On 22 February 2022, the European Banking Authority (EBA) published its reports on the annual market and credit risk benchmarking exercises.
These exercises monitor the consistency of risk weighted assets (RWAs) across all EU institutions authorised to use internal approaches for the calculation of capital requirements. They contribute to the work the EBA is conducting for improving the regulatory framework, increase convergence of supervisory practices and restore confidence in internal models. For credit risk internal models, the EBA has followed its roadmap for the implementation of the regulatory review of internal models.
The report on the credit risk exercise provides an in-depth analysis of the observed and potential impact of the COVID-19 pandemic. It includes theoretical analysis on where potential impact is likely to be observed and empirical analysis on the development of average RWs, probabilities of default and default rates between 31 December 2019 and 31 December 2020 for the different benchmarking portfolios.
The report on the market risk exercise presents the results of last year’s supervisory benchmarking and summarises the conclusions drawn from a hypothetical portfolio exercise conducted by the EBA during 2020/21. The exercise considered the same instruments applied in 2019 and 2020, which are mostly plain vanilla.
The exercises should be read in parallel with other efforts to reduce undue level of variability. In particular, the EBA roadmap to repair internal rating-based (IRB) models is a key component of the review of the IRB framework, along with the enhancements brought by the final Basel III framework assessed by the EBA in a set of recommendations as an answer to the call for advice of the European Commission.