24 July 2014
The European Banking Authority (EBA) published today a peer review on the implementation of its guidelines on the management of concentration risk under the supervisory review process (SREP). The report shows that National Competent Authorities (NCAs) largely comply with the assessed guidelines (GL31) and credit concentration risk forms an integral part of NCAs' risk assessment system.
In particular, the report shows that concentration risk is continuously monitored and assessed and forms an integral part of the NCAs' risk assessment system for individual credit institutions.
Furthermore, various examples of good supervisory practices were identified in relation to the management of credit concentration risk. These include: the use of domestic central credit registers; the capability of large credit institutions to capture adequate credit data, analyse and monitor their credit concentrations, and produce a comprehensive set of automated supervisory reporting; the conduct of regular benchmarking exercises by NCAs for credit concentration risk by sector, industry and/or country.
The report also identified some weaknesses, such as some NCAs do not adequately verify whether credit institutions apply forward-looking credit risk mitigation techniques and risks associated with large indirect credit exposures; only half of the NCAs consider whether the credit institution's framework takes into account the underlying exposures to credit concentration risks that may arise from complex products, such as securitised products; and only half of the NCAs assess credit institutions' conservatism of their models' underlying assumptions and techniques, as well as how a credit institution uses such outputs when it formulates credit policies and limits.
Based on the outcome of the peer review, the EBA will assess these elements and practices when developing the module on credit concentration risk in its Single Supervisory Handbook, as well as in its ongoing work on Guidelines related to supervisory practices.
Peer reviews are conducted in accordance with Article 30 of the EBA Regulation and with the EBA Decision establishing the Review Panel. A peer review entails an assessment and comparison of the effectiveness of supervisory activities as well as of the implementation of the provisions by competent authorities vis-à-vis those of their peers.