The European Banking Authority (EBA) launched today a public consultation on its draft Regulatory Technical Standards (RTS) on the assessment methodology under which competent authorities verify institutions’ compliance with the requirements applicable to their internal models under the Fundamental Review of the Trading Book (FRTB) rules. These RTS are part of the phase 4 deliverables of the EBA roadmap for the new market and counterparty credit risk approaches. The consultation runs until 26 June 2023.

One of the prerequisites for an institution to use the new internal model approach (IMA) for calculating its own funds requirements for market risk is the approval from its competent authority. To obtain such an approval, the institution is subject to a thorough and comprehensive assessment of its internal model by the competent authority to ensure it complies with the relevant regulatory provisions.

With these RTS, the EBA ensures clarity on the assessment performed by competent authorities, so as to guide the implementation of FRTB internal models in EU. In particular, these draft RTS set out a framework for competent authorities to assess these requirements and focus on three main aspects: governance, the internal risk-measurement model - covering the expected shortfall, and the stress scenario risk measure -  and the internal default risk model.

On governance, the RTS leverage on the former draft RTS on assessment methodology for market risk. There are, however, some novelties. For example, competent authorities are now required to check that as part of the stress testing programme, institutions also consider environmental risks.

Regarding the internal risk-measurement model and the internal risk default model, these draft RTS are mostly addressed to competent authorities, rather than to institutions. They provide the former with a set of assessment techniques to verify that the requirements already set out in the Capital Requirement Regulation (CRR) or in other relevant RTS are met to ensure that the assessment is comprehensive in scope, and, where possible, harmonised.

The RTS include assessment techniques that the competent authorities must apply, and some others that competent authorities may decide to apply depending on the situation of the institution, for example, on the basis of proportionality considerations. As a result, these RTS provide clarity as to the type of requests institutions can expect from competent authorities during the investigation phase.