EBA publishes final draft technical standards on conditions for assessing materiality of extensions and changes of internal approaches for credit and operational risk

The European Banking Authority (EBA) published today its final regulatory technical standards (RTS) specifying the conditions for assessing the materiality of extensions and changes of internal approaches for credit and operational risk. These RTS will be part of the Single rulebook aimed at enhancing regulatory harmonisation in Europe.

According to the Capital Requirements Regulation (CRR), all institutions shall apply for permission whenever they intend to implement any material extension and change to their internal approaches for credit and operational risk.

In this respect, the proposed RTS aim at harmonising the assessment of the materiality of extensions, and changes to internal approaches, as well as at ensuring that their approved internal approaches comply with the regulatory requirements. Also it specifies the modalities of notification.

In particular, these RTS specify the conditions for assessing the materiality of extensions and changes to the Internal Rating Based approach (IRB approach) for credit risk and the Advanced Measurement Approach (AMA) for operational risk.

The key features of the proposed RTS include:

• the introduction of three categories of model extensions and changes (which require permission; ex-ante notification and ex-post notification);
• the introduction of an exhaustive list of qualitative conditions, which is linked to the minimum requirements for internal approaches;
• the design of the quantitative threshold as back-stop regime;
• the inclusion of standardised documentation requirements, which enable competent authorities to assess compliance of institutions with the above rules.

Legal basis and next steps

These final RTS have been developed in accordance with Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 (colloquially known as Capital Requirements Regulation or CRR).

The final standards have been sent today to the European Commission for their adoption as EU Regulations that will be directly applicable throughout the EU.

The next step will be to review and finalise the RTS specifying the conditions for assessing the materiality of extensions and changes to the Internal Models Approach (IMA) for market risk. The IMA part should be submitted to the European Commission before the end of 2014.