On 9 July 2019, the European Banking Authority (EBA) published a progress report on the roadmap set out in 2016 to repair internal models used to calculate own funds requirements for credit risk under the internal ratings based (IRB) approach.

The EBA’s IRB roadmap was set up to address concerns about undue variability of own funds requirements and to restore trust in IRB models by ensuring comparability of the estimates of risk parameters, while retaining their risk sensitivity.

The report addresses concerns with regard to the implementation timelines. The EBA has decided to extend the deadline for introducing changes in the rating systems by one year, to the end of 2021. The EBA has also allowed for the changes in the loss given default and conversion factors models for low default portfolios to be implemented by the end of 2023, at the latest.

In terms of next steps:

  • apart from the current consultation on the guidelines on credit risk mitigation, the EBA does not intend to make any further revisions to its guidance on internal models;
  • whilst the industry is implementing the regulatory review of the IRB approach, the EBA’s efforts will now focus on monitoring and exploring whether there is evidence of reduced variability of risk-weighted exposure amounts;
  • the EBA has been performing an annual benchmarking exercise and will further develop and improve this tool through more thematic analyses and in cooperation with competent authorities; and
  • the EBA has started work to improve transparency through harmonised Pillar 3 disclosures, based on the revised requirements set out in the revised Capital Requirements Regulation. The EBA will also: (i) undertake work on supervisory reporting to align it with the revised disclosure requirements; and (ii) carry out a more comprehensive review with a view to improving consistency of data requests with the definitions and clarifications developed in the regulatory review of the IRB approach.