EBA updated ITS package for 2021 benchmarking exercise includes IFRS9 template

The European Banking Authority (EBA) published today an update to its Implementing Technical Standards (ITS) on benchmarking of internal approaches. The updated ITS include all benchmarking portfolios that will be used for the 2021 exercise. The main novelty is the inclusion of the IFRS9 template. The benchmarking exercise is an essential supervisory tool to enhance the quality of internal models, which is particularly important in a stressed economic situation.

In order to analyse potential sources of variability stemming from the implementation of the new accounting standard (IFRS 9), two annexes have been introduced. The collection of quantitative data on the IFRS 9 parameters will contribute to gather a better understanding of the different methodologies, models, inputs and scenarios, which could lead to material inconsistencies in expected credit loss (ECL) outcomes, and affect own funds and regulatory ratios. The initial focus of the analysis is on the probability of default (PD) parameter, and, in particular, on the following three aspects:

• The analysis of the variability of the PD parameter estimated over a default horizon of 12 months;
• Variability of the macroeconomic forecasts and the interaction between the lifetime PD curve and the macro economic scenarios used for determining the ECL;
• Variability of practices in the assessment of significant increases in credit risk (SICR). 

On the credit risk side, neither new portfolios nor new data points have been added compared to the 2020 exercise. However, some marginal changes have been applied in annex I. First, the annex now includes counterparties treated under the standardised approach, which are reported in the IFRS 9 template. Second, institutions should report the hypothetical RWA calculated under the standardised approach  for low default portfolios (LDP) and the hypothetical RWA based on empirical default rates at the rating split level.

For the market risk benchmarking, some instruments have been updated and clarified but the overall composition of the portfolio has not changed with respect to the 2020 exercise.

In addition, the update includes changes and clarifications that the EBA introduced based on the Consultation Paper that was published on 17 December 2019.  

Finally, the EBA believes that under the current circumstances, the usefulness of this exercise has increased. From a supervisory perspective, it will help maintain the high quality of internal models. From the regulatory point of view, it will continue to be used to monitor the models’ behaviours and sensitivity to a stressed economic situation, as well as the implementation of the forthcoming regulatory products along the IRB road map.