Public hearing 03022020 Supervisory Benchmarking SVB Consultation Paper

Public hearing – 03/02/2020 Supervisory Benchmarking (SVB)| Consultation Paper – ITS 2021 - Reference date 31 Dec 2020

Introduction 1. Mandated by article 78 of the CRD: • Competent Authorities (CA) to conduct an annual assessment of the quality of internal approaches • EBA to produce a report to assist competent authorities in this assessment 1. 3 major objectives • Supervisory assessment of the quality of internal approaches • Explain and monitor RWA variability over time and the resulting implications for prudential ratios • provide the banks with valuable information on their risk assessment compared to other banks assessment on comparable portfolios 2. This CP introduces IFRS 9 benchmarking templates • Marginal changes for credit and market risk templates • Focus on Low Default Portfolio (Common counterparties) for the IFRS 9 Public hearing - Consultation Paper – ITS 2021 2

Contents New IFRS 9 templates Updates related to existing credit risk templates Updates related to existing market risk templates Public hearing - Consultation Paper – ITS 2021 3

Contents New IFRS 9 templates Updates related to existing credit risk templates Updates related to existing market risk templates Public hearing - Consultation Paper – ITS 2021 4

Understanding IFRS 9 modelling aspects – rationale Background – previous EBA initiatives on IFRS 9 implementation • November 2016 and July 2017: Pre – implementation impact assessment reports; • December 2018: Post-implementation report based on supervisory data reported by banks • 2018 - 2019: Set of indicators developed to extract data from regulatory reports and public disclosures. These indicators are now part of the EBA Risk Indicators (publicly available); • December 2018: report announcing, amongst other initiatives, that the EBA would continue the monitoring on IFRS 9 implementation, in particular: (i) understanding of modelling aspects; and (ii) continuing to monitor qualitative aspects of IFRS 9 implementation. • July 2019: EBA roadmap on IFRS 9 published on the EBA website • July - December 2019: Ad Hoc benchmarking exercise (reference date: 31 12 2018). o Initial focus on LDP portfolios, buildling on already existing c ommon counterparties list (annex 1, template 101). . . o … Customised to IFRS 9 specificities (additional dimensions: economic scenarios and facility) Public hearing - Consultation Paper – ITS 2021 5

Understanding IFRS 9 modelling aspects – rationale A staggered approach is followed • Main objective of the current set of templates: have a good understanding of the different methodologies, models, inputs and scenarios could lead to material inconsistencies in ECL outcomes • Initial focus on LDP is expected to allow an analysis of ECL without undue variability: o Preliminary focus on the PDs (common counterparties implies same default risk) o LGD, Outstanding amount and HDP exposures are not in the scope: to be introduced in the medium term • Three potential variabilities of the accounting framework are analysed: o 12 months - PD parameters o Macroeconomic forecasts and its interaction with the lifetime PD curve o Practices in the SICR assessment Public hearing - Consultation Paper – ITS 2021 6

New IFRS 9 templates – qualitative part Background – qualitative questionnaire in the Ad Hoc Exercise (not part of the ITS) SICR ECL measurement FLI Do. D • Main qualitative and quantitative indicators • Individual and collective assessment • Application of ratings-based thresholds • Synergies between IRB and ECL • Adjustments performed when leveraging on IRB models • Stage 3 approach – individual or collective, changes to IAS 39 • Main sources of information used • Consistency of macroeconomic factors (e. g. ICAAP) • Overlays • Time-horizon for available FLI Number and weight of scenarios • Differences between accounting and prudential Do. D • Main indicators (quantitative and qualitative) used for the definition of default Questions in the CP: Question 1 for consultation: Do you agree with the necessity to complement the quantitative data collection with qualitative templates? Question 2 for consultation: In your view, which aspects, from a LDP perspective, are relevant to investigate from a qualitative perspective, where there might be different practices leading to different impact across institutions? PRESENTATION TITLE 7

