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?

• In preamble (3) it is stated that “extensions of additional exposures that were not risk weighted by another rating system before the change are not covered by Delegated Regulation (EU) No 529/20”. While the reasoning behind the scope demarcation is clear, we would ask EBA to consider that immaterial extensions can be covered by this RTS:
  • The proposed wording implies that any proposed changes to a type of exposure such that the scope of application of a rating system includes such additional exposures should be treated as an initial roll-out of IRB to a new type of exposure, irrespective of the materiality and nature of these extensions. In particular, it is implied that extensions otherwise not classified as material based on the conditions in annex I, part I, section I, point 1, and article 4(1)(d), would effectively be treated as material by requiring an initial approval.
  • As an alternative, we ask EBA to consider that where extensions are not classified as material under these conditions, the type of exposure is effectively not materially changed due to the extension, and prior approvals therefore cover previous approvals based on this type of exposure. As a result, the extension should not require a new approval, unless classified as material based on other changes that are classified jointly with the immaterial extension, following article 3(3).

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?

Regarding Annex I, part II, Section 1,

• We recognize the classification of changes listed in points 3 (a)-(b), which refer to aspects of default classification that derive from article 178(1)(b), and therefore can be seen as requiring approval irrespective of the impact of these changes, while these aspects are not covered elsewhere.
• By contrast, since point 3 (c) refers to changes in the use of external data used for the quantification of risk parameters and the requirement to apply appropriate adjustments to account for differences in the default definition applied in external data. As such, in our view, these type of changes are already covered by Annex I, part II, section 1, point 2(h), or by more general updates to data used for the quantification of risk parameters, and quantitative backstop. Therefore, we suggest to remove point 3 (c).
• In addition, in our view, point 3 (d) (changing UtP from manual to automatic classification or vice versa) is not likely to be related to higher impact, and relates only to switching the type of classification process without any other changes directly related to article 178(3), including purely operational changes. Therefore, we suggest to also remove point 3 (d).
• Regarding the consideration (par. 40) of applying quantitative thresholds as necessary conditions, rather than maintaining them as a backstop for qualitative criteria, ING appreciates the transparency of argumentation supporting the latter option. However, we would ask EBA to give further consideration (par 43, preamble (5)) to changing the materiality of certain qualitative criteria, or removing them altogether, in order to avoid interpretative issues and requiring CA’s approval for changes that are immaterial or within scope of earlier approvals.
  • In our view point 2(a) is already covered by point 2(d), and not sufficiently specific to avoid interpretative issues or lack of harmonization. Therefore, we suggest to also remove point 2(a).
  • Concerning point 2(e), the current wording of this item refers to changes to the use of individual external ratings (“an external rating”). We suggest to clarify that the item considers changes to whether or not external ratings are used to assign internal ratings (i.e., in general).
  • Regarding point 2 (f), there remains an interpretative issue with respect to the distinction between changes to the fundamental methodology for estimating risk parameter values versus any other changes to this methodology referred to in section 2, point 2(h). Therefore, we suggest to remove this distinction by removing Point 2 (f) and instead rely on the quantitative threshold in Point 2(d) instead, such that changes to the methodology that in addition meet the criteria in 2(d) are treated as material, whereas changes to the methodology that do not meet the criteria in 2(d) would require ex-ante notification. Alternatively, we would suggest providing a list of specific types of changes that would be considered changes to the ‘fundamental’ methodology.
  • Point 2 (g) would benefit from clarification of which types of changes to procedures directing the treatment of types of collateral under 181(1)(c)-(g) would be considered in the condition (“if their treatment differs from procedures already approved”)

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?

• See the answer provided for question 1; we suggest for these criteria to apply also to extensions to exposures not yet in scope of any IRB approval and rating system, such that extensions which meet the conditions in section 2, point 3 (i.e., where data used to build the model and for risk quantification are representative of the extended scope of application), are classified as immaterial changes requiring prior notification, instead of being treated as roll-out of the IRB approach to new types of exposures under article 144.

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)?

