EBA sets out roadmap for the implementation of the regulatory review of internal models

The European Banking Authority (EBA) published today an Opinion specifying the general principles and timelines for the implementation of the regulatory review of the internal ratings-based (IRB) approach. The aim of the Opinion is to provide guidance and clarity to both Competent Authorities and institutions on the planned review and its implementation. The Opinion is supported by a Report, which summarises the feedback received from the public consultation on the EBA discussion paper on the future of the IRB approach.

 

Both the Opinion and the Report are part of the EBA's work to identify the main regulatory actions necessary to address the key drivers of variability in the implementation of IRB models. The proposed changes to the regulatory framework included in the Opinion aim at addressing the current concern about the lack of comparability of capital requirements determined under the IRB approach across institutions.

 

In particular, in its Opinion, the EBA reiterates its stance in favour of the continued use of the IRB approach and introduces changes which aim at harmonising definitions and supervisory practices in the definition of default, the estimation of risk parameters and treatment of defaulted assets, credit risk mitigation techniques and disclosure in four phases. These changes should be supplemented by amendments to the underlying framework – beyond what is currently allowed in European legislation – in order to reduce undue variability in the implementation of the IRB models.

 

In order to ensure an efficient use of resources in institutions and supervisory authorities, the EBA calls for a flexible approach in the implementation of the regulatory review. To this end, the Opinion sets out an overall timeline, which requires all changes related to the regulatory review to be finalised by the end of 2020, at the latest. At the same time, the Opinion notes that the necessary bank-specific changes are best determined together with the relevant Competent Authority.

 

With this approach, the EBA has struck a balance between the industry's concerns regarding the operational burden of implementing the changes and a sufficiently ambitious timeline to address the concerns regarding the variability observed in capital requirements. In addition, the proposed timeline will allow banks to have certainty of any potential changes in the IRB framework introduced by the Basel Committee of Banking Supervision.