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.
- 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
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