EBA issues Opinion to the European Commission on the proposed amendments to the EBA final draft RTS on IRB assessment methodology

The European Banking Authority (EBA) publishes today an Opinion on the amendments proposed by the European Commission as regards the EBA final draft RTS specifying the assessment methodology competent authorities are to follow when assessing the compliance of credit institutions and investment firms with the requirements to use the Internal Ratings Based (IRB) approach laid down in the Capital Requirements Regulation (CRR). These RTS are an important part of the EBA’ regulatory review of the IRB approach, as they harmonise the supervisory assessment methodology on the IRB approach across all Member States in the European Union (EU).

The EBA has identified a number of substantive changes in the Commission’s version of the RTS compared to the final draft RTS submitted in July 2016. The most important change is related to the flexibility for competent authorities to apply any other tests and verifications when assessing institutions’ compliance with the IRB approach. The EBA is in particular concerned about the Commission’s amendments in this regard, as this could potentially hampers supervisory efforts to ensure harmonized use of IRB models.

Other substantive changes identified by EBA relate to the assessment of the institutions’ validation of internal models, approaches towards grade assignment and risk parameter estimation as well as any governance and procedural aspects required in the context of the IRB approach. In these areas, the EBA also notes that the amendments change the policy that was developed and agreed by the EBA.

As regards the Commissions’ amendments that make it mandatory for third parties involved in model development to provide input into the validation, the EBA has now concerns. The amendments continue to ensure that institutions still comply with the principle of independence between model development and model validation.

Finally, the Opinion also highlights a number of editorial and structural changes that are needed to ensure consistency if taking on board the changes proposed by the Commission.

It should be stressed, that the EBA work on the comparability of risk weighted exposures (RWAs) have in the past demonstrated that significant differences in supervisory practices can contribute to non-risk-based differences in capital requirements for institutions using the IRB approach. Consequently, the EBA fully supports the Commission’s progress to adopt these RTS.

Legal basis and background

The EBA has delivered this Opinion in accordance with Article 10(1), subparagraph 6, of Regulation (EU) No 1093/2010, which requires the Authority to submit its response in the form of an opinion to amendments proposed by the European Commission.

The EBA had submitted its final draft RTS[1] to the European Commission on 5 November 2018.