Internal Ratings-Based (IRB)

Econ Vote on Resolution on Basel III Revisions

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On November 10, 2016, the European Parliament published a press release on a vote taken by its Committee on Economic and Monetary Affairs (“ECON“) in relation to revisions to Basel III, which are currently under consideration by the Basel Committee on Banking Supervision (“BCBS“).

The text of the resolution has not been published, yet the release states that it calls on the European Central Bank (“ECB”), the European Commission (“EC”) and the EBA to engage in the BCBS’s work and report to the ECON on their progress. Furthermore, the press release states that the revisions should:

  • strengthen the overall financial provision of European banks but should not significantly increase overall capital requirements;
  • respect the principle of proportionality and the important role played by banks in financing the European economy; and
  • consider and mitigate the differences between jurisdictions and, at the same time, avoid penalizing the EU banking model.

The resolution will be considered by the European Parliament in its plenary session between November 21, 2016 and November 24, 2016.

The package of reforms to Basel III is expected by the end of 2016 and will cover issues such as internal ratings-based (“IRB“) approaches and operational risk as well as the standardized approach for credit risk.

EBA Final Draft RTS on Assessment Methodology for Internal Ratings-Based Approach

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The European Banking Authority (EBA) has published final draft regulatory technical standards (RTS) on the specification of the assessment methodology for competent authorities regarding compliance of an institution with the requirements to use the internal ratings-based (IRB) approach in accordance with Articles 144(2), 173(3) and 180(3)(b) of the Capital Requirements Regulation (Regulation 575/2013) (CRR).

The 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 relating to verification requests and of the methods to be used by competent authorities in this context.  Under the IRB approach, institutions determine their own funds requirements for credit risk, taking into account their own estimates of risk parameters.  Competent authorities may, under the CRR, permit institutions to use the IRB approach, provided that the relevant conditions set out in the CRR are met.

The draft RTS are available here and will now be submitted to the European Commission for endorsement.

EBA Publishes RWA Assessment as the Next Step in Improving Consistency of Internal Model Outcomes

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The European Banking Authority (EBA) has published two reports on the consistency of Risk-Weighted Assets (RWAs) across large EU institutions for large corporate, sovereign and institutions’ Internal Ratings-Based (IRB) portfolios (collectively referred to as “low default portfolios”, or LDP). The LDP analysis explains how much of the variability in RWAs is led by difference in riskiness (namely, idiosyncratic portfolio features), and tries to identify residual drivers that are linked to banks’ practices. The CCR benchmarking report considers the calculation of counterparty credit risk (CCR) exposures under the Internal Model Method (IMM) and the credit value adjustments (CVA) according to the advanced approach (ACVA).

The reports summarize the findings obtained from two benchmarking exercises aimed at improving the comparability of EU banks’ RWAs. A key finding is that around 75% of the observed difference in global charge (GC) levels across institutions could be explained by the proportion of defaulted exposures in the portfolio and the portfolio mix. As for the CCR and ACVA analyses, the report shows that there is significant variability across banks in the calculation of CCR and ACVA, especially for equity and foreign exchange OTC derivatives.