The European Banking Authority (EBA) has published a report on its peer review of the credit concentration risk aspects of its guidelines on the management of concentration risk under the supervisory review process (GL 31).

The EBA peer reviewed national competent authorities (NCAs) from 28 EU Member States and two EEA/EFTA countries regarding specific parts of GL 31. The main findings from the peer review include the following:

  • the vast majority of Member States have implemented GL 31 regarding credit concentration risk in their existing domestic supervisory regulations or guidelines (predominantly their guidelines on the internal capital adequacy assessment process (ICAAP) or supervisory review and evaluation process (SREP));
  • NCAs indicated that their assessment of credit concentration risk is continuous, goes beyond the annual SREP capital calculation and forms an integral part of their risk assessment system for individual institutions;
  • almost all NCAs’ approaches assess the definition of credit concentration used by credit institutions;
  • most NCAs’ approaches assess whether credit institutions employ methodologies and tools to identify their overall credit risk exposure. However, half of the NCAs do not consider whether the credit institution’s framework takes into account the underlying exposures to credit concentration risks that may arise from the structure of the underlying complex products, such as securitised products; and
  • most NCAs check whether credit institutions fully understand their models and whether the models consider portfolio characteristics, but only half of the NCAs assess the conservatism of the models’ underlying assumptions and techniques.

The report also identifies some examples of good practice, including the use of domestic central credit registers, the capability of large credit institutions to capture adequate credit data, analyse and monitor their credit concentrations, and produce a comprehensive set of automated supervisory reporting, and the conduct of regular benchmarking exercises by NCAs for credit concentration risk by sector, industry and/or country.

The report recommends that the EBA analyse the elements and practices identified in the peer review when developing its Single Supervisory Handbook, and as part of its ongoing work on guidelines related to supervisory practices linked to the CRD IV Directive.

View Report on the peer review of the EBA guidelines on the management of concentration risk under the supervisory review process (GL 31), 24 July 2014