EBA warns on operational risk rule amendments
The European Banking Authority (EBA) has issued an opinion opposing key amendments proposed by the European Commission to draft technical standards on operational risk. The EBA warns that the changes could compromise prudential requirements and increase supervisory complexity.
Combined risk models raise EBA concerns
The European Banking Authority (EBA) strongly opposes the European Commission's proposal to allow institutions to combine the Accounting Approach (AA) and the Prudential Boundary Approach (PBA) for operational risk capital calculations.
This amendment, impacting key articles of the draft regulatory technical standards, introduces a hybrid methodology.
The EBA argues this significantly increases the framework's complexity and burden for both institutions and supervisors, requiring extensive IT system adjustments and new risk management procedures.
The EBA highlights that this proposal deviates from the Basel 3 standard and is inconsistent with the market risk framework, which expects uniform accounting practices.
The EBA warns that allowing partial use of the PBA could lead to regulatory arbitrage, as institutions might tailor portfolios to minimize capital requirements rather than genuinely mitigate operational risk.
This could result in a less prudent capital calculation.
The EBA's initial mandate for PBA use was specifically for cases where the AA led to unwarranted capital increases.
Therefore, the EBA advocates for maintaining the exclusive use of either the AA or the PBA across an institution's entire balance sheet.
Materiality threshold sparks debate
The EBA also opposes the Commission's proposal to mandate institutions notify competent authorities only of *material* changes to the scope of the Prudential Boundary Approach (PBA).
The EBA argues this introduces a materiality concept for notifications, risking an unlevel playing field as institutions would define "material" differently.
This inconsistency would significantly increase supervisory complexity, requiring authorities to assess varying materiality valuations from different banks.
The EBA warns that, especially when combined with the possibility of using PBA and AA together, this materiality concept for scope changes could result in a less prudent framework and increase regulatory arbitrage.
Such a scenario adds further complexity for both institutions and supervisors.
The EBA recommends removing or clarifying the reference to materiality in Article 12(3), second subparagraph.
It also suggests removing the concept of materiality from Article 9(b)(iv) of the Commission's proposed regulatory technical standards entirely, deeming it unnecessary for effective hedging.
Flexibility vs. Prudence
The EBA's opinion highlights a fundamental disagreement on the practical implementation of operational risk standards.
The Commission's push for flexibility, while seemingly easing burden, risks undermining the very prudential goals the EBA aims to uphold.
This clash underscores the tension between regulatory simplification and robust financial stability.