EBA Releases Results of 2019 Benchmarking Exercise for Internal Models
EBA published two annual reports that assess 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 market risk and credit risk for high- and low-default portfolios (LDPs and HDPs). The results of the 2019 benchmarking exercise confirm that the majority of risk-weight variability can be explained by fundamentals.
The credit risk report examines the different drivers leading to the observed dispersion across banks' models. The results are broadly in line with the previous exercises, with 50% of the difference in variability explained with simple risk drivers, a risk-weighted deviation on low-default portfolios below 10 percentage points and estimates for high-default portfolios generally on the conservative side when compared with empirical observed metrics. Furthermore, this year, for the first time, on high-default portfolios, EBA performed a comparison with the standardized approach risk-weights. The overall observed variability under the standardized approach is at a similar level than the one observed on internal rating-based (IRB) approach. Within a single exposure class, the variability under the IRB approach follows, in a conservative manner, the empirical variability of risk (observed via default rates). In addition to a questionnaire filled in by supervisors and interviews conducted with seven institutions, a survey was conducted among institutions to better assess the variability of practices in terms of rating scales. This survey highlights the variability of practices on the type of calibration of the probability of default.
The market risk report presents the results of the 2019 supervisory benchmarking and summarizes the conclusions drawn from a hypothetical portfolio exercise conducted by EBA during 2018-19. Compared to the previous exercises, the 2019 analysis shows a substantial reduction in terms of dispersion in the initial market valuation and some reduction in risk measures, especially for the aggregated portfolios. This improvement was expected and is likely due to the simplification in the market risk benchmarking instruments. The remaining dispersion is probably the result of new benchmarking instruments being used by banks for the first time. The quantitative analysis, which has been extended in terms of scope with respect to the previous exercises, was also complemented by a questionnaire to competent authorities. Although the majority of the causes were identified and actions were put in place to reduce the unwanted variability of the hypothetical RWAs, the effectiveness of these actions can be evaluated only with ongoing analysis. The 2019 exercise is the first exercise with the new set of hypothetical instruments and portfolios. The new set of instruments mainly consists of vanilla instruments and is more extensive in terms of the number of instruments to model with respect to the three previous benchmarking exercises.
Related Links
- Press Release
- Results of Credit Risk Benchmarking (PDF)
- Annex: Charts from Credit Risk Benchmarking (PDF)
- Results of Market Risk Benchmarking (PDF)
Keywords: Europe, EU, Banking, Credit Risk, Market Risk, Benchmarking, Internal Models, 2019 Benchmarking Exercise, Regulatory Capital, EBA
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Patrycja Oleksza
Applies proficiency and knowledge to regulatory capital and reporting analysis and coordinates business and product strategies in the banking technology area
Related Articles
BIS and Central Banks Experiment with GenAI to Assess Climate Risks
A recent report from the Bank for International Settlements (BIS) Innovation Hub details Project Gaia, a collaboration between the BIS Innovation Hub Eurosystem Center and certain central banks in Europe
Nearly 25% G-SIBs Commit to Adopting TNFD Nature-Related Disclosures
Nature-related risks are increasing in severity and frequency, affecting businesses, capital providers, financial systems, and economies.
Singapore to Mandate Climate Disclosures from FY2025
Singapore recently took a significant step toward turning climate ambition into action, with the introduction of mandatory climate-related disclosures for listed and large non-listed companies
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
EBA Proposes Standards Related to Standardized Credit Risk Approach
The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.
ECB to Expand Climate Change Work in 2024-2025
Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.
