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Modifications to the IRB approach

European Banking Authority (EBA)

The EBA has published a discussion paper setting out the main actions to take to improve the IRB approach framework.

IRB models have proved to be valid for measuring capital requirements for credit institutions and investment services firms, given their particular sensitivity to risk.

However, despite the positive aspects of internal models, the high degree of flexibility of the IRB framework has compromised the comparability of capital requirements between entities, and many have questioned the integrity of the IRB models.

In this respect, the EBA has issued a Discussion Paper on the future of the IRB Approach. This discussion paper contains the regulatory developments aimed at improving the IRB framework that the EBA has carried out and intends to carry out in the near future. Thus, the regulatory response of the EBA is divided into two main groups:

  • Review of the regulatory framework.
  • Consistency in monitoring and improving transparency.

In addition, the discussion paper contains a number of changes that EBA plans to undertake in the medium to long term. However, these measures could not be implemented under the existing framework of the CRR, so a legislative review by the European Parliament and the Council would be required.

The discussion paper aims to invite feedback from the industry regarding the proposed regulatory changes. Thus, the opinions expressed herein do not compel the EBA to develop standards in the future.
The technical note prepared by Management Solutions’ R&D department contains an executive summary and analysis of key aspects in the document. In addition, a timeline with the main rules that the EBA will be approving in the near future is included.

Executive summary

The Discussion Paper is divided into three parts: a review of the regulatory framework, supervisory consistency and transparency, and possible amendments in the future.

Context

  • Capital Requirements Regulation (CRR) and Capital Requirements Directive (CRD IV).

Prior regulation

  • Credit institutions and investment services companies that have received permission from the competent authority to calculate their RWA through internal IRB models.

 

Download the technical note by clicking here (only in Spanish)


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© GMS Management Solutions, S.L., 2018. All rights reserved. The information contained on this publication is of a general nature and does not constitute a professional opinion or an advisory service. The data used in this publication come from public sources. GMS Management Solutions, SL assumes no liability for the veracity or accuracy of such data.