EBA Updates the 2021 Benchmarking Package to Include IFRS 9 Template
EBA updated the implementing technical standards on benchmarking of internal approaches of banks. The key update is the inclusion of the IFRS 9 template. The updated implementing technical standards include all benchmarking portfolios that will be used for the 2021 exercise. These revised benchmarking portfolios and reporting requirements are expected to be applicable to the submission of initial market valuation data in the third quarter of 2020 and of other market and credit risk data in 2021 (with a reference date of December 31, 2020).
For the 2021 benchmarking exercise, changes to the reporting templates and instructions are necessary to integrate the subset of templates dedicated to the benchmarking of IFRS 9. The collection of quantitative data on the IFRS 9 parameters will contribute to gathering a better understanding of the different methodologies, models, inputs, and scenarios, which could lead to material inconsistencies in expected credit loss outcomes and affect own funds and regulatory ratios. The initial focus of the analysis is on the probability of default parameter, particularly the following three aspects:
- The analysis of the variability of the probability of default parameter estimated over a default horizon of 12 months
- Variability of the macroeconomic forecasts and the interaction between the lifetime probability of default curve and the macro-economic scenarios used for determining the expected credit loss
- Variability of practices in the assessment of significant increases in credit risk, also known as SICR
On the credit risk side, neither new portfolios nor new data points have been added compared to the 2020 exercise. However, some marginal changes have been applied in the credit risk portfolio annex. It now includes counterparties treated under the standardized approach, which are reported in the IFRS 9 template. Institutions should report the hypothetical risk-weighted assets calculated under the standardized approach for low-default portfolios and the hypothetical risk-weighted asset based on empirical default rates at the rating split level. For the market risk benchmarking, some instruments are updated and clarified but the overall composition of the portfolio did not change with respect to the 2020 exercise. The update also includes changes and clarifications that the EBA introduced based on the consultation paper that was published on December 17, 2019.
EBA believes that the usefulness of this exercise increased, under the current circumstances. From a supervisory perspective, it will help maintain the high quality of internal models. From the regulatory point of view, it will continue to be used to monitor the behavior and sensitivity of models to a stressed economic situation. The draft implementing technical standards will be submitted to EC for endorsement before being published in the Official Journal of the European Union and will apply 20 days after publication in the Official Journal. The supporting technical package consisting of the data point model (DPM), the validation rules, and the taxonomy are being prepared simultaneously and will be published at a later stage.
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Keywords: Europe, EU, Banking, Implementing Technical Standards, Benchmarking Exercise, CRD IV, Credit Risk, IFRS 9, Expected Credit Loss, Internal Models, Reporting, Market Risk, EBA
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