EBA interim report on the consistency of risk-weighted assets in the banking book

The European Banking Authority (EBA) releases today the interim results of its investigation on risk-weighted assets (RWAs) in the banking book aimed at identifying any material difference in RWA outcomes and at understanding the sources of such differences. This report, which illustrates the outcomes of the first phase of the investigation, is part of a wider EBA analysis on the consistency of RWAs, whose ultimate objective is to better understand the differences in the calculation of RWAs and, if need be, to formulate the necessary policy solutions to enhance convergence between banks and to  improve disclosure.

Interim report on the analysis of the banking book

The ‘top down' analysis conducted using the existing supervisory reporting data from 89 European banks across 16 countries confirms material differences between banks in the calculation of the Global Charge (GC) defined as the sum of  RWAs (unexpected losses) and the expected losses (EL).

The analysis conducted so far suggests that:

-  50% of the differences in terms of GC between banks mainly stem from the approach for computing RWAs in use (standardised vs IRB) as well as from the composition of each bank's loan portfolio. In other words, these are differences that relate to the structure of a bank's balance sheet as well as to its reliance on the different regulatory approaches for assessing and measuring risks (referred in the report as A-type differences).

- The remaining 50% stem from the IRB risk parameters applied thus reflecting each bank's specific portfolio and risk management practices. (referred in the report as B-type differences).

The A-type differences can be easily explained and disentangled if proper disclosure is ensured. In this respect, the EBA is already working to enhance disclosure in general, and in particular on RWAs. This would allow for a better comparison by third parties, thus increasing confidence in the IRB approach. Some of the A-type differences appear to be driven by potentially different supervisory practices that may require further investigation and possibly supervisory measures to foster convergence.

The analysis of the B-type differences, which may also be caused by a different interpretation and practical application of the regulation, is not the scope of this report as it requires further data.

 To shed more light on the B-type differences, which appear mainly in the corporate and retail portfolios, and to be able to draw some conclusions on the A-type differences, more granular "bottom up" exercises based on specific data requests from banks are needed. This would allow to combine a quantitative analysis with a qualitative understanding of the underlying data.

Work is currently underway on two bottom-up steps of the analysis on banking book exposures. These analyses which are expected to be achieved by the end of 2013, include:

- an investigation of the low default portfolio exposures;

- an ad-hoc review of SMEs and residential mortgage exposures.

Commenting on this analysis, Andrea Enria, Chairperson of the EBA, said "Thanks to this preliminary analysis, we identified some explanatory drivers of RWA differences across banks. Greater disclosure could, therefore, go some way to appease the concerns raised by investors and market analysts on the reliability of banks' RWAs. But this is not enough. The remaining dispersion is significant and calls for further investigations and possibly policy solutions. We are strongly committed to deepening this analysis to ensure RWAs are seen and understood as reliable and consistent across banks, reflecting their true risk profile".

EBA wider analysis on the consistency of risk weighted assets across European banks

The work currently undertaken on the banking book exposures is part of a wider analysis on the consistency of RWAs conducted by the EBA.

In this respect, the EBA is planning to:

• conduct interviews with the banks and the supervisors in to complement the bottom-up exercises and to detect inconsistent practices;
• perform a review of the Pillar 3 disclosures on RWAs;
• carry out an assessment of the trading book exposures by the end of 2013.

The overall results of the review on RWAs will inform the work the EBA is conducting in parallel on the validation of internal models, which will also contribute to harmonising supervisory and banks' practices and to enhancing consistency.