Response to consultation on Guidelines on proportionate retail diversification methods
Q2. Do you identify any implementation issue in implementing the diversification method?
We welcome the willingness of EBA to take a proportionate approach as less burdensome as possible. Nevertheless, we are of the opinion that the contemplated two-steps approach could be further simplified to better leverage on existing computation already constraining the classification of regulatory retail exposures eligible for the 75% risk-weight.
Indeed, as per CRR Article 123, we would like to recall that the criteria of the EURM 1 threshold is to be computed based on the total amount owed by the clients and connected clients, excluding exposures secured by immovable properties up to the property value. This notion is based on the current outstanding of the loans to the same set of clients, i.e. the part that they have already drawn. This notion is different from the one of EAD which also encompasses the undrawn amount subject to CCF.
Thus, we would suggest enhancing the principle of proportionality by basing the diversification test on the same metric as the regulatory retail threshold instead of EAD, i.e. the total amount owed by the clients. This would notably allow large institutions to not run an unduly burdensome new computation which would always show a proportionate diversification in regards of their size.
Indeed, by adjusting to a metric already developed by all institutions, since based on a regulatory requirement, EBA would strongly ease the diversification test for institutions with portfolio of 75%-eligible exposures representing an aggregated total amount owed of EURM 500 (excluding exposure secured by immovable properties up to the property value). Beyond this threshold, 0,2% of the total amount owed at portfolio level is necessarily greater than EURM 1 and, by definition, no set of regulatory retail clients can in any way have a total owed amount greater than EURM 1.
This is somehow already anticipated by EBA, stating in Section 5. Accompanying document:
“20.Larger institutions can be in a better position to have less concentrated retail portfolios, in case retail exposures are a relevant part of the business activities of this institution, and in such case are expected to meet the 0.2% granularity criterion more easily compared with smaller institutions. Thus, diversification concerns are limited for larger retail portfolios and the introduced measure is of particularly relevance and provides flexibility for those institutions with retail portfolios with obligors for which the total amount owed by all these obligors or groups of connected clients to the institution, its parents and its subsidiaries (other than for RRE) is lower than EUR 500mn.”
Alternatively, should the test metric not be amended, giving explicit exemption to institutions with retail portfolios with obligors for which the total amount owed by all these obligors or groups of connected clients to the institution, its parents and its subsidiaries (other than for RRE) is no less than EURM 500 would greatly increase the proportionality and, for groups, allow to better cope with the EBA guideline for assessing diversification at all the levels of the group that are subject to prudential requirements.
Additionally, it would prevent banks from an unduly burdensome calculation.
Q3. Which methods do you currently use to assess retail diversification? Please elaborate.
Principle-based:
- The size of our retail portfolios ensures meeting Basel threshold
- Clients and products segmentation belonging to retail portfolio translates into diversification