EBA Reports Examine Consistency of Internal Model Outcomes in 2020
EBA published two reports that examine the consistency of risk-weighted assets (RWAs) across EU institutions authorized to use internal approaches for the calculation of capital requirements for 2020. The reports analyze the variability observed in risk-weighted assets for market risk and credit risk, including high- and low-default portfolios. EBA also published a document (Annex) that presents the methodological choices and caveats on the credit risk benchmarking exercise analysis. The results of the benchmarking exercise on credit and market risks confirm that the majority of risk-weight variability can be explained by fundamentals.
The report on credit risk benchmarking exercise presents key results of the 2020 supervisory benchmarking exercise for both high- and low-default portfolios. The results of the 2020 regular benchmarking analyses for credit risk are largely comparable to those of the last exercises, which is an indication of the general stability of bank portfolios and internal model outcomes. As in the past years, the observed variability of institutions’ overall internal ratings-based, or IRB, approach exposure can mostly be explained by the different share of defaulted and non-defaulted exposures and by the portfolio mix of the individual institutions. For both high- and low-default portfolios, nearly 60% of the total variability is explained via these two drivers. For high-default portfolios, the variability of risk-weights is mostly in line with the intention of the internal ratings-based approach. For the low-default portfolios, analysis at the counterparty level shows a slight decrease of the observed overall risk-weight variability for large corporates under the advanced internal ratings-based approach, but it remained mostly stable for the other analyzed LDP exposures. For the first time, the report also includes time an analysis on the newly introduced portfolios on specialized lending exposures. This analysis reveals that variability of risk-weighted assets calculated under the internal ratings-based approach for specialized lending exposures stems primarily from an unequal distribution across banks in terms of type and volume of investment into these exposures.
The report on market risk benchmarking exercise presents the results of the 2020 supervisory benchmarking exercise pursuant to the Capital Requirements Directive (CRD) and the related regulatory and implementing technical standards that define the scope, procedures, and portfolios for benchmarking internal models for market risk. The 2020 analysis showed a reduction in the dispersion in the initial market valuation with respect to the 2019 exercises with regard to the equity, interest rate, and credit spread asset classes. This improvement was expected and reflects the instruments’ simplification as applied in the 2019 exercise. The 2020 exercise considered the same instruments applied in 2019, which are mostly plain vanilla financial instruments. However, at the portfolio level, the variability increased with the risk metric’s complexity while stressed value-at-risk, incremental risk charge, and all price risk showed higher levels of dispersion. Across asset classes, except for the commodity exposures, the overall variability for value at risk is lower than the observed variability for stressed value-at-risk. More complex measures such as incremental risk charge and all price risk show a higher level of dispersion. Although the majority of the causes were identified and actions were put in place to reduce any unwanted variability of the hypothetical risk-weighted assets, the effectiveness of these actions can be evaluated only with ongoing analysis.
Related Links
- Press Release
- Credit Risk Benchmarking (PDF)
- Annex on Methodology (PDF)
- Market Risk Benchmarking (PDF)
Keywords: Europe, EU, Banking, Credit Risk, Market Risk, Basel, RWA, 2020 Benchmarking Exercise, Regulatory Capital, Internal Models, 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
Previous Article
EBA Report Examines Implementation of Liquidity Coverage Ratio in EURelated 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.