Response to consultation on Regulatory Technical Standards that specify material changes and extensions to the Internal Ratings Based approach
Question 1. Do you have any comments on the clarification of the scope of the revised draft regulatory technical standards to specify the conditions for assessing the materiality of the use of an existing rating system for other additional exposures not already covered by that rating system and changes to rating systems under the IRB Approach?
The clarified scope provides much-needed guidance on defining materiality in the use of existing rating systems for additional exposures and model changes. However, further specificity regarding the threshold criteria for materiality assessments would improve regulatory clarity. It is our belief that institutions require a structured framework to assess the risk implications of these expansions.
Challenges: The proposed approach may lead to inconsistencies in determining materiality, as the reliance on qualitative judgments could increase supervisory burden and ambiguity for institutions.
Impact on the Industry: The lack of a standardized quantitative assessment approach may lead to varying interpretations, making cross-institutional comparisons difficult.
How Risk Accounting Can Help: Risk Accounting introduces a quantitative method through the use of Risk Units (RUs) to objectively measure the materiality of new exposures under an existing rating system. This allows for a structured comparison of exposure impacts across different rating segments, aligning with regulatory expectations while reducing subjective interpretation.
Question 2. Do you have any comments on the clarifications and revisions made to the qualita-tive criteria for assessing the materiality of changes as described in the Annex I, part II, Section 1 and Annex I, part II, Section 2?
The revisions to the qualitative criteria introduce greater flexibility but in our perception also raise concerns regarding the subjectivity of materiality assessments. Institutions would benefit from additional regulatory guidance on applying these criteria consistently.
Challenges: The absence of standardized quantification tools may lead to inconsistencies across institutions, making it difficult for supervisors to objectively benchmark and compare assessments.
Impact on the Industry: The increased reliance on judgment-based assessments could introduce compliance risks and complicate regulatory reporting and result processing for a comprehensive market level view.
How Risk Accounting Can Help: Risk Accounting provides a structured framework to assess qualitative materiality criteria by mapping risk changes into RUs. This ensures that qualitative assessments are converted into measurable risk factors, enhancing comparability and regulatory alignment.
Question 3. Do you have any comments on the clarifications and revisions made to the qualita-tive criteria for assessing the materiality of extensions and reductions as described in the Annex I, Part I, Section 1 and Annex I, Part I, Section 2?
The refinements in assessing materiality for model extensions and reductions improve transparency but may still pose challenges in practical implementation. Institutions would benefit from clearer thresholds for defining significant versus minor extensions.
Challenges: A lack of precise guidance on when an extension or reduction qualifies as material may increase regulatory uncertainty.
Impact on the Industry: Variability in assessment criteria may lead to regulatory fragmentation across different jurisdictions.
How Risk Accounting Can Help: By leveraging RUs, Risk Accounting introduces an objective method to evaluate extensions and reductions. This structured approach allows financial institutions to consistently measure the impact of changes on risk exposure and capital requirements, reducing ambiguity.
Question 4. Do you have any comments on the introduced clarification on the implementation of the quantitative threshold described in Article 4(1)(c)(i) and 4(1)(d)(i)?
The introduction of a clear quantitative threshold provides a structured approach to assessing materiality, but additional granularity on its application may be necessary.
Challenges: The fixed threshold approach may not account for institution-specific risk profiles and business models.
Impact on the Industry: A rigid threshold may disproportionately impact smaller institutions with limited diversification options, compared to larger institutions.
How Risk Accounting Can Help: Risk Accounting offers a dynamic approach by aligning RUs with capital adequacy measures, ensuring that threshold calculations reflect actual risk exposure levels rather than arbitrary percentage thresholds.
Question 5. Do you have any comments on the revised 15% threshold described in Article 4(1)(d)(ii) related to the materiality of extensions of the range of application of rating systems?
The revised 15% threshold is a reasonable benchmark for assessing materiality but should consider adjustments based on product portfolio risk profiles and historical performance.
Challenges: A uniform percentage threshold does not account for varying risk sensitivities across different asset classes.
Impact on the Industry: Institutions may need to recalibrate rating systems frequently to stay within compliance, increasing operational complexity and workload.
How Risk Accounting Can Help: Risk Accounting provides a structured mechanism to assess rating system extensions through RUs, allowing institutions to validate whether changes align with regulatory limits while considering risk-based factors.
Question 6. Do you have any comments on the documentation requirement for extensions that require prior notification?
The requirement for prior notification is a positive step towards improving regulatory oversight but should be complemented with guidance on documentation expectations.
Challenges: The lack of standardized templates may result in inconsistent reporting, increasing compliance challenges.
Impact on the Industry: Institutions may struggle with added administrative burdens if documentation requirements are not clearly defined.
How Risk Accounting Can Help: Risk Accounting introduces a structured approach to documentation by integrating RUs into risk assessment reporting. This ensures that institutions provide regulators with consistent, auditable records that align with compliance expectations.
The RTS requires institutions to assess materiality based on quantitative and qualitative criteria. Risk accounting enables a structured methodology for quantitatively measuring and documenting model changes using RUs, ensuring a comprehensive audit trail for supervisory review.
The use of risk accounting can streamline the validation process by providing standardized risk assessments across different models and business lines.