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Summary of CEBS Peer Review on Guidelines for AMA and IRB Approvals

Introduction

The CEBS peer review exercise aimed to promote supervisory convergence across the European Economic Area by evaluating the implementation of supervisory provisions, including the CEBS Guidelines on the implementation, validation, and assessment of Advanced Measurement (AMA) and Internal Ratings Based (IRB) approaches. This review focused on the first validation processes completed by the end of March 2008, with the goal of testing the peer review mechanism rather than identifying non-compliant entities. The review was conducted by the Review Panel in July 2008 and included both a self-assessment by the 27 EU banking authorities and independent peer reviews.

Level of Compliance

The peer review found that the level of compliance with the CEBS Guidelines was generally high among the 27 supervisory authorities, with only a few minor exceptions. Most joint decisions were reached within the six-month period stipulated by the CRD. However, some countries delayed the decision-making process, indicating that the six-month requirement was unduly challenging for large cross-border banking groups. Additionally, some non-compliance issues were identified in the application completeness, implementation, and communication processes.

Main Issues

1. Six Months Period

• Timing of the clock: The six-month period starts upon receipt of a complete application by the consolidating supervisor. However, some countries considered the trigger to be the dispatch of the latest documents or the introduction of CRD provisions into national law.
• Delays in decision-making: Belgium, France, and the United Kingdom experienced delays beyond six months, with France taking up to 7 months, Belgium up to 10 months, and the UK up to 11 months. These delays were generally agreed upon with host supervisors to allow more time for comments or additional information.
• Use of suspension: Only two countries (Austria and Luxembourg) used the suspension mechanism outlined in the Guidelines to delay the decision process, while Germany retroactively adjusted the decision date to meet the six-month target.
• Need for clarity: There is a need for further guidance on the "minimum requirements" for application completeness, the maximum duration for checking completeness, and the preconditions for stopping the clock.

2. Consistency of Implementation of the Joint Decision

• Language barriers: Host supervisors in jurisdictions where the joint decision is not self-executing may face challenges in ensuring consistent implementation due to differences in local language and legal systems.
• Transposition requirements: In some countries, the joint decision must be explicitly transposed into national law to be enforceable, while in others it is self-executing. The Guidelines suggest that national transposition should be done "shortly" after the decision is made, but the exact meaning of "shortly" is unclear.
• Coordination: Close cooperation between consolidating and host supervisors during the initial stages of the decision process is essential to ensure consistent implementation across jurisdictions.

3. Involvement of Host Supervisors in Later Phases of Assessment

• Roll-out phase concerns: Host supervisors expressed concerns that centralized models implemented later at subsidiaries might not be adequately assessed if they were not involved in the initial approval process.
• Supplementary joint decisions: Several countries, including Austria, France, and Italy, use supplementary joint decisions to address model roll-out without reopening technical discussions from the initial phase.
• Need for early involvement: Host supervisors should be involved in the assessment of centralized models during the initial phase to ensure consistency and avoid re-opening discussions later.

4. Degree of Reliance on Pre-Validation Self-Assessment

• Use of self-assessment: Supervisors generally used institutions' self-assessments as part of the validation process, especially in risk-based approaches.
• Reliance criteria: The degree of reliance on self-assessments was influenced by factors such as the systemic risk of the institution, the nature of the application, and the complexity of the model.
• Recommendation: The Guidelines should provide clearer guidance on the appropriate level of reliance on self-assessments.

5. Communication Issues

• Communication flow: Effective communication between consolidating and host supervisors is critical for the success of cross-border model validation.
• Case examples: Germany and France experienced communication issues, including misunderstandings and lack of inclusion in consultation processes. The Netherlands reported a lack of regular information exchange during the implementation phase.
• Need for structured communication: There is a need for more structured and regular communication channels to ensure transparency and consistency in the validation and implementation process.

Lessons Learnt and Way Forward

1. Peer Review Methodology

• The peer review methodology was tested and found to be effective in identifying areas for improvement and promoting convergence.
• The process should be refined to include more detailed questions and better alignment with the practical realities of the validation process.

2. Adequacy of the Guidelines

• The Guidelines provided useful principles but were not comprehensive enough to address all practical challenges.
• The Review Panel supports a revision of the Guidelines to include specific guidance on:
  • Criteria for the assessment of the completeness of an application
  • Maximum duration for checking the completeness of an application
  • Preconditions for stopping the clock
  • Impact of national transposition timelines and the six-month requirement
  • Consistency between the decision and local transposition
  • Reliance on institutions' self-assessments
  • Involvement of host supervisors in later phases of the roll-out plan

The peer review process highlighted the need for more detailed and harmonized guidance to ensure consistent and effective implementation of the CEBS Guidelines across the European Economic Area.