July 09, 2019

EBA published a progress report on the roadmap set out in 2016 to repair internal models used to calculate own funds requirements for credit risk, under the Internal Ratings-Based (IRB) approach. The roadmap aims to address the concerns about undue variability of own funds requirements and to restore trust in IRB models by ensuring comparability of the estimates of risk parameters, while retaining their risk sensitivity. This progress report marks the finalization of the IRB regulatory review and provides clarity on the next steps.

The IRB roadmap of EBA was set up to review the IRB regulatory framework, to ensure supervisory consistency, and to increase transparency. The regulatory review, which includes all the EBA related guidelines and technical standards, is the result of an open and constructive dialog with the industry and of a close cooperation with competent authorities. The report addresses concerns of both parties with regard to the implementation timelines. To allow for a high-quality implementation, EBA has decided to extend the deadline for introducing changes in the rating systems by one year, to the end of 2021. In addition, considering the interactions with the final Basel III framework, which BCBS published in December 2017, EBA allowed for the changes in the loss given default and conversion factors models for low-default portfolios to be implemented by the end of 2023, at the latest.

Besides the guidelines on credit risk mitigation, which are under consultation, EBA does not intend to make any further revisions to its guidance on internal models, as set out in its roadmap. While the industry and competent authorities are implementing the regulatory review of the IRB approach, EBA efforts will now focus on monitoring and exploring whether there is evidence of reduced variability of risk-weighted exposure amounts. In this area, EBA has been performing an annual benchmarking exercise and will further develop and improve this tool through more thematic analyses and in cooperation with competent authorities. 

EBA has also started work to improve transparency through harmonized Pillar 3 disclosures, based on the revised requirements set out in the revised Capital Requirements Regulation (CRR2). In parallel, EBA will undertake work on supervisory reporting to align it with the revised disclosure requirements. In addition, EBA will carry out a more comprehensive review with a view to improving consistency of data requests with the definitions and clarifications developed in the regulatory review of the IRB approach. This broader work will take into account all the data requirements, including both supervisory reporting and data collected for the purpose of supervisory benchmarking. EBA believes that implementation of the bottom-up repair as well as the top-down reforms set out in the final Basel III framework will significantly reduce undue variability of own funds requirements. It is, therefore, important that the implementation efforts continue at the current high pace, ensuring continued credibility of the IRB framework.

 

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Keywords: Europe, EU, Banking, Internal Ratings Based, Internal Models, Basel III, CRR 2, Pillar 3, Disclosures, Reporting, EBA

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