Consultation on RTS for material changes to IRB models

The European Banking Authority (EBA) has published a consultation on the draft regulatory technical standards (RTS) to clarify and reinforce the conditions for material changes and extensions to internal ratings-based approach (IRB) models. The aim of the future technical standard is to ensure a consistent and effective assessment of model changes by supervisory authorities, thus contributing to the integrity and stability of the financial system.

Consultation on RTS for material changes to IRB models

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Executive summary

The EBA has published a consultation on the draft RTS for assessing material changes in IRB models. The proposal clarifies materiality criteria, redefines model extensions, and sets clearer thresholds. Additionally, it provides a more detailed view of how supervisory authorities should address modifications in risk models to ensure consistency and effectiveness in the evaluation process. It also focuses on improving the oversight and transparency of these changes, ensuring alignment with current regulatory standards. The consultation will be open until March 10, 2025.

Main content

• Scope of the RTS. The EBA clarifies that changes outside the rating systems are not within the scope of these RTS. For instance, it highlights that changes to parameters such as maturity, annual sales, or the assignment of Credit Conversion Factors (CCF) under the standardized approach (SA), which only affect the formula for calculating capital requirements, fall outside the scope of this RTS. Conversely, it specifies that the methodology for assigning exposures to exposure classes is included within the scope.
• Qualitative criteria for assessing the materiality of changes. The RTS proposal reclassifies certain aspects previously considered as material changes into non-material changes that only require notification. Among these, material changes related to the definition of default are limited to those  that may be more complex to implement and pose a greater risk of non-compliance in the identification of defaulted exposures.
• Qualitative criteria for assessing the materiality of extensions and reductions. The RTS proposal clarifies the distinction between extensions covered under Article 148(1) and the scope of the RTS. Additionally, it simplifies the categorization of model extensions and reclassifies changes in the methodology for assigning exposures to risk classes as prior notifications (ex-ante notifications).
• Quantitative criteria for material changes and extensions. The draft RTS specify which changes of a similar nature in the internal rating systems should be considered as a single change, and that a change affecting multiple rating systems should also be treated as a single change. Furthermore, quantitative thresholds for reductions in the scope of application of a rating system are adjusted to reflect the risks associated with such changes.
• Documentation and IT requirements. The proposal describes firms' obligations with respect to technical documentation and validations related to extensions. These obligations are intended to ensure transparency and compliance with the updated regulatory framework. In addition, expectations regarding the required ex ante calculations are outlined, particularly with respect to the IT implementation of rating systems.

Download the technical note on the Consultation on RTS for material changes to IRB models.