New IFRS 9 templates – overview Update on EBA IFRS 9 benchmarking exercise 8

New IFRS 9 templates – PD 12 months (1/2) PD estimates may refer to different concept • PD IRB: derived from long run averages of one-year default rates, with floors and margins of conservatism. • PD TTC: reflects risk of default occurring over the economic cycle. not defined in any regulatory text; definition could build on PD IRB: for example, PD IRB without conservative adjustment • PD PIT: reflects the risk of default occurring considering the current macroeconomic situation. Not defined in any regulatory text; definition could build on PD IFRS 9: for example, PD IFRS 9 without FLI adjustments • PD IFRS 9 (PD FLI): unbiased and probability-weighted estimate, determined by evaluating a range of possible outcomes, and reflecting the risk of default considering reasonable and supportable information about past events, current conditions and forecasts of future economic conditions. Public hearing - Consultation Paper – ITS 2021 9

New IFRS 9 templates – PD 12 months (2/2) No change in the portfolio structure Questions in the CP: Question 6 for consultation: Do you see any issues or lack of clarity in the definition of the data points of template 111. 01? Question 7 for consultation: Do you see the need to adjust or add any variable for the intended outcome? Please specify Question 8 for consultation: Would you see any particular problem in filling some of the data requested? For which reasons? Please give your comments related to the PD 12 month and the economic scenario in question 7 Public hearing - Consultation Paper – ITS 2021 10

New IFRS 9 templates – PD lifetime (1/2) Analysis split in two separate steps: Variability of the economic scenario: balancing accuracy with simplicity • Accuracy: forward-looking information cannot be captured by only one macroeconomic variable • Simplicity: manageable template size (with sufficient number of institutions forecast) • Template not populated if not using a discrete number of scenarios (e. g. Monte Carlo simulation) Questions in the CP: Question 9 for consultation: Do you see any issues or lack of clarity in the definition of the data points of template 111. 02? Please explain Question 12 for consultation: Do you believe that additional macro-economic variables should be tested in future exercises and if yes, which ones would be appropriate in the context of a benchmarking exercise? Public hearing - Consultation Paper – ITS 2021 11

New IFRS 9 templates – PD lifetime (2/2) Introduction of a categorization of PD models: • Approach 1: ECL amount calculated as a probability weighted ECL of each scenario • Approach 2: PDs developed for a single forward looking economic scenario, no adjustment for non-linearity effects in any further step (e. g. non-linearity effects with non-material impact on ECL) • Approach 3: ECL is based on a forward-looking economic scenario, followed by an adjustment (either at PD or ECL level) Questions in the CP: Question 10 for consultation: Do the categorisations reported above reflect the approach applied by your bank, in incorporating forward looking information? If not, please explain what are the main differences. Question 11 for consultation: For banks applying Approach 3, what will be, in your view, an appropriate approach for reporting the data related to the PD in scenario 0 (i. e. the PD considered in the application of the impairment requirements under IFRS 9)? Do you think that, (if available) a probability weighted average PD represents an appropriate proxy? Do you think that the PD used for the SICR assessment represents an appropriate proxy? If not, what other approach do you suggest to report this data? Public hearing - Consultation Paper – ITS 2021 12

New IFRS 9 templates – SICR Additional dimension: counterparties by facility (as SICR assessment per facility) Quantitative triggers Qualitative triggers 30 days past due watch list forbearance Questions in the CP: Question 13 for consultation: Do you see any issues or lack of clarity in the definition of the data points of template 111. 03? Question 14 for consultation: Do you believe the reduction of the number of facilities to five significantly reduces the burden of the data collection? Question 15 for consultation: Do you agree with the list of the three qualitative triggers, or do you believe one indicator currently classified as “ 5 other indicators” is more important and should deserve a specific field? Public hearing - Consultation Paper – ITS 2021 13

