Implications for ECB regulated banks currently engaged with their IRB Repair Programme

For many banks, the TRIM reports of the inspection ECB teams revealed many findings in the last two years. And the banks have received in return time to prepare their remediation plans. These plans usually have accommodated several remediation actions so that banks might be able to keep their IRB status going forward. The plans were in length discussed with the JST and in most cases were tied up to some deadlines; i.e. for several banks there were need for the redevelopment of the LGD models, where new components had to be incorporated. In most cases, banks were held to keep higher capital for their IRB portfolios under the remediation programme as their IRB risk parameters were not necessarily fully in compliance due to the TRIM findings, and expectedly this capital add-ons were only to be lifted once the full remediation took place. Such model redevelopments naturally require extensive new data collection, where the data should be tempered and aligned with the New Default Definition requirements. Such actions take significant time and require several internal sources in the bank work closely in coordination. Under the current circumstances as many bank risk resources will be working remotely from home and will not have the chance to meet frequently with their team members as during the normal times. Due to this it would be not possible for the bank to achieve a certain level of efficiency to be prepared to fulfill the tasks for the committed deadlines along the remediation plans that had been already agreed with the JSTs of the respective banks regulated directly with the ECB.

There could be several impediments due to the impeding circumstances in the Single Market regulated by the ECB, most of the banks were not ready to switch to complete remote working modus. And yet this new modus can be emulated and fostered across the project team members working remotely, it will certain require time to be adjusted. The banks’ internal IT systems are not necessarily ready to cope with the surging demand of data uploading for those system users within this remote working modus; so, some of the banks are seriously stretching out their existing capacities. Though, in the next weeks should the remote working modus become the norm until further notice, there could be improvements by either beefing up the server capacity and other means to meet the demand of the increased data streaming through the banks’ systems.

However, remote working has its own limitations; working from home leads to inefficiencies as one can not see the other co-workers or have no chance to understand in real time where the key misunderstandings are or how the expected results could not be delivered in a timely manner. For many consultants and external free lancers, it might be a natural extension of their working lives as they are used to this, working from home or while they were travelling however bank intern resources have usually not this experience, and getting used to the remote working conditions might require some time. Similarly, several banks did not have the relevant laptops and other devices made available to their internal resources at this moment in time, as this has not been thought to be the norm, banks would need to adjust their internal working processes, i.e. in order to avoid overcrowding the network capacity there are banks introducing particularly for the model developers some restriction of connectivity, they can reach out to their data servers to analyze the model reference data sets only early in the morning hours or quite late after usual working hours. Though this can be achieved for a temporary period, it is not viable for the longer-term engagements. Other banks have imposed restrictions as well not permitting model developers to take over to their hard-drives the actual reference data set, but only letting them work remotely on the data set in the banks’ own data servers. Such measures might limit the risks of security breach in normal times, however, cause serious limitations for the model development work. Simple precautions related to the access with additional security coding, or prioritization of the data access could help to sort out and lead to better outcomes.

Due to all the listed limitations, there could be significant delays in the implementation of the previously agreed remediation plans. Given the disruptions that has been caused by the current coronavirus outbreak, assessing the capacity of the bank internal resources and available external resources to conduct the relevant tasks of the IRB Repair Programme, should be the fundamental objective. Once, the project leads observe the need for a realistic revision of the programme based on facts, this should be discussed, and reasons provided to the JST. This way, the previously agreed plans for the IRB Repair can be renegotiated anew with JST to agree on a more realistic implementation plan.

There is already a six-month grace period for all the major remediation activities as this has been announced by the ECB as of 20th of March on their public internet page. However, this should not lead to complete closure to the existing programme, as keeping the teams and having the project continuation will lead the banks to avoid unnecessary delays once the planned project re-initiated. As the required remediation work would need to be conducted even though we have the grace period, postponed does not mean cancelled. Consequently, it is essential for the banks to keep the existing team structure and even external support and have a slightly lower intensity of the project workload, though keep up the continuation in order not to experience significant delays after things eventually rolled back to the normality. There has been in the history several pandemic outbreaks though none of them lasted eternally; so eventually we will all revert to the normal working conditions. Given that, keeping the existing teams working on the IRB Repair programme in order to pick up the tasks will be ultimately the recipe for success.

It has been already stipulated that ECB will be deferring several inspection deadlines. Consequently, there could be soon bank specific information available. However, it might be in the interest for the discussions ahead with both ECB and local regulator drafting a simple survey how the existing projects the bank would like to staff remotely and continue, and which among the regulatory preparation work will be impacted most and therefore will be delayed. So that the regulator will have a clear idea what regulatory tasks might experience delays and for what reasons. Some banks have already started preparing such surveys to have a better view to what capacity they can rely on their internal resources.

Lastly, once the banking business working under normal conditions, there could be shortage for the external support as most banks would be renewing their plans across the industry around the same time. Henceforth, keeping the lifelines of the existing remediation plans is in its essence the best strategy banks can emulate.

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