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Credit risk drivers are analysed in the context of the European mortgage market characteristics. Differences in supervisory practices across European borders are examined according to the experience of the participating banking groups.
The main elements that characterise residential mortgage portfolios and the associated IRB models across Europe are reviewed. Common practices and divergences are commented on throughout the report, including those arising from the drivers of credit risk parameters, notably probability of default (PD) and loss given default (LGD). The information shown across this report has been obtained from an EBF questionnaire supported by supplementary evidence where it is available.
This study is meant to be complementary to other papers that are being (or have been) prepared by analysts and institutions, e.g. the IMF. In addition, articles and comments have been recently published concerning the level of risk-weighted assets (RWA) across jurisdictions. It is important to note that straight comparisons between the RWA figures in Europe and other jurisdictions miss a lot of information that needs to be taken into account for a well-informed interpretation.
This study sheds light on factors and circumstances that explain the state of play of residential mortgage IRB models across Europe and the resulting risk weighting of such assets. The objective of this study is two-fold:
This is a preliminary look at the banks’ experience in residential mortgage IRB modelling to be used to inform discussions with policy-makers, regulators and supervisors by showing: