EBA publishes 2025 assessment of banks’ internal capital calculation approaches

The European Banking Authority (EBA) has published its 2025 reports on the annual market and credit risk benchmarking exercises. These reports highlight ongoing progress in the consistency and reliability of banks’ internal models across the European Union, while identifying areas requiring supervisory attention as key regulatory reforms approach full implementation.

For market risk, results show stable and low dispersion in key risk metrics, reflecting improved data quality and modeling practices. For credit risk, the variability of the probability of default (PD) estimates has gradually decreased over the long term.

Market risk: progress ahead of FRTB

The 2025 EU market risk benchmarking indicates tangible improvements in data quality, consistency, and comparability across banks. The assessment is presented in two reports covering the Internal Model Approach (IMA) and the Alternative Standardised Approach (ASA), enhancing transparency and analysis, especially as the ASA is expected to play a larger role under the upcoming Fundamental Review of the Trading Book (FRTB) framework.

The IMA report, covering 43 EU banks across 13 jurisdictions, shows significant improvement in data quality for Initial Market Valuation (IMV), with reduced dispersion across asset classes. Variability in Value-at-Risk (VaR) remains at low levels, but higher dispersion persists in stressed VaR (sVaR) and Incremental Risk Charge (IRC).

Results for the ASA confirm its role as a stable and comparable framework, with continued improvements in consistency. Dispersion in the Sensitivities-Based Method (SBM) has decreased further, reaching an average of 8%. Seven banks were flagged for further supervisory review.

Credit risk: stable outcomes with gradual improvements

The credit risk benchmarking shows 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 to decline gradually. The increase in approved material model changes across asset classes indicates progress in implementing the IRB roadmap.

Between 2015 and 2024, probability of default (PD) variability declined across several asset classes, while loss given default (LGD) variability remained stable with a slight downward trend. The long-term default rate explains some PD variability, with some correlation observed. Variability in LGD is partly explained by collateralisation levels, measured by loan-to-value (LtV) ratios.

The EBA’s benchmarking exercises are vital supervisory tools to assess model consistency and comparability across EU banks. They support supervisory efforts, enhance confidence in the regulatory framework, and contribute to a level playing field by identifying undue variability and promoting best practices.