EBA publishes RWA assessment as the next step in improving consistency of internal model outcomes
22 July 2015
The European Banking Authority (EBA) published today two reports on the consistency of RWAs across large EU institutions for large corporate, sovereign and institutions' IRB portfolios, (collectively referred to as "low default portfolios" - LDP), as well as for 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 summarise the findings obtained from two benchmarking exercises conducted in line with the mandate laid down in the Capital Requirements Directive (CRD) and related draft technical standards. The benchmarking exercises aim at improving the comparability of EU banks' RWAs and are a crucial tool to restoring trust in internal models.
The LDP analysis explains how much of the variability in RWAs is led by difference in riskiness – i.e., idiosyncratic portfolio features – and tries to identify residual drivers that are linked to banks' practices. A key finding is that three-quarters 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. When looking at each portfolio separately, the analysis shows that the impact of defaulted exposures explains about 40% of the GC differences for the large corporate portfolios, while the remaining 60% may be due to differences in bank-specific factors, such as risk management practices.
As for the CCR and ACVA analyses, which have been carried out in close cooperation with the Basel Committee for Banking Supervision (BCBS), the report shows that there is significant variability across banks in the calculation of counterparty credit risk and advanced credit value adjustments, especially for equity and foreign exchange OTC derivatives.
These findings will inform the work the EBA is conducting for improving the regulatory framework and restoring confidence in internal models. A deeper understanding of what drives differences in RWAs will allow the EBA to explore a number of options to address specific concerns, as put forward in the EBA report on CVA as well as in the discussion paper on the future of the IRB Approach published by the EBA in February and March 2015 respectively.
How to use the 2014 LDP report
The 2014 LDP report could be used in conjunction with the information on EU banks' risk parameters disclosed as part of the 2014 Stress Test Exercise and published in December 2014 (annexes to the EBA Risk Dashboard Q1 2014 and Q3 2014). See below the respective links.
EBA Risk dashboard Q1 2014
EBA Risk dashboard Q3 2014
In addition, it could be useful to use the global benchmarks as included in the LDP report in conjunction with banks' Pillar 3 disclosures on capital and risk management. In particular the information on credit risk provides information on RWA density by region and regulatory portfolios. It should be noted, however, that the definition of the portfolios used for the LDP exercise differs from the main regulatory portfolios used in Pillar 3 reports.
Finally, for comparison purposes see below the link to the findings of the 2012 LDP exercise.
Franca Rosa Congiu
E-mail: firstname.lastname@example.org - Tel: +44 (0) 207 382 1772