The European Banking Authority (EBA) has published a report on the consistency of risk weighted assets (RWAs) in the residential mortgage portfolio. The report, details the finding of a so-called "drill-down analysis" on the extent to which the most commonly used risk drivers influence the variability in risk weights. Overall, the analysis confirmed that risk parameters, such as loan to value, are drivers of RWAs. However, there are differences in how the banks reflect such drivers in RWAs.
The objective of the analysis was to understand if and how different variables describing the portfolios - besides the country cluster variables - could explain the differences in risk-weights across EU banks which were found in the first phase of this analysis.
The analysis confirmed the existence of a positive correlation between the value of the different drill-down variables - loan to value at origination (LTVO), indexed loan to value (ILTV), debt to service at origination (DTSO) and loan to income at origination (LTIO) - and the risk weights at EU aggregated level.
The commonly used risk drivers, regardless of whether they are used by banks in the estimation of the probability of default (PD) and loss given default (LGD), or simply in the credit lending process, influence the risk weights final outcomes.
The existing differences in risk weights for residential mortgages are only partly explained by the risk weight sensitivity to the investigated risk drivers. The analysis also highlighted the potential impact of market differences (namely credit risk mitigants other than mortgages), banks' specific credit policies as well as different modelling choices.