11 June 2014
The European Banking Authority (EBA) published today a second report on the consistency of risk weighted assets (RWAs) in the residential mortgage portfolio. The report, which is part of a wider ongoing EBA work on comparability of RWAs, illustrates the findings of a so called "drill-down analysis", an investigation on the extent to which the most commonly used risk drivers influence the variability in risk weights. Overall, the analysis confirmed that risk parameters, such as loan to value, are drivers of RWAs. However, there are differences in how the banks reflect such drivers in RWAs.
The objective of this analysis was to understand if and how different variables describing the portfolios - besides the country cluster variables - could explain the differences in risk-weights across EU banks which were found in the first phase of this analysis.
The analysis confirmed the existence of a positive correlation between the value of the different drill-down variables - loan to value at origination (LTVO), indexed loan to value (ILTV), debt to service at origination (DTSO) and loan to income at origination (LTIO) - and the risk weights at EU aggregated level.
The commonly used risk drivers, regardless of whether they are used by banks in the estimation of the probability of default (PD) and loss given default (LGD), or simply in the credit lending process, influence the risk weights final outcomes.
The existing differences in risk weights for residential mortgages are only partly explained by the risk weight sensitivity to the investigated risk drivers. The analysis also highlighted the potential impact of market differences (namely credit risk mitigants other than mortgages), banks' specific credit policies as well as different modelling choices.
This study shed additional light on the sources of variation in risk weights, creating the basis for a better knowledge and comparison of banks at country level across the EU. However, final conclusions at bank level can only be drawn by national competent authorities.
The EBA is currently engaging with competent authorities and expects to receive their feedback on the assessment they are conducting on banks' internal approaches.
This process is in line with the consultation document on supervisory benchmarking and represents a call on supervisors to conduct their assessment of banks' internal approaches making concrete use of the findings of this analysis.