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The reports cover credit risk for large corporate, institutions, and sovereign portfolios (collectively referred to as "low default portfolios" - LDP), 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.
The LDP 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 LDP exercises, with 61% of the difference in variability explained by a few drivers (the proportion of defaulted exposures in the portfolio; the country of the counterparty; and the portfolio mix). The remaining variability could be attributed to differences in riskiness – i.e., idiosyncratic portfolio features, modelling assumptions and risk management practices used by banks, as well as supervisory practices. An analysis was performed to quantify the impact on RWs for banks with lower RWs. If banks' parameters were replaced by benchmarking parameters, RW would increase by 7.9 percentage points (7.5 percentage points in the 2015 LDP exercise).
In line with the EBA IRB roadmap, this exercise confirmed that the definition of default and the treatment of defaulted assets are key areas of supervisory attention. The EBA is currently finalising its Guidelines on the estimation of risk parameters, which are expected to be published by the end of November 2017.
For market risk, the initial market valuation variability tends to be lower for interest rate portfolios due to more consistent practices across banks for modelling interest rate risk. In line with the previous exercises, a significant dispersion for all the risk measures is observed, particularly for more sophisticated measures, such as the Incremental Risk Charge (IRC) and All Price Risk (APR).
EBA_Report results from the 2017 LDP Credit Risk benchmarking
EBA_Report results from the 2017 market risk benchmarking exercise