Tighter standards: No more tricks to change the rating system
The EBA has published a Consultation Paper on Draft Regulatory Technical Standards amending Delegated Regulation (EU) No 529/2014, which supplements Regulation (EU) No 575/2013 regarding the materiality assessment of extensions and changes to the Internal Ratings-Based (IRB) Approach.
It introduces more rigorous standards for evaluating changes to rating systems to ensure a consistent and comprehensive assessment of their materiality. One significant change is the prohibition of splitting material extensions or modifications into smaller, less significant changes to avoid regulatory scrutiny. Related changes are now aggregated, whether they occur simultaneously or sequentially, and changes affecting multiple rating systems are considered collectively
Clear formulas for calculating the impact of changes have been introduced, focusing on the ratio of the difference in risk-weighted exposure amounts before and after the modification. These calculations apply to extensions of the range of application of a rating system and are now standardized across institutions. Additionally, institutions are required to provide enhanced documentation for changes needing prior approval or notification, including assessments of model performance, independent validation reports, and quantitative impact analyses of changes on risk measures or capital requirements.
Notably, the revisions remove some references to the Advanced Measurement (AMA) Approach framework to simplify the regulatory framework with regard to the AMA. The overall aim of these revisions is to strengthen oversight of internal rating systems, ensure more accurate assessments of risk impacts, and improve the quality and transparency of information provided to competent authorities.
Customers considering the IRB approach instead of the standardized approach should be aware that the new output floor introduced by CRR III requires them to calculate the standardized approach in parallel. After the transition period ending in 2030, the output floor will ensure that risk-weighted exposure amounts under the IRB approach cannot fall below 72.5% of those calculated using the standardized approach. This additional requirement may impact the cost and complexity of adopting the IRB approach.
