EBA publishes final draft technical standards on assessment methodology for the validation of credit risk models

The European Banking Authority (EBA) published today the final draft Regulatory Technical Standards (RTS) specifying the assessment methodology competent authorities shall follow in assessing the compliance of an institution with the requirements for the use of the Internal Ratings Based Approach (IRB Approach). The purpose of these RTS is to harmonise the supervisory assessment methodology with respect to the IRB Approach across all Member States in the European Union (EU).

 

These final draft RTS provide a mapping of the minimum IRB requirements, as laid down in Chapter 3, Title II, Part three of the CRR into fourteen chapters. Each chapter starts with a brief description of the assessment criteria to be used by competent authorities as regards verification requests and of the methods to be used by competent authorities in this context. 

 

Among others, clarifications are provided on the independence of validation function from the credit risk control unit, on the calculation of own-LGD estimates as default-weighted averages and on the process of calculation of the difference between expected loss amounts and credit risk adjustments.

 

EBA's studies on the comparability of risk weighted exposure amounts (RWAs) have shown that different supervisory practices can contribute significantly to non-risk-based differences in capital requirements when calculated according to the IRB Approach.

 

The draft RTS published today are part of the EBA's work on supervisory convergence, which is key for ensuring comparability of models' outcomes and restoring public confidence in the use of such models for regulatory purposes. These final draft RTS are considered an integral part of the EBA's Plan of a regulatory review of the IRB Approach.

 

Under the IRB Approach institutions determine their own funds requirements for credit risk taking into account own estimates of risk parameters. Competent Authorities may, according to Article 143(1) of Regulation (EU) No 575/2013 (Capital Requirements Regulation – CRR), permit institutions to use the Internal Ratings Based Approach (IRB Approach), provided that the conditions set out in Chapter 3, Title II, Part three of the CRR are met.

 

The mandate for the EBA to develop such RTS is laid down in Article 144(2) CRR. Additionally the draft RTS published today covers Article 173(3) according to which EBA should develop draft RTS specifying methodologies for competent authorities to assess the integrity of the assignment process and the regular and independent assessment of risks and Article 180(3)(b) according to which EBA should also specify in draft RTS the methodologies according to which competent authorities shall assess the methodology of an institution for estimating the PD.