Featured Product

    EBA Consults on Use of Machine Learning for IRB Credit Risk Models

    November 11, 2021

    The European Banking Authority (EBA) published a discussion paper on machine learning used in the context of internal ratings-based (IRB) models to calculate regulatory capital for credit risk. The aim of the discussion paper is to set supervisory expectations on how new sophisticated machine learning models can coexist with and adhere to the Capital Requirements Regulation (CRR) when used in the context of IRB models. The discussion paper seeks stakeholder feedback on many practical aspects on the use of machine learning in the context of IRB models, with the consultation period ending on February 11, 2022.

    This discussion paper is a first step to engage the industry and the supervisory community to investigate the possible use of machine learning in IRB models and to build a common understanding of the general aspects of machine learning and the related challenges in complying with the regulatory requirements. The discussion paper provides a general definition of machine learning models, discusses the main learning paradigms used to train machine learning models, and discusses the current limited use of machine learning models in the context of IRB models. It also analyzes the challenges and the benefits institutions may face in using machine learning to develop compliant IRB models. The paper provides a set of principle-based recommendations that aim to ensure that machine learning models adhere to the regulatory requirements set out in the CRR, should they be used in the context of the IRB framework.

    EBA recommends for institutions to ensure that the staff working in the model development unit, credit risk control unit, and the validation unit is sufficiently skilled to develop and validate machine learning models. EBA recommends that institutions should ensure that the management body and senior management are in a position to have good understanding of the model, by providing them with appropriate high-level documentation. It is also recommended for institutions to avoid any unnecessary complexity in the modeling approach, unless it is justified by a significant improvement in the predictive capacities. Institutions should avoid including an excessive number of explanatory drivers or drivers with no significant predictive information and using unstructured data if more conventional data is available that provides similar predictive capacities. Institutions should also avoid overly complex modeling choices if simpler approaches yielding similar results are available. In addition, to ensuring that the model is correctly interpreted and understood, institutions are recommended to:

    • analyze, in a statistical manner, the relationship of each single risk driver with the output variable and the overall weight of each risk driver in determining the output variable.
    • assess the economic relationship of each risk driver with the output variable to ensure that the model estimates are plausible and intuitive.
    • provide a summary document in which the model is explained in an easy manner based on the outcomes of the analysis.
    • ensure that potential biases in the model (for example, overfitting to the training sample) are detected.

     

    Related Links

    Comment Due Date: February 11, 2022

    Keywords: Europe, EU, Banking, CRR, Basel, Machine Learning, Regulatory Capital, Credit Risk, Regtech, IRB Approach, EBA

    Featured Experts
    Related Articles
    News

    EBA Proposes Standards for IRRBB Reporting Under Basel Framework

    The European Banking Authority (EBA) proposed implementing technical standards on the interest rate risk in the banking book (IRRBB) reporting requirements, with the comment period ending on May 02, 2023.

    January 31, 2023 WebPage Regulatory News
    News

    FED Issues Further Details on Pilot Climate Scenario Analysis Exercise

    The U.S. Federal Reserve Board (FED) set out details of the pilot climate scenario analysis exercise to be conducted among the six largest U.S. bank holding companies.

    January 17, 2023 WebPage Regulatory News
    News

    US Agencies Issue Several Regulatory and Reporting Updates

    The Board of Governors of the Federal Reserve System (FED) adopted the final rule on Adjustable Interest Rate (LIBOR) Act.

    January 04, 2023 WebPage Regulatory News
    News

    ECB Issues Multiple Reports and Regulatory Updates for Banks

    The European Central Bank (ECB) published an updated list of supervised entities, a report on the supervision of less significant institutions (LSIs), a statement on macro-prudential policy.

    January 01, 2023 WebPage Regulatory News
    News

    HKMA Keeps List of D-SIBs Unchanged, Makes Other Announcements

    The Hong Kong Monetary Authority (HKMA) published a circular on the prudential treatment of crypto-asset exposures, an update on the status of transition to new interest rate benchmarks.

    December 30, 2022 WebPage Regulatory News
    News

    EU Issues FAQs on Taxonomy Regulation, Rules Under CRD, FICOD and SFDR

    The European Commission (EC) adopted the standards addressing supervisory reporting of risk concentrations and intra-group transactions, benchmarking of internal approaches, and authorization of credit institutions.

    December 29, 2022 WebPage Regulatory News
    News

    CBIRC Revises Measures on Corporate Governance Supervision

    The China Banking and Insurance Regulatory Commission (CBIRC) issued rules to manage the risk of off-balance sheet business of commercial banks and rules on corporate governance of financial institutions.

    December 29, 2022 WebPage Regulatory News
    News

    HKMA Publications Address Sustainability Issues in Financial Sector

    The Hong Kong Monetary Authority (HKMA) made announcements to address sustainability issues in the financial sector.

    December 23, 2022 WebPage Regulatory News
    News

    EBA Updates Address Basel and NPL Requirements for Banks

    The European Banking Authority (EBA) published regulatory standards on identification of a group of connected clients (GCC) as well as updated the lists of identified financial conglomerates.

    December 22, 2022 WebPage Regulatory News
    News

    ESMA Publishes 2022 ESEF XBRL Taxonomy and Conformance Suite

    The General Board of the European Systemic Risk Board (ESRB), at its December meeting, issued an updated risk assessment via the quarterly risk dashboard and held discussions on key policy priorities to address the systemic risks in the European Union.

    December 22, 2022 WebPage Regulatory News
    RESULTS 1 - 10 OF 8699