EBA: Technical standards on the joint decision process for internal model authorisation

 

The European Banking Authority (EBA) has released its final draft of Implementing Technical Standards (ITS), amending the existing Implementing Regulation governing the joint decision process for internal model authorization under the Capital Requirements Regulation (CRR). These revisions align the ITS with updates to the EU legal framework and form part of the initial phase of the EBA’s roadmap for implementing the EU Banking Package.

Key amendments include:

• Revised scope for internal models under CRR III: The use of internal models for operational risk has been eliminated, leading to the removal of references to the Advanced Measurement Approach (AMA) in the updated ITS.
• Updated references to supervisory colleges: Adjustments have been made to align the ITS and Regulatory Technical Standards (RTS) with the revised regulatory framework governing the functioning of supervisory colleges.

Article 20(8) of Regulation (EU) 575/2013 (CRR), as amended by Regulation (EU) 2024/1623 concerning credit risk, credit valuation adjustment risk, operational risk, market risk, and the output floor (CRR III), requires the EBA to develop draft Implementing Technical Standards (ITS) specifying the joint decision process outlined in Article 20(1)(a). This applies to applications for permissions referenced in Articles 143(1), 151(9), 283, and 325az of the regulation.

This mandate was already present in the CRR and was previously fulfilled through the EBA/ITS/2014/064, later adopted by the European Commission via Commission Implementing Regulation (EU) 2016/1005. The key update in the new mandate reflects the revised scope for internal models under CRR III, which eliminates the use of these models for operational risk.

Background:

The existing ITS outlines the decision-making process for competent authorities regarding the granting or denial of permission to use internal models for credit risk, counterparty credit risk (CCR), and market risk for prudential purposes. This applies to EU parent institutions and their subsidiaries or jointly to subsidiaries of an EU parent financial holding company or mixed financial holding company, with terms and conditions specified where necessary.

In line with its scope, the ITS details the steps competent authorities must follow when assessing an institution’s request for permission to use internal models for prudential purposes, particularly when a joint decision (JD) is required.

The mandate aims to facilitate timely and efficient cooperation among authorities, ensuring they reach a joint decision within the six-month timeframe defined in Article 20(2) CRR, starting from the date a complete application is received by the consolidating authority.

Specifically, the ITS establishes procedures to guide the consolidating supervisor and relevant competent authorities in their assessments and contributions to the JD. It includes provisions on evaluating application completeness, home-host cooperation in organizing the JD process, and aligning the timing with the scope and complexity of the application. The ITS also addresses cooperation aspects such as workload division and resource allocation among competent authorities.

Since its adoption in 2016, the ITS has not been revised. The revised mandate retains the original objectives and content, except for changes to its scope following CRR III, which removes the applicability of the Advanced Measurement Approach (AMA) for operational risk.

Beyond these regulatory updates, the possibility of further refinements was explored based on a decade of practical experience, including revalidation processes for internal models under the EBA IRB repair program. The current framework has been deemed robust and effective in facilitating cooperation among authorities, with no significant adjustments required.

Consequently, the proposed revised ITS primarily reflects changes to the EU legal framework, particularly the reduced scope for internal models and updates to the EBA RTS/ITS on the functioning of supervisory colleges.

Given the delayed implementation of the Fundamental Review of the Trading Book (FRTB) standards under Commission Delegated Regulation (EU) 2024/2795, the reference to Article 363 of CRR, as applicable on 8 July 2024, has been temporarily retained in the draft amending ITS. Once the new standards take effect, this reference will automatically cease to apply.