The reports cover credit risk for high and low default portfolios (LDPs and HDPs), as well as market risk. The results confirm previous findings, with the majority of risk-weights (RWs) variability explained by fundamentals. These benchmarking exercises, conducted by the EBA on an annual basis are a fundamental supervisory and convergence tool to address unwarranted inconsistencies and restoring trust in internal models.
Credit Risk exercise
The credit risk report examines the different drivers leading to the observed dispersion across banks' models. Most of the results are broadly in line with previous exercises, with 50% of the difference in variability explained by the proportion of defaulted exposures in the portfolio and the portfolio mix. The remaining could be attributed to differences in collateralisation and other institution-specific factors, such as risk strategy and management practices, idiosyncratic portfolio features, modelling assumptions, client structure, as well as supervisory practices. This confirms previous findings that RWA variability can be explained, to a large extent, by looking at some measurable features of institutions' exposures.
Market Risk exercise
Compared to the previous exercise, the 2018 analysis shows a reduction in the dispersion in the initial market valuation (IMV) and risk measures. This improvement was expected and is mainly due to the simplification in the market risk benchmark portfolios. Some variability in the results persists, which mainly stems from different interpretations and heterogeneous market practices adopted by the firms. Some of these issues have been addressed, and the quality of the data has improved.
From a risk factor perspective, interest rate portfolios exhibit a lower level of dispersion than the other asset classes, which is most likely due to the use of more consistent practices and assumptions that are more homogeneous across the banks when modelling interest rate risk. This finding confirms the conclusions drawn in last year's analysis.
Press release
Full report - market risk
Full report – credit risk
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