Response to consultation on Regulatory Technical Standards on the allocation of off-balance sheet items and UCC considerations
Question 1. Do you have any comment on the non-exhaustive list of examples provided?
I propose below wording:
- EBA lists in bucket 2 “Documentary credits in which the underlying shipment does not act as collateral, because it is a transaction related contingent item where the trigger event, typically presentation of bill of lading, is not credit risk related.”
- The inclusion of these instruments as an example of an item assigned to bucket 2, making a differentiation according to the existence or not of a documentary collateral, disregarding their Trade Finance nature, creates confusion regarding the prevailing assignment criteria.
- As mentioned above, Trade related transactions are by nature supporting flows of goods and services, and can be both short and long term. Therefore, collateral / not collateral items shall not be a condition triggering the Trade nature of any transaction, leading all documentary credits to belong, by nature, to bucket 4 at CCF 20%.
- In the same line, tax, shipping and customs guarantees that are trade finance and can be linked to commercial transactions while depending on the technical performance of a company before being claimed by the beneficiary should fit within bucket 4 definition.
Question 2. Which is the average period of time given to the client to accept the mortgage loan offer?
NA
Question 3. What is the applicable percentage tht institution currently apply to these commit-ments?
NA
Question 4. What is the average acceptance rate by the client of a mortgage loan offered by the bank?
NA
Question 5. Do you have any comment on the allocation criteria proposed under Article 1?
NA
Question 6. Do you have any suggestion regarding allocation criteria for buckets 4 and 5?
We believe the commitments to issue instruments contained in bucket 4 should be classified under bucket 5. It would be not appropriate in case there is a committed line to issue trade finance performance guarantees, the same CCF should apply whether it is issued or not. ICC would suggest classifying the non-used committed part under bucket 5, as it is worth mentioning the issuance of performance bonds does not increase because a company is close to default – as opposed to what may happen in credit commitments – and also the issuance of performance bonds is typically subject to some conditions in terms of legal agreements, KYC/AML and other review by the banks.
Do you identify any specific item you may hold off-balance sheet that is currently classi-fied as “Other off-balance sheet items carrying similar risk and as communicated to EBA” and that may experience a change in bucket allocation based on the criteria listed in Ar-ticle 1 of these RTS? What would be the related change in the associated percentage as per article 111(2)?
ICC welcomes the consultation from the EBA regarding the allocation of off-balance sheet items and UCC considerations as an initiative to provide clarity and ensure an homogeneous playing field for financial institutions.
Nevertheless, as a reminder, the EBA, several times[1], clearly established in its RTS draft that it is mandated to “specify the criteria that institutions shall use to assign off-balance sheet items, with the exception of items already included in Annex I “.
EBA mandate being to classify off-balance sheet items which are not already included in Annex I of CRR, we consider that such items item, among which trade finance instruments (bucket 4), should be out of the scope of the RTS.
We underline that in the consultation there are a number of changes considered by the EBA which are out of its mandate, as they are already included in Annex I, such as funding commitments (bucket 3) or especially relevant for ICC, the trade finance off balance sheet items (bucket 4), regarding documentary credit or trade finance performance and related bonds).
As such, ICC considers that there is a risk we would highlight that some aspects of the draft RTS are fundamentally changing the current allocation of off-balance sheet items in a way that was not intended by the Basel Committee and the final compromise of the trilogue.
[1] “the concept of conditionality to events helps to better frame the decision flow on how to allocate those off-balance sheet items that are not already explicitly listed in Annex I,”