCR for BanksAPRA released minor changes to the three reporting standards for the standardized approach for measuring counterparty credit risk exposures (SA-CCR).
May 22, 2019
WebPage
Regulatory News
|
|
News
APRA on Industry Self-Assessments into Governance and AccountabilityAPRA released an information paper analyzing the self-assessments performed by 36 of the country’s largest banks, insurers, and superannuation licensees in response to the final report on the Prudential Inquiry into the Commonwealth Bank of Australia (CBA).
May 22, 2019
WebPage
Regulatory News
|
|
News
PRA Consults on Maintenance of TMTP Under Solvency IIPRA published a consultation paper (CP11/19) that sets out its approach to update supervisory statement (SS6/16) on maintenance of the transitional measure on technical provisions (TMTP) under Solvency II.
May 22, 2019
WebPage
Regulatory News
|
|
News
APRA Proposes to Amend Guidance on Residential Mortgage LendingAPRA is consulting on revisions to the prudential practice guide APG 223 on residential mortgage lending in Australia.
May 21, 2019
WebPage
Regulatory News
|
|
News
IASB Proposes Improvements to IFRS 9 and IFRS 16IASB published the exposure draft ED 2019/2 that proposes amendments to four IFRS standards, including IFRS 9 on Financial Instruments and IFRS 16 on Leases.
May 21, 2019
WebPage
Regulatory News
|
|
News
Denis Beau of BDF on Supervisory Priorities for Climate-Change RisksDenis Beau, the First Deputy Governor of BDF, delivered opening remarks at the BCBS-BSCEE-FSI High-level Meeting for Europe on banking supervision.
May 21, 2019
WebPage
Regulatory News
|
|
News
ISDA CDM to be Deployed for UK Digital Regulatory Reporting PilotISDA announced deployment of the ISDA Common Domain Model (ISDA CDM 2.0) to support the UK FCA, BoE, and participating financial institutions in testing phase two of the Digital Regulatory Reporting pilot for derivatives.
May 21, 2019
WebPage
Regulatory News
|
|
News
MAS to Consolidate Regulation of Merchant Banks Under Banking ActMAS published a consultation paper that proposes to consolidate the regulation of merchant banks under the Banking Act and to move merchant banks to a licensing regime under the MAS Act.
May 21, 2019
WebPage
Regulatory News
|
|
News
ESAs Amend Technical Standards on Mapping of ECAIs Under CRRESAs published a second amendment to the implementing technical standards on the mapping of credit assessments of External Credit Assessment Institutions (ECAIs) for credit risk under the Capital Requirements Regulation (CRR).
May 20, 2019
WebPage
Regulatory News
|
