EBA: Interim report on the consistency of risk-weighted assets (RWA) in the banking book

26 February 2013

This interim report is aimed at identifying any material difference in RWA outcomes and at understanding the sources of such differences. It is part of a wider EBA analysis on the consistency of RWAs.

The analysis conducted so far suggests that:

• 50 per cent of the differences in terms of GC between banks mainly stem from the approach for computing RWAs in use (standardised vs IRB) as well as from the composition of each bank’s loan portfolio. In other words, these are differences that relate to the structure of a bank’s balance sheet as well as to its reliance on the different regulatory approaches for assessing and measuring risks (referred in the report as A-type differences).
• The remaining 50 per cent stem from the IRB risk parameters applied thus reflecting each bank’s specific portfolio and risk management practices. (referred in the report as B-type differences).

The A-type differences can be easily explained and disentangled if proper disclosure is ensured. In this respect, the EBA is already working to enhance disclosure in general, and in particular on RWAs. This would allow for a better comparison by third parties, thus increasing confidence in the IRB approach. Some of the A-type differences appear to be driven by potentially different supervisory practices that may require further investigation and possibly supervisory measures to foster convergence. 

The analysis of the B-type differences, which may also be caused by a different interpretation and practical application of the regulation, is not the scope of this report as it requires further data.

To shed more light on the B-type differences, which appear mainly in the corporate and retail portfolios, and to be able to draw some conclusions on the A-type differences, more granular “bottom up” exercises based on specific data requests from banks are needed. This would allow combining a quantitative analysis with a qualitative understanding of the underlying data.

Work is currently underway on two bottom-up steps of the analysis on banking book exposures. These analyses which are expected to be achieved by the end of 2013 include:

• an investigation of the low default portfolio exposures;
• an ad-hoc review of SMEs and residential mortgage exposures.

The work currently undertaken on the banking book exposures is part of a wider analysis on the consistency of RWAs conducted by the EBA.

In this respect, the EBA is planning to:

• conduct interviews with the banks and the supervisors in to complement the bottom-up exercises and to detect inconsistent practices;
• perform a review of the Pillar 3 disclosures on RWAs;
• carry out an assessment of the trading book exposures by the end of 2013.

The overall results of the review on RWAs will inform the work the EBA is conducting in parallel on the validation of internal models, which will also contribute to harmonising supervisory and banks’ practices and to enhancing consistency.

Press release

Interim report

© EBA