The European Banking Authority (EBA) recently issued several regulatory publications impacting the banking sector. Key among these are reporting requirements for the interest rate risk in the banking book (IRRBB), proposed standards related to the calculation of own funds requirements for market risk on the basis of internal models, and aspects relevant for the banks using, or planning to use, the internal ratings-based models. The recent publications also included proposed changes to the disclosure guidelines for systemic importance indicators, results of the stress testing exercise, and the mapping of the financial soundness indicators to the EBA reporting data.
Below are the key highlights of recent updates:
- IRRBB reporting. The recently published final amending technical standards on supervisory reporting introduce new reporting on IRRBB. This new reporting will provide supervisors with the necessary data to monitor IRRBB risks in credit institutions, taking into careful consideration the concept of proportionality for small and non-complex institution/institutions and “other” institutions. The first reference date for the application of these technical standards is September 30, 2024. The final draft implementing technical standards are part of the 3.4 reporting framework release and the technical package will be published by mid-October 2023.
- IRRBB ad hoc data collection. Nearly a week after this update, EBA announced its decision to run an ad-hoc data collection of the IRRBB data of institutions; this collection will apply only to the institutions that are already providing IRRBB data in the context of the quantitative impact study exercise and include the same templates that these institutions will have to report once the final implementing technical standards on IRRBB reporting start applying. The submission reference date for this ad-hoc collection is set as of December 31, 2023 while the competent authorities will need to submit institutions’ data to EBA by March 2024. The technical package supporting the collection of this IRRBB ad-hoc collection will be made available by mid-October 2023, as part of reporting framework 3.3.
- Market risk capital standards for internal models. The Authority is also seeking comments, until November 03, 2023, on the draft regulatory technical standards to identify extraordinary circumstances of market disruption, permitting to waive certain requirements for the calculation of own funds requirements for market risk on the basis of internal models. The draft standards establish a high-level framework for identifying a situation of extraordinary circumstances, set out conditions that need to be met, and define indicators that could support the identification of extraordinary circumstances. Under such extraordinary circumstances, institutions may continue using their internal models for a trading desk, even if that trading desk does not meet the back-testing requirements or fails the profit and loss attribution test, or they may disregard certain overshootings observed during the back-testing.
- Use of machine learning in IRB models. EBA published a follow-up report on the use of machine learning for internal ratings-based (IRB) models. The report provides an overview of the current use cases of machine learning techniques for IRB models. The use of machine learning techniques in credit risk models may create issues beyond the scope of prudential consideration. This follow-up report also discusses the interaction with two other legal frameworks—namely the General Data Protection Regulation (GDPR) and the Artificial Intelligence Act—and called for some clarifications to reduce legal uncertainty and avoid unintended consequences of the Artificial Intelligence Act.
- Timeline for implementation of IRB roadmap. The banking authority updated the timeline for implementation of IRB roadmap and published its final supervisory handbook for the validation of IRB rating systems. The implementation of the IRB repair requirements for loss given default (LGD) and credit conversion factor (CCF) models that cover portfolios no longer eligible for the revised advanced internal ratings based (AIRB) approach in accordance with the final Basel III framework (that is, large corporates, institutions, and financial sector entities portfolios) may be postponed to the date of entry into force of the future Capital Requirements Regulation (CRR 3). Within that period, institutions may also choose to apply for permission to return to a less sophisticated IRB approach or for the permanent partial use of the standardized approach for those portfolios.
- Disclosure guidelines for systemic indicators. EBA proposed changes to guidelines on the specification and disclosure of systemic importance indicators. The proposed changes aim primarily at updating the annex that replicates the data template issued by the Basel Committee on Banking Supervision (BCBS) on a yearly basis. The consultation runs until September 01, 2023. In January 2023, the BCBS published a new data template with revisions for the 2023 identification exercise, based on end-2022 business year data. To ensure consistency between the internationally agreed standards and the EU regulatory framework, the annex of the EBA guidelines has been amended to replicate the yearly updated Basel reporting template.
- FSI reporting to IMF. EBA updated the guidance on how to compile and report to the International Monetary Fund (IMF) the Financial Soundness Indicators (FSI) based on EBA data. FSIs provide insight into the financial health and soundness of countries’ financial institutions as well as corporate and household sectors, thus supporting the economic and financial stability analysis. The EBA guidance provides a mapping of IMF the FSI indicators to EBA supervisory reporting data, ensuring a harmonized methodology across the EU when compiling and reporting these indicators to IMF. This updated mapping includes additional metadata recommendations, which the national authorities in European Union should consider when reporting country-level FSI to the IMF.
- Stress test results. EBA published results of the 2023 stress test among banks in the European Union. Enhancements to this year’s exercise included an increased sample with 20 more banks, the introduction of top-down elements for net fees and commission income, and a detailed analysis on sectoral exposures of banks. The results show that capital depletion under the adverse stress test scenario is 459 bps, resulting in a fully loaded CET1 ratio at the end of the scenario of 10.4%.
Visit the Moody’s Analytics microsite for Banking Cloud Solutions to find out how our solutions help banks get up-to-date with the latest capital adequacy requirements and address the regulatory reporting requirements.
Related Link: EBA Press Releases
Keywords: Europe, EU, Banking, Basel, Regulatory Capital, IRRBB, Reporting, IRB Approach, Credit Risk, Market Risk, Stress Testing, EBA
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