​The EBA streamlines supervisory approvals for IRB model changes

​The European Banking Authority (EBA) is making the supervisory approval process for banks using Internal Ratings Based (IRB) models more efficient. Today's publication of the Regulatory Technical Standards (RTS) on material model changes introduces targeted amendments that significantly reduce the number of changes classified as material, allowing supervisors to apply a more risk-based approach in the supervision of IRB models. This will ease the administrative burden on both banks and supervisors while maintaining appropriate supervisory oversight.

​The EBA's amendments to its RTS on material model changes are driven by two main objectives. First, they address the high volume of material model change applications, which have put pressure on supervisory resources. This had led to lengthy approval timelines for material model changes and delayed banks' ability to remediate deficiencies or implement improvements. These delays have hampered effective model use. Against this background, the EBA opted for a pragmatic recalibration of the materiality criteria, with a view to reducing the overall number of changes subject to prior approval.

​As a result, the revised RTS place stronger reliance on quantitative thresholds, substantially reducing the number of changes classified as material while preserving appropriate supervisory visibility. Qualitative triggers are limited to changes that imply model redevelopments and re-estimations of risk parameters, or significant changes to banks' definitions of default. Changes related to routine model maintenance will generally be subject to notification, unless they exceed the quantitative thresholds.

​Second, the RTS have been aligned with changes introduced under the Capital Requirements Regulation III (CRR3). References to approaches that are no longer part of the prudential framework have been removed, such as the IRB approach for equity exposures and the Advanced Measurement Approach (AMA).

​The revised RTS run in parallel with the work undertaken by the European Central Bank (ECB) to simplify its approval processes for material model changes. Together, these efforts are expected to support more efficient supervisory procedures at the ECB and national competent authorities within the EU, leading to quicker and smoother IRB model approvals for EU banks.

​​​Legal references and background

The EBA is mandated under Article 143(5) of Regulation (EU) No 575/2013 to develop draft RTS specifying the conditions for assessing the materiality of changes to rating systems under the IRB Approach, including their extension to additional exposures.

The revised RTS also contribute to the EBA's broader work on improving the efficiency the EU regulatory and supervisory framework, in particular recommendation 2.4 on enhancing supervisory processes set out in the EBA's report on the efficiency of the regulatory and supervisory framework.

The work has been conducted in close coordination with supervisory authorities to support more efficient supervisory processes. In this context, the ECB has also published today an update on its progress in streamlining its approval process for IRB model changes.

Final report on draft RTS on material model changes

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