EBA: Bank internal models show progress, need attention
The European Banking Authority (EBA) published its 2025 reports on market and credit risk benchmarking. The assessment highlights progress in the consistency of banks' internal models but identifies areas for supervisory attention as regulatory reforms near.
Market Risk: Converging models, persistent dispersion
The 2025 EU market risk benchmarking exercise reveals tangible improvements in data quality, consistency, and comparability across banks.
The assessment, presented in dedicated reports for the Internal Model Approach (IMA) and the Alternative Standardised Approach (ASA), highlights the ASA's increasing importance under the forthcoming FRTB framework.
The IMA exercise, covering 43 EU banks, shows improved data quality for Initial Market Valuation (IMV) and reduced dispersion.
While Value-at-Risk (VaR) remains at historically low levels, higher dispersion persists in stressed VaR (sVaR) and Incremental Risk Charge (IRC).
For the ASA, convergence strengthens its role as a stable benchmark, with Sensitivities-Based Method (SBM) dispersion declining to 8%.
However, methodological issues remain in FX translation and equity sector mapping, leading to seven banks being flagged for further supervisory review.
Credit Risk: Stability, but LGD variability persists
The credit risk benchmarking exercise presents a stable overall picture, with structural improvements linked to ongoing regulatory reforms.
The share of Exposure at Default (EAD) under the Internal Ratings Based (IRB) approach has continued its gradual decline, and approved material model changes suggest the IRB roadmap is advancing.
Over the 2015–2024 period, PD variability declined across several asset classes, while LGD variability remained broadly stable.
These annual benchmarking exercises are a key supervisory tool to assess internal model consistency and comparability across EU banks.
They support supervisory work, enhance confidence in the regulatory framework, and complement the EBA's roadmap to repair IRB models and finalise Basel III reforms.
Progress, but the devil in the details
The EBA's assessment confirms a positive trend in model consistency, yet persistent dispersion in stressed VaR and IRC highlights remaining challenges.
While progress is evident, the identified methodological issues and flagged banks underscore that supervisory vigilance is still paramount.
Achieving true comparability across all internal models remains a complex, ongoing endeavor for the banking sector.