Publication alert: EBA - Report on the 2021 credit and market risk benchmarking exercise
We inform of the publication by the European Banking Authority (EBA) of the following documents:
Report on the 2021 Credit Risk Benchmarking Exercise.
Report on the 2021 Market Risk Benchmarking Exercise.
1. Context
According to the directive Capital Requirement Directive (CRD), competent authorities (CAs) shall carry out supervisory benchmarking studies of internal approaches for calculating own funds requirements. Moreover, the EBA is mandated to produce a report to assist the CAs in the assessment of the quality of the internal approaches.
In this regard, the EBA has published two reports on the consistency of the Risk Weighted Assets (RWAs), a Report on the results from the 2021 high and low default portfolios (HDPs and LDPs) credit risk benchmarking, and a Report on the results from the 2021 market risk benchmarking exercise. In particular, the credit risk benchmarking exercise aims to monitor the variability of the RWAs for institutions applying the IRB approaches in EU Member States. For its part, the market risk benchmarking assesses the variability in banks’ market risk models and identifies the drivers that account for it.
2. Main points
Report on the 2021 Credit Risk Benchmarking Exercise
Sample. 83 institutions provided related realisations for LDP portfolios (i.e. exposures to large corporates, sovereigns and institutions) and HDP portfolios (i.e. residential mortgages, small and medium-sized enterprise (SME) retail, SME corporate and corporate-other portfolios). In addition, institutions provide the RWA and related IRB parameters for some specific large corporates, institutions and sovereigns to which they have exposures.
IRB risk parameters end-2020.
- Description of average RW, probability of default (PD) and loss given default (LGD). Decrease of average RWs between December 2019 and December 2020 in nearly all exposure classes. For LDP portfolios, the average RW has decreased for central governments and central banks and institutions. On the other hand, the average RW has increased for large corporates.
- Analysis of decreased average PDs. Decrease in PDs in HDP portfolios might be driven by:
- The annual review of estimates and recalibration.
- The impact of national measures that were imposed to contain the coronavirus and to support the economy.
- The use of moratoria and public guarantee schemes for material shares of a given IRB portfolio.
- The implementation of the IRB roadmap.
- Variability of IRB parameters. A top-down analysis was performed with a methodology broadly unchanged from previous years. This approach shows that the overall variability has slightly decreased from the 2020 to 2021 exercise.
Default rates as of end-2020. With reference to other retail SME exposures (SMOT) and retail SME exposures secured by real estate (RSMS) exposures classes, the average default rates observed in 2021 (i.e. as of December 2020) are significantly lower than those observed in 2020 (as of December 2019).This can probably, among others, be explained by the different materiality and effects stemming from the public support measures and from the use of moratoria in particular.
Report on the 2021 Market Risk Benchmarking Exercise
Sample. 40 banks from 13 jurisdictions that submitted data for 59 market portfolios across all major asset classes (e.g. equity, interest rates) and 4 correlation trading portfolios.
Main findings.
- Reduction in the dispersion of the initial market valuation (IMV) versus the 2020 exercises with regard to the FX and Commodities (CO) asset classes.
- Interest rates and CO portfolios exhibit a lower level of dispersion than the FX and credit spread asset classes.
- Across all asset classes the overall variability for value at risk (VaR) is lower than the observed variability for stressed VaR (sVaR) (27% and 31% respectively). More complex measures such as the incremental risk charge (IRC) show a higher level of dispersion (43% compared with 49% in 2020).
- The variability of empirical estimates of expected shortfall (ES) at a 97.5% confidence level across risk factors is similar than that found for VaR and profit and loss (P&L) VaR.
Dispersion in capital outcome. The average variability across the sample, measured by the inter-quantile dispersion statistic (IQD) coefficient, is around 24% (considered significant by the EBA), especially for the most complex portfolios in the credit spread asset class.
CAs’ assessments based on supervisory benchmarks. Overall, CAs planned some actions for 13 banks (e.g. reviewing the banks’ internal VaR and IRC models; a supervisory extra charge; stringent conditions on any extension of the internal model approach).