Next steps ITS 2021: • Consultation from 13/12/2019 – 13/02/2020 • Finalisation of the ITS: S 1 2020 Next ITS 2022: • Preliminary reflexions: S 1 2020 • Introduction of new risk parameters Public hearing - Consultation Paper – ITS 2021 14

Contents New IFRS 9 templates Updates related to existing credit risk templates Updates related to existing market risk templates Public hearing - Consultation Paper – ITS 2021 15

Updates related to existing templates 1. No change in the portfolio structure 2. Two proposed extensions of already existing data points (removal of reporting exemption): • LDP: RWA calculation under the Standardised approach (RWA (SA)), • HDP: Implied RWA derived from empirical Default Rates (RWA+, RWA-) for the rating split. 3. The CP aims at collecting feedback of the implied additional burden: • LDP: temporary exemption to report the RWA(SA). Already mandatory for HDPs (since 2019 exercise). Already reported for LDPs (on a voluntary basis) by a majority of institutions, • HDP: RWA+, RWA- are already reported at the aggregate level for which rating grade level calculation is required; should therefore be readily available. Question 3 for consultation: Do you have any concerns on the three changes applied to the credit risk IRB templates? In particular, do you believe the extension of the data collection for hypothetical RWA will add a significant burden to the exercise? Public hearing - Consultation Paper – ITS 2021 16

Contents New IFRS 9 templates Updates related to existing credit risk templates Updates related to existing market risk templates Public hearing - Consultation Paper – ITS 2021 17

Updates related to existing market templates 1. No change in the instruments composition or portfolio structure 2. Two proposed changes in Annex 5: • Reference date specification • IBOR specification No changes in Annex 6 or 7 Public hearing - Consultation Paper – ITS 2021 18

Reference dates for Market Risk benchmarking Suggested notation in the ITS (Annex 5), letter (b): (b) The following dates shall apply for the exercise: (i) The booking date shall be the 3 rd Thursday of September of Year T-1; GMT; (ii) the IMV reference date shall be 5 working days after the booking date referred to in point (i) at 5: 30 pm CET - 4. 30 pm (iii) the IMV remittance date shall be the 1 st Friday of October of year T-1; (iv) the RM initial reference date shall be the 3 rd Monday of January of Year T; (v) the RM final reference date shall be 10 working days after the RM initial reference date referred to in point (iv)]; (vi) the RM remittance dates shall be the 4 th Friday of February of Year T; (vii) for (i-iii) IMVs references dates “year T-1” is equal to “every single calendar year”. For the RMs reference dates shall be the year T where “year T” is equal the following year after the year T-1, as defined in (i) the booking date. (viii) Where any of the dates specified in points (i) to (vi) is a festive day, the submitter shall use the first non-festive day after that date. Question 4 for consultation: Stakeholders are invited to express their view on the new reference date specification with respect the precedent method to specify the reference dates for the exercise. Public hearing - Consultation Paper – ITS 2021 19

Reference dates for Market Risk benchmarking Previous notation (b) The following dates shall apply for the exercise: (i) The booking date shall be 17 September 2020; (ii) the IMV reference date shall be 24 September 2020; (iii) the IMV remittance date shall be 02 October 2020; (iv) the RM initial reference date shall be 18 January 2021; (v) the RM final reference date shall be 29 January 2021; (vi) the RM remittance dates shall be 26 February 2021. Public hearing - Consultation Paper – ITS 2021 20

IBOR specification Suggested update: (aa) The Euro Interbank Offered Rate (‘EURIBOR’) shall refer to the rate calculated by the European Money Markets Institute at different maturities for EURO interbank term deposit. The London Interbank Offered Rate (‘LIBOR’) is the rate calculated by the Intercontinental Exchange at different maturities for interbank term deposit in different currencies. Institutions shall apply the EU Benchmarks Regulation for the interest rate in order to substitute the reference rate (‘EURIBOR’) and (‘LIBOR’) stated in Section 2 of this Annex. Institutions shall specify the alternative rate they use instead of the reference rate (‘EURIBOR’) and (‘LIBOR’) in the explanatory note referred to in point (d)of these instructions. Question 5 for consultation: Stakeholders are invited to express their view on the implementation of the Benchmarks Regulation, in terms of which rate to apply in the instruments in the market risk exercise. PRESENTATION TITLE 21

