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EBA sets out roadmap for the regulatory review of internal models
Banking alert
Banking alert | 26 February 2016 | EBA sets out roadmap for the regulatory review of internal models
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The EBA aims to harmonise key definitions and supervisory practices in order to reduce variability in the implementation of IRB models - sets out roadmap for the regulatory review of internal models with phases I and II to be finalised in 2016.
Opinion overview
The EBA published an Opinion outlining phased changes to various regulatory products related to IRB models.
Through the Opinion the EBA aims to address the key drivers of variability in the implementation of IRB models, in particular the lack of comparability of capital requirements derived from IRB models across institutions.
As reported by the EBA - 4 February 2016
Read the press release and access the opinion. The report supporting the opinion may be accessed here.
Phased introduction of regulatory developments
The proposed timeline of the regulatory review is outlined below:
Phase |
Regulatory products (Articles of Regulation(EU) No 575/2013) |
Tentative dates |
Phase 1: IRB assessment methodology |
RTS under Articles 144(2), 173(3), 180(3b) on the assessment methodology |
By Q1 2016
|
Phase 2: definition of default |
RTS under Article 178(6) on the materiality threshold |
By mid-2016 |
GL under Article 178(7) on the application of the definition of default |
||
Phase 3: risk parameter estimation and treatment of defaulted assets |
RTS under Articles 181(3a), 182(4a) on the nature, severity and duration of economic downturn |
By mid-2017 |
GL on downturn LGD estimation – EBA own initiative (report on Article 502) |
||
GL on PD estimation – EBA own initiative (report on Article 502) |
||
GL on LGD in-default, ELBE and IRB shortfall calculation – EBA own initiative (report on Article 502) |
||
Phase 4: credit risk mitigation |
RTS under Article 183(6) on the recognition of conditional guarantees |
By end 2017 |
RTS under Article 194(10) on liquid assets |
||
RTS under Article 221(9) on the Internal Models Approach for master netting agreements |
||
Across phases: transparency |
Implementation of the Basel Committee dis-closure proposals (Pillar 3 disclosures) in the EU |
Pillar 3: work to start in 2016 |
Overall objective
In its Opinion, the EBA re-iterates its stance in favour of the continued use of the IRB approach. The objective of finalising the regulatory review by the end of 2020 is two-fold:
- It gives sufficient time for banks to adjust their IRB models
- It addresses the variability observed in capital requirements in a reasonable timeframe.
How can we help?
Our credit modelling team brings substantial experience on the subject having worked both on the development and validation of such models, locally and abroad. Feel free to reach out to us for a consultation meeting.
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