Future of the IRB approach

The European Banking Authority (EBA) has published Discussion Paper on the future of the IRB Approach. EBA believes that the approach to calculation of capital requirements for credit risk based on internal rating (IRB) has proved its validity, including higher risk sensitivity and contribution to risk management. However, EBA points out its high variability and incomparability of outputs across institutions, which causes a certain distrust in IRB models. Therefore, the goal of EBA is to increase the robustness and comparability of these models.

As a result, EBA plans a whole range of regulatory measures. These are above all based on current legal mandate of EBA and they should include issuing technical standards and guidelines. The regulatory measures are grouped into four thematic areas as well as implementation phases – see table on page 15 of the discussion paper. The planned changes will affect almost all areas of the IRB approach, including definition of default, risk factors of PD and LGD and their calibration, treatment of exposures in default and scope of application. Therefore, the changes will affect both the institutions and their supervisory authorities, because the most of these changes will probably be a subject of approval procedure. Finalization of the changes is expected in the end of year 2018.

Document is open for consultation until 5th May 2015 and can be found in following link: https://www.eba.europa.eu/news-press/calendar?p_p_id=8&_8_struts_action=%2Fcalendar%2Fview_event&_8_eventId=1003457