The guidelines (GL) are one of the initiatives undertaken by the European Banking Authority (EBA) to reduce unjustified variability of risk parameters and own funds requirements and are part of a broader review of the Internal Ratings-Based (IRB) Approach that is carried out by the EBA in accordance with the plan outlined in the Report on the review of the IRB Approach published in February 2016. These GL are focused on the definitions and modelling techniques used in the estimation of risk parameters for both non-defaulted and defaulted exposures, whereas other regulatory products developed in the review process will clarify other aspects related to the application of the IRB Approach. The EBA considers these clarifications and harmonisation necessary to achieve comparability of risk parameters estimated on the basis of internal models, and to restore trust in these models by market participants while at the same time preserving risk sensitivity of capital requirements.

The EBA has in its previous work identified a clear need for these GL, including in five reports on the comparability and pro-cyclicality of capital requirements, developed in accordance with Article 502 of Regulation (EU) No 575/2013 and published by the EBA in December 2013, in addition to subsequent benchmarking reports. These reports confirmed significant discrepancies in risk parameters and own funds requirements across institutions and jurisdictions, which did not reflect differences in risk profiles but resulted from different underlying definitions and certain modelling choices. These discrepancies were in part a consequence of excessive flexibility incorporated in the IRB framework and are considered to be a main driver in the loss of trust of internal models by observers, investors and other market participants.