Response to consultation on RTS on conditions for capital requirements for mortgage exposures
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Moreover, the adopted basis for the determination of the loss experience and the loss expectation is imprecise. In our opinion, the statistics set out in Article 101(1) CRR do not make it possible to reliably determine the economic loss experience. The loss experience (or rather its changes over time) is in turn supposed to be the basis for the determination of the related loss expectation. What is also relevant to the setting of risk weights is the potential future level of unexpected losses and not only current loss expectation forecasts. In particular, the ratio of the unexpected loss to the loss expectation also changes over time and depends on several factors, not all of which are indicated.
From the perspective of some countries (including Poland), what is missing is perhaps a factor involving exchange rate volatility where there is a significant proportion of loans denominated in foreign currencies.
The approach expressed in Questions 2 and 3 is incorrect also for another reason. For assets secured by mortgages, the relationship between losses on the mortgage portfolio and the risk weights is much more complex than Article 2 of the draft appears to suggest. Loans secured by mortgages are of high quality early in their tenure. Their quality begins to deteriorate after about five to seven years. The level of losses will be completely different on a stable market with a stable and small growth rate than on a market where the growth rate of new loans granted is high and variable. In particular, the introduction of loss limits as referred to in the explanation to Questions 2 and 3 is hard to accept as the draft RTS are to be qualitative in nature, indicating the necessary analysis factors and the procedure for the translation of the results into specific risk weights. However, they must not impose any values. No one should have the impression that the purpose of the RTS is to prevent excessive risk weight increases rather than setting them too low. Therefore, no additional limitations should be imposed on competent authorities, going beyond those specified explicitly in Articles 124, 126 and 164 CRR.
b. For loss expectation justifying the 35% risk weight of exposures, the lower limit of 0.1% is too low, whereas the upper limit of 1.5% is too high (it could be 0.75%). For the 50% risk weight, the limit could be set at 1.0%.
b. The other qualitative conditions seem to be selected correctly. The quantitative recommendations, however, should be removed. The market for immovable property and loans secured by mortgages on immovable property is very complex, strongly dependent on several national macroeconomic factors. For that reason, unconditionally binding quantitative recommendations will be absolutely inadequate to the actual problem and they may do more harm than good. Moreover, if the solution was so simple as the draft RTS suggest, the legislator would place it in the CRR instead of introducing a national option in the Regulation.
It should be borne in mind that the historical data is often incomparable in the new European Union member states due to the system transformation which they have undergone; therefore, any developments used as the basis for adjustments have lasted not more than about a dozen years.
c. An immovable property market is a local market, with all the consequences thereof. We believe that the specificities of national immovable property markets should be taken into account.
This data set does not seem to be necessary, yet it will do no harm if it is treated as an illustration. It does not seem to be necessary to point competent authorities to the essential variables as the authorities usually perform more complex analyses and they are also familiar with financial stability considerations and their assessment. However, although it is redundant, it may stay if this will improve the quality of the RTS.
It is worth adding the following indicators:
• time needed to complete a sale transaction on the market for a specific type of immovable property;
• the average immovable property debt collection period.
Question 2: Do you agree with the conditions for specification of the loss experience and the loss expectations? Do you agree with the adjustments allowed to be made to the loss experience on the basis of the forward-looking immovable property market developments?
You cannot identify forward-looking residential immovable property market developments on the young Polish market with adequate probability, what with the unstable tax laws and frequently-changing residential property buyer support schemes. Forward-looking commercial immovable property market developments may be identified with higher probability and the answer may be affirmative in this respect.Moreover, the adopted basis for the determination of the loss experience and the loss expectation is imprecise. In our opinion, the statistics set out in Article 101(1) CRR do not make it possible to reliably determine the economic loss experience. The loss experience (or rather its changes over time) is in turn supposed to be the basis for the determination of the related loss expectation. What is also relevant to the setting of risk weights is the potential future level of unexpected losses and not only current loss expectation forecasts. In particular, the ratio of the unexpected loss to the loss expectation also changes over time and depends on several factors, not all of which are indicated.
From the perspective of some countries (including Poland), what is missing is perhaps a factor involving exchange rate volatility where there is a significant proportion of loