The Future of the IRB approach: a major discussion paper launched by the EBA. Respond by May 5th.

The EBA has published a discussion Paper on a major Topic, namely  the evolution of the IRB approach. Responses may be submitted before May 5th, 2015.

The core problem that the EBA intends to address is the lack of trust in the IRB approach arising from the excessive degree of flexibility  in the present IRB framework (which results in a variability of outcomes in the measure unwarranted by the underlying risk factors). A working Group has been active since 2012 preparing the planned regulatory developments. Some of these can be carried out within the existing legislative framework in the EU (either within the mandate of CRR IV, or within the margin of initiative recognised to the EBA), but others will need legislative changes. This latter work will be carried out in close relationship with BCBS. Interestingly, the EBA indicates that those changes are expected to result in substantial workload for both the Competent Authorities and the Institutions. Moreover, the changes will affect such fundamentals as he definition of default, PD, LGD, and the treatment of defaulted Assets.

The stakes for the Institutions are therefore high. And yet, the Institutions are prompted to give their advice, not on the substance of the change, but on its form. In fact, they are requested to give basically their opinion on the sequence and the rythm of the change, not on the change itself. You will find below the core of the consultation, which bears on the proposed grouping of the ‘EBA regulatory Products’. Fine marketing language, for sure!