EUROPEAN BANKING AUTHORITY Floors 24 -27, 20 Av André Prothin, 92927 Paris La Défense Tel: +33 1 86 52 7000 E-mail: info@eba. europa. eu http: //www. eba. europa. eu

Annex 1 : overview of the questions for credit risk (1/2) Question 1 for consultation: Do you agree with the necessity to complement the quantitative data collection with qualitative templates? Question 2 for consultation: In your view, which aspects, from a LDP perspective, are relevant to investigate from a qualitative perspective, where there might be different practices leading to different impact across institutions? Question 3 for consultation: Do you have any concerns on the three changes applied to the credit risk IRB templates? In particular, do you believe the extension of the data collection for hypothetical RWA will add a significant burden to the exercise? Question 6 for consultation: Do you see any issues or lack of clarity in the definition of the data points of template 111. 01? Question 7 for consultation: Do you see the need to adjust or add any variable for the intended outcome? Please specify Question 8 for consultation: Would you see any particular problem in filling some of the data requested? For which reasons? Please give your comments related to the PD 12 month and the economic scenario in question 7 Question 9 for consultation: Do you see any issues or lack of clarity in the definition of the data points of template 111. 02? Please explain Public hearing - Consultation Paper – ITS 2021 23

Annex 1 : overview of the questions for credit risk (2/2) Question 10 for consultation: Do the categorisations reported above reflect the approach applied by your bank, in incorporating forward looking information? If not, please explain what are the main differences. Question 11 for consultation: For banks applying Approach 3, what will be, in your view, an appropriate approach for reporting the data related to the PD in scenario 0 (i. e. the PD considered in the application of the impairment requirements under IFRS 9)? Do you think that, (if available) a probability weighted average PD represents an appropriate proxy? Do you think that the PD used for the SICR assessment represents an appropriate proxy? If not, what other approach do you suggest to report this data? Question 12 for consultation: Do you believe that additional macro-economic variables should be tested in future exercises and if yes, which ones would be appropriate in the context of a benchmarking exercise? Question 13 for consultation: Do you see any issues or lack of clarity in the definition of the data points of template 111. 03? Question 14 for consultation: Do you believe the reduction of the number of facilities to five significantly reduces the burden of the data collection? Question 15 for consultation: Do you agree with the list of the three qualitative triggers, or do you believe one indicator currently classified as “ 5 other indicators” is more important and should deserve a specific field? Public hearing - Consultation Paper – ITS 2021 24

Annex 1: overview of the questions on market risk Question 4 for consultation: Stakeholders are invited to express their view on the new reference date specification with respect the precedent method to specify the reference dates for the exercise. Question 5 for consultation: Stakeholders are invited to express their view on the implementation of the Benchmarks Regulation, in terms of which rate to apply in the instruments in the market risk exercise. Public hearing - Consultation Paper – ITS 2021 25

Annex 2: useful links Consultation paper: https: //eba. europa. eu/its-package-2021 -benchmarking-exercise#pane-new-7 bdd 87 fb-e 02 f-492 a-99 d 6129449 e 3 cf 9 d Benchmarking reports and previous publications: https: //eba. europa. eu/regulation-and-policy/supervisory-benchmarking-exercises Public hearing - Consultation Paper – ITS 2021 26

EUROPEAN BANKING AUTHORITY Floors 24 -27, 20 Av André Prothin, 92927 Paris La Défense Tel: +33 1 86 52 7000 E-mail: info@eba. europa. eu http: //www. eba. europa. eu