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    EBA Publishes Reports on Credit and Market Risk Benchmarking Exercises

    February 22, 2022

    The European Banking Authority (EBA) published reports on the annual credit and market risk benchmarking exercises. These exercises aim to monitor the consistency of risk-weighted assets across all European Union institutions that are authorized to use internal approaches for the calculation of capital requirements. This iteration of the exercise also focuses on analyzing the impact of the pandemic and the compensating public measures on the internal rating-based (IRB) models. EBA published a document (Annex) presenting a chart pack that analyzes the credit risk benchmarking metrics. The chart pack aggregates results of the supervisory benchmarking exercise for internal models used by both high-default portfolios and low-default portfolios across a sample of European Union institutions.

    The report on credit risk benchmarking exercise provides an in-depth analysis of the observed and potential impact of the COVID-19 pandemic. It includes theoretical analysis on where potential impact is likely to be observed and empirical analysis on the development of average risk-weights, probabilities of default, and default rates between December 31, 2019 and December 31, 2020 for the different benchmarking portfolios. The theoretical assessment concludes that heterogeneity of the impact is expected not only due to the different extent to which the underlying loans (obligors) are affected by the pandemic but also because of the institutions’ relevant processes for assigning and reviewing IRB ratings. The empirical analysis indicates that the observed decrease of average risk-weight and probability of defaults for high-default portfolios is mostly due to the re-estimation of probability of defaults conducted in 2020. For qualified revolving exposures slight migrations of retail obligors or exposures toward better rating grades are observed, while for corporates small and medium-size enterprises (SMEs) the decrease of risk-weight is likely to be related to the Capital Requirements Regulation (CRR) quick-fix. For retail SME portfolios, the observed decrease of average default rates may indicate a potential overcompensation of the expected impact of the economic crisis by public measures and moratoria. The report also includes an analysis of the developments of both average probability of defaults and average default rates between end-2019 and end-2020, which may be due to the IRB roadmap implementation.

    The report on market risk benchmarking exercise indicates that the 2021 results show a reduction in dispersion of the initial market valuation versus the 2020 exercise, with regard to the foreign exchange and commodities asset classes. This improvement was expected and reflects the clarifications provided in the 2020 exercise. The 2021 exercise considered the same instruments that were applied in 2019 and 2020, which are mostly plain vanilla. The overall variability for value-at-risk across all asset classes, except for the credit spread, is slightly lower than the observed variability for stressed value-at-risk. More complex measures, such as incremental risk charge, or IRC, show a higher level of dispersion. The increase of the value-at-risk dispersion for 2021 was also analyzed separately to explain the impact of the increased market volatility, followed by the COVID-19 outbreak. Although the majority of causes were identified and actions put in place to reduce the unwanted variability of the hypothetical risk-weighted assets, the effectiveness of these actions can be evaluated only with ongoing analysis.

     

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    Keywords: Europe, EU, Banking, Covid-19, Credit Risk, Market Risk, CRR, Basel, Benchmarking Exercise, Regulatory Capital, Internal Models, Supervisory Benchmarking, IRB Approach, EBA

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