• In our view the treatment of changes to the methodology of assigning exposures to rating systems, where the range of application of 2 or more rating systems is changed[1], is not clear, as these could fall under the 4(1)(c)(i) as well as 4(1)(d)(i), considering either the combined impact of extensions and complementary reductions on consolidated RWEA[2], or the impact of extensions of each of the individual rating systems affected by the change on the rating system RWEA.
  • The latter treatment could lead to a scope change (i.e., reduction or extension of scope of application of a rating system) not subject to prior approval to be effectively conditional on the approval of other, complementary scope changes.
  • In addition, the latter treatment could effectively result in changes resulting in a material reduction of consolidated RWEAs not being subject to prior approval, and vice versa.
  • In case the intention was for complementary changes in scope of application of multiple rating systems to be subject to the thresholds in both 4(1)(c)(i) and 4(1)(d)(i), we suggest to clarify this in the preamble or in the wording of article 4(1)(c)(i) (e.g., “they are changes to rating systems or related extensions and reductions to rating systems [...]”).
• Regarding 4(1)(d)(i), it is unclear in which cases the extension of the scope of application of a rating system could lead to a reduction of RWEAs, unless either it was meant to be considered in combination with complementary reductions of the scope of application of other rating systems, in which this should be clarified (see previous point), or considered in combination with other changes to the quantification of risk parameters[3], e.g., recalibration based on the extended scope resulting in an overall reduction of RWEAs, in which case these changes already fall under the thresholds listed in 4(1)(c). 

Therefore, we suggest to remove article 4(1)(d)(i), or else to clarify the treatment of extensions/reductions under article 4(1)(c)(i), as in our view the additional quantitative threshold therein does not contribute to the stated policy objective of clarifying interpretative issues nor results in a more harmonized and risk sensitive framework.

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[1]We point out that, in case immaterial extensions to exposures previously on SA are considered out of scope (see questions 1 and 3), any extension necessarily would be combined with a complementary reduction.

[2] In line with article 3(3)(c)

[3] In line with article 3(3)(a) 

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?

• See answers to question 4; in our view, considering the impact of extensions to individual rating systems separately from the impact of complementary reductions could lead to changes being classified as immaterial and not requiring prior approval to be conditional on the approval of complementary changes.
• In addition, in our view, in relation to the stated objective of the revised threshold for extensions, risk that a rating system might not perform adequately for the additional exposures to which the range of application of the rating system is extended is already covered by the conditions in Annex I, part I, section 1, point 1, or by the requirement to treat (material) extensions to exposures currently under SA as an IRB roll-out under article 144. Moreover, the impact of any changes resulting indirectly from the extension, e.g., recalibration or redevelopment based on the extended scope, should already be considered under article 4(1)(c)(i). 

Therefore, we suggest to remove article 4(1)(d)(ii) and instead clarify the treatment of extensions in light of the considerations above.

Question 6. Do you have any comments on the documentation requirement for extensions that require prior notification?

• In relation to article 8(1)(h), regarding the reference to article 144(1)(g) in article 3(5); in our view, demonstration of the ability to submit reporting should not be required based on article 144(1)(g), as previous approvals of IRB for the same type of exposure (which is not materially altered, based on the classification of extensions) should cover the requirements under article 144(1)(g), unless these changes affect the reporting infrastructure itself. Therefore, in such cases it should be sufficient to demonstrate that the proposed extension does not affect reporting infrastructure.
• Regarding article 8(1)(f), in our view, requiring an assessment by the internal validation function for extensions classified as not material risks lengthening overall internal approval timelines, overburdening the validation function with immaterial extensions as well as the CA by requiring to review additional documentation, jeopardizing the overall policy objectives of the amendment, i.e. to avoid unduly burdensome requirements. Instead, the stated objective of this revision (i.e., of providing the CA with sufficient opportunity to challenge the materiality assessment of ex-ante extensions) is already achieved by a requirement for institutions to document and provide the evidence referred to in Annex I, part I, section 1, point 1 (regarding the representativeness of data of the extended scope of application). Therefore, we suggest removing the requirement in article 8(1)(f) to submit reports of the institutions' independent review or validation for immaterial extensions.

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