EBF response to the consultation on the materiality of extensions and changes of internal approaches

10 June 2013

EBF attaches great importance to the draft RTS that the EBA has put forward in this consultation. The supervision of internal risk models is a central part in the prudential framework established with the adoption of the Basel II standards.

The EU took the lead with the implementation of the more risk-sensitive options available under the Basel II prudential framework from the outset in 2007. Since then, European banks have invested major resources and built up experience with internal risk models that promote the adoption of stronger risk management practices by the banking industry.

In EBF's view, the present draft RTS should contribute to creating a sounder and more consistent regulatory framework for the use of internal models if certain cautions are taken on board. This response paper condenses the experience of EU bank experts as to the questions raised by the EBA. Firstly, several proposals are put forward for EBA’s consideration. Secondly, answers to specific questions follow.

EBF Proposals

• The considerable burden associated with the ex-ante notification process could be alleviated by including the following provisions in the RTS:
  • Changes should be either classified as material therefore requiring approval, or as immaterial in which case ex-post notification on a periodic basis should be sufficient.
  • In case that the ex-ante notification category is maintained, the following should be considered:
  • In credit risk, recognise the fundamental difference of scoring systems as to the number of tiny changes inherent to their normal operation and allow for direct implementation of minor changes that will be duly reported to the competent authority on a periodic basis.
  • In credit risk, operational risk and market risk, include an additional category of immaterial changes that do not require ex-ante notification.
  • Allow for bundling changes that would require ex-ante notification at regular intervals in order to reduce the workload for both banks and supervisors without detriment of the adequate degree of control.
  • Restrict ex-ante notification only to new data used to recalibrate existing models.
  • Review the thresholds proposed in the RTS making them less stringent in search for a right balance between the level of the thresholds1 and the burden entailed. The consistency across Europe is the main benefit sought after all.
  • In market risk, it is worth noting that the Fundamental Review of the Trading Book (FRTB) currently underway at the Basel Committee may include proposals to use, for benchmarking purposes, internal models with standardised calibration. Such models may provide fair benchmarks for assessing the materiality of model changes. Therefore, we would favour the introduction of a clause that allows the EBA to review the assessment of the materiality of changes in the light of the FRTB final paper.
• Rely more on internal validation evaluations. The role of the independent validation teams has proved to save a lot of time and resources on the part of supervisors and has largely brought about confidence to the whole supervisory framework. We believe that EBA should promote, in these RTS, further and better use of the outcomes from independent internal validation teams.
• Request a timeline of one month for supervisory approval and allow for the implementation of changes in the meantime. In the absence of supervisory response changes should be deemed acceptable.
• Changes to stress test processes should not be subject to ex-ante notification as these exercises are subject to continuous scrutiny of supervisors.
• The qualitative assessment should have greater priority than the quantitative criteria. The consultation should concentrate on the capital impact of model changes rather than a detailed analysis of all changes that may occur.
• The EBA proposal links the quantitative thresholds to the risk-weighted exposure per risk category, i.e. credit risk, operational risk or market risk. We would argue that the threshold should be related to the impact on the overall risk-weighted assets instead of one risk category.

Full response

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