EBA final draft RTS on changes to the internal ratings based approach under CRR

The European Banking Authority (EBA) has published a final report with final draft regulatory technical standards (RTS) amending the framework for assessing the materiality of changes to internal ratings based models under the Capital Requirements Regulation (CRR). The aim is to streamline supervisory approvals and reduce undue delays in model implementation. The EBA notes that the high volume of model changes classified as "material" has strained supervisory resources under the current approval processes, creating uncertainty for institutions and hampering effective model use and timely model improvements.

In light of constraints introduced by the final Basel III framework on internal models (including input and output floors), the amending RTS seeks to take a pragmatic approach and significantly reduce the number of changes deemed material. It does this by placing stronger reliance on quantitative thresholds and narrowing the qualitative criteria, such that changes will generally be material only where those thresholds are breached. A limited set of criteria categorising changes as material is retained for changes that are fundamentally significant, such as complete model redesigns. These changes will continue to be treated as material regardless of their quantitative impact. The EBA also indicates that these revisions will be complemented by a further review of Commission Delegated Regulation (EU) 2022/439 on assessment methodology to ensure competent authorities retain adequate tools for risk based supervision of model changes. The draft RTS will now be submitted to the European Commission for endorsement prior to publication in the Official Journal of the European Union. On the same day, the ECB also announced changes to make the approval process for material model changes faster and more predictable.

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