Guidelines on the implementation, validation and assessment of Advanced Measurement (AMA) and Internal Ratings Based (IRB) Approaches

The Committee of European Banking Supervisors (CEBS) today publishes its guidelines on the implementation, validation and assessment of the risk management and risk measurement systems used by credit institutions and investment firms applying to move to an advanced approach to calculate their capital requirements.

The new Capital Requirements Directive (CRD) allows institutions to use more risk-sensitive approaches that allow them to estimate their own risk parameters. Institutions that want to use these approaches for regulatory purposes can do so only with the prior approval from their supervisory authority. Before granting this approval, the supervisors have to assess the institutions? validation procedures and control environment. The use of the more risk-sensitive approaches requires institutions to meet higher risk management standards than those required under the less risk-sensitive approaches.

CEBS? guidelines on validation reflect a common understanding of what supervisors should take into account when assessing an application from an institution to use the Internal Ratings Based (IRB) or Advanced Measurement (AMA) approaches for regulatory purposes. CEBS? aim is to streamline the approval process, especially for cross-border groups, and to contribute to a level-playing field for institutions using the more advanced risk measurement approaches.

CEBS received 34 responses from industry associations and other market participants during two consultation periods. The responses generally supported CEBS' work towards convergence, while criticising the guidelines as being too detailed and prescriptive. CEBS amended the guidelines to include many of the changes proposed by the respondents. For example, CEBS introduced some flexibility for institutions that had developed their models before final guidelines were issued. CEBS also streamlined the internal governance parts of the guidelines and changed several provisions in the paper to be read as examples illustrating underlying principles rather than formal guidance.

However, CEBS was not able fully to accommodate industry's general request for less prescriptive and less detailed guidelines. The assessment of IRB and AMA approaches is a new area and consequently there are no established supervisory practices on which CEBS guidelines can build. Moreover, a certain level of detail is necessary for both the industry and the supervisors in order to ensure the efficiency of joint assessment processes for large cross-border banking groups. Over time, as good practices emerge, it should be possible to move towards more principles based guidance.