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November 14, 2017

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 market risk as well as credit risk for large corporate, institutions, and sovereign portfolios—collectively referred to as low-default portfolios (LDPs). The results confirm previous findings, with the majority of risk-weights variability explained by fundamentals. These annual EBA-conducted benchmarking exercises are a fundamental supervisory and convergence tool to address unwarranted inconsistencies and restore trust in internal models.

LDP Credit Risk Exercise. This report presents the results of a supervisory benchmarking exercise of the internal models used for LDPs across a sample of EU institutions. LDPs consist of sovereigns, institutions and large corporates, as these portfolios generally contain few defaults relative to the total number of obligors. The LDP credit risk report examines fferent drivers leading to the observed dispersion across bank models. Most results are broadly in line with the previous LDP exercises, with 61% of the difference in variability explained by a few drivers. The remaining variability could be attributed to differences in riskiness, such as idiosyncratic portfolio features, modeling assumptions, and risk-management practices used by banks, along with the supervisory practices. An analysis was performed to quantify the impact on risk-weights for banks with lower risk-weights. 

Market Risk Exercise. This report presents the results of the 2017 supervisory benchmarking exercise pursuant to Article 78 of 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 aim of this exercise was to assess the level of variability observed in risk-weighted exposure amounts for market risk (MRWA) produced by banks’ internal models. 

 

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Keywords: Europe, Banking, Credit Risk, Market Risk, LDP, CRD, RWA, Internal Model, Benchmarking, EBA

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