EBA updates timeline for the implementation of the IRB roadmap and publishes its final supervisory handbook for the validation of IRB rating systems

EBA announced significant developments concerning the implementation of IRB model requirements, aimed at reducing compliance costs for financial institutions. The EBA introduced modifications to the IRB model roadmap to address portfolios no longer eligible for the AIRB approach under the final Basel III framework, which primarily applies to large corporations, institutions, and financial sector entities.
In light of the forthcoming implementation of Basel III standards, the EBA allowed for the postponement of IRB repair requirements related to LGD and CCF models. Institutions can defer these requirements until the entry into force of the future CRR 3. During this period, institutions can choose to revert to a less complex IRB approach or use the standardized approach for relevant portfolios.
Additionally, the EBA published a finalized supervisory handbook designed to provide guidance on validating IRB rating systems. This handbook clarifies the role and responsibilities of the validation function within the framework of corporate governance. It outlines the areas that the validation function should assess, focusing on both the model’s performance and the modeling environment.
The validation function is intended to operate as an independent layer of defense positioned between the CRCU and internal audit. It evaluates various aspects, including the accuracy, performance, and reliability of IRB rating systems. The handbook outlines specific elements that the validation function should consider during assessments, covering aspects like risk differentiation, risk quantification, data quality, calibration methodologies, and the treatment of different risk parameters.
The handbook distinguishes between first validation activities conducted before submitting applications and ongoing validation activities that occur post-approval by competent authorities. It provides tailored guidance for each phase, emphasizing model performance assessment, data quality, and IT implementation. Additionally, the handbook addresses specific challenges faced by the validation function, including scenarios involving external data use in model development, the outsourcing of validation tasks, and validation in situations of data scarcity.
The supervisory handbook is designed as a non-binding resource that outlines best supervisory practices for competent authorities. It offers guidance to regulatory bodies rather than directly to financial institutions and aims to foster convergence in supervisory approaches and practices. These updates seek to streamline IRB model implementation, enhance validation procedures, and bolster the effectiveness of IRB in the banking sector.