The European Banking Authority (EBA) has published its second report on the consistency of risk weighted assets (RWAs) in the residential mortgage portfolio. The report sets out the EBA’s findings of a so called “drill-down analysis” being an investigation into the extent to which the most commonly used risk drivers influence the variability in risk weights.
Generally, the EBA found that risk parameters, such as loan to value, are drivers of RWAs but that there were differences in how the banks reflect such drivers in RWAs. The EBA also found that commonly used risk drivers, regardless of whether they are used by banks in the estimation of the probability of default and loss given default, or simply in the credit lending process, influence the risk weights final outcomes. The existing differences in risk weights for residential mortgages are, according to the EBA, only partly explained by the risk weight sensitivity to the investigated risk drivers.
The EBA believes that its study has helped to shed additional light on the sources of variation in risk weights creating the basis for a better knowledge and comparison of banks at national level across the EU. However, final conclusions at bank level can only be drawn by national competent authorities.