Response to consultation on Guidelines on proportionate retail diversification methods
Q2. Do you identify any implementation issue in implementing the diversification method?
From my perspective, the EBA exceeds its mandate with these guidelines by introducing requirements that go beyond its remit. As currently framed, the guidelines establish binding criteria not explicitly provided for in the CRR. This raises both substantive and legal concerns, as guidelines must not impose criteria that are more appropriately addressed through a Level II legislative act. Specifically, the strict granularity criterion lacks any foundation in the CRR. For instance, the 0.2% threshold should have been incorporated into Article 123 of CRR III, with the EBA restricted to defining specific calculation rules within this framework.
CRR III specifies that exposures qualifying as retail exposures must belong to a pool of exposures with homogeneous characteristics, ensuring substantial risk reduction. In my view, this requirement implies that such exposures must relate to standard business activities. The EBA’s role is therefore limited to defining proportionate diversification methods that classify an exposure as part of a homogeneous group. The EBA cannot rely solely on the Basel Committee's inclusion of this criterion, particularly since the EU made a deliberate political decision to omit it. This omission underscores that there is no proportionality-based justification for treating minor breaches as grounds for non-compliance with the guidelines.
Moreover, the strict granularity criterion disproportionately impacts banks with smaller retail portfolios by restricting their ability to diversify risks. This raises significant questions about whether such a criterion constitutes a proportionate diversification method. The EBA's failure to explore or propose alternative approaches further undermines the guidelines and highlights their potential legal vulnerability.
In summary, the EBA’s guidelines appear to overreach both substantively and legally. By introducing new criteria absent from the CRR, the guidelines exceed the EBA’s mandate and disproportionately disadvantage smaller banks. Given these issues, the publication of the guidelines in their current form is legally questionable.
Proposed Adjustments for Practical Implementation
Notwithstanding the legal issues, institutions must have planning certainty. As a basis for calculating the "exception quota", the retail portfolio (excluding consideration of risk weights) should be defined as of December 31 of a given year. To reduce the complexity of calculations, only the "one-step approach" should be implemented, albeit with a threshold of 10% instead of the defined 5%. This "exception quota" should then apply throughout the subsequent fiscal year.
Furthermore, the 0.2% threshold could be adjusted upward, depending on the risk profile and complexity of an institution’s business. This flexibility would help avoid disproportionately disadvantaging smaller institutions. Such an adjustment would ensure that fewer exposures fall under the "exception quota" and could therefore continue to be weighted at 75%.