IIF Authors

Status: Will be live at 05/07/2015 00:00

IIF RWA Task Force responds to EBA Paper 'The future of the IRB approach'

Thursday, May 7, 2015

In its response, the IRTF supports the work of the EBA aimed at enhancing the robustness and comparability of the internal risk estimates and capital requirements, and in restoring trust in banks' internal models. The IRTF concurs with the EBA's overall perspective that the IRB framework has proven its validity as a risk-sensitive way of measuring capital requirements. However, the IRTF expressed concern on the following main issues:

1. Other drivers of RWA variance, such as differences in definitions, technical modeling choices unrelated to risk representation, local Basel and other standards, as well as supervisory practices need to be addressed. Many are a direct result of ambiguity in the Basel rules and subsequent different interpretations and implementation by banks and their supervisors.

2. Although the IRTF agrees with the sources of differences listed in the EBA DP, our own prioritization (based on findings in the IRTF analysis) shows some notable differences.

3. Harmonization of internal model approaches should not jeopardize risk sensitivity.

4. Given the interconnection between different drivers of RWA variance, an all-encompassing review of RWA variance drivers should be conducted.

5. The EBA should share and coordinate its proposals with the BCBS in order to achieve the goal of harmonization of standards and practices across the globe.