18 December 2013

EBA publishes reports on comparability of risk-weighted assets and pro-cyclicality

The objective of this work is to address unjustified differences in the denominator of the capital ratios, to understand the sources of such differences and, if need be, to formulate the necessary policy solutions to enhance convergence in supervisory and banks' practices, ultimately improving disclosure too.

The two reports related to IRB models published today and the two previously published interim reviews on the consistency of credit risk RWAs together with the pro-cyclicality report have been compiled in a summary report which has been submitted today to the European Commission, in line with the EBA's mandate in the CRR.

The summary report includes the policy responses that the EBA considers as particularly important for addressing concerns about RWA consistency. In this respect, the EBA will focus its future work on the following aspects:

• Enhancing disclosure and transparency of RWA-related information.
• Supporting competent authorities in properly implementing the single rulebook with the delivery of existing mandates set out in the CRR. These include the important benchmarking work on RWA parameters that supervisors can use to assess model outcomes.
• Developing additional guidance that specifically addresses and facilitates consistency in supervisory and banks' practices, which includes for example uniform default definitions and harmonised treatment of defaulted assets under the IRB approach, clearer guidance on PD and LGD estimations and treatment of low-default assets.

Report on SMEs and residential mortgages

This report outlines the interim results of the third stage of the EBA's work on banking book exposures and focuses on SMEs and residential mortgages portfolios. Forty-three banks provided quantitative and qualitative information on the Internal Ratings-Based (IRB) models used for Residential Mortgages, SME Retail and SME Corporate, along with the historical data used for the development and calibration of the internal approaches.

Report on the comparability of supervisory rules and practices

The EBA also issued a report on the impact of supervisory rules and practices on comparability of capital requirements under the IRB approach across the EU. On the basis of data collected from EU supervisors, the EBA noticed divergences in terms of how regulatory frameworks are implemented at national level. Some aspects were identified that may require additional work to ensure better harmonisation of supervisory practices across the EU. These relate to aspects such as supervisory practices, roll-out plans, PD and downturn LGD computation.

Report on pro-cyclicality of the IRB approach

As mandated by the European Commission, the EBA also assessed whether the Capital Requirements Directive (CRD) contributes to pro-cyclicality in the financial system, i.e. whether the capital requirement regulation exacerbates business cycle fluctuations. The question addressed in this report is, whether the design of the current capital requirement regulation is a cause of higher business cycle fluctuations.

Report on variability of RWAs for market risk portfolios

Besides the RWA work related to credit risk, the EBA has also focused its attention on market risk. This report outlines the conclusions stemming from a market hypothetical portfolio exercise (HPE) which the EBA conducted in 2013 in parallel with a similar exercise performed by the Basel Committee. The report focuses on the level of variability in banks' internal models for market RWAs.

Full press release

Summary report on comparability and pro-cyclicality of the IRB-Approach

Report on the pro-cyclicality of capital requirements under the IRB-Approach

Report on the comparability of supervisory rules and practices

Third interim report on the consistency of risk-weighted assets - SME and residential mortgages

Report on variability of Market RWA

© EBA