CP10 (Full Document) - European Banking Authority

Executive summary
1. This consultation paper (CP 10) reflects a common understanding
among European supervisory authorities of the procedures to be
used in processing, assessing, and making decisions on the
application of an institution to use an Advanced Measurement (AMA)
or an Internal Ratings Based (IRB) approach for regulatory purposes.
It also sets out guidance, again based on a common understanding
among the supervisory authorities, on the meaning and the
implementation of the minimum requirements for using these
approaches, as set out in the recast Capital Requirements Directive
(CRD).
2. The CRD requires an explicit approval process for the use of AMA and
IRB approaches for regulatory purposes. An approval to use an IRB
approach can be given only if the competent authority is satisfied
that the institution's systems for managing and rating credit risk
exposures are sound and implemented with integrity and, in
particular, that they meet the requirements listed in Article 84 in
accordance with Annex VII, Part 4 of the CRD. Similarly, approval to
use an AMA under Article 105 can be only given when institutions
satisfy their competent authorities that they meet the qualifying
criteria set out in Annex X, Part 3 of the CRD.
3. One of the greatest challenges for supervisors in implementing the
CRD is defining under what conditions they will be satisfied with
these systems. Supervisors would like these conditions to be
convergent across the EU member states, in order to make the
playing field as level as possible for institutions using AMA and IRB
approaches.
4. When CEBS began working on these guidelines, its aim was to cover
a wide range of areas related to AMA and IRB approaches, including
the definition of loss and default, requirements for rating obligors
and exposures, the estimation and validation of internal risk
parameters, stress testing, corporate governance matters, data
issues, and the application, assessment and decision processes. The
tight time frame imposed on this project made some prioritisation
indispensable. These guidelines therefore represent only the first
phase of CEBS’s work on the implementation, validation, and
assessment of AMA and IRB approaches. Nevertheless, they cover a
large number of topics, sometimes in a considerable degree of detail,
relating to the application, decision, and especially the assessment
process.
5. These guidelines are drafted as guidance to supervisors, elaborating
on the CRD Articles and Annexes. However, since the guidelines
express CEBS’s expectations of how national supervisory authorities
should deal with the implementation and assessment of AMA and IRB
approaches, it is clear that they also affect the institutions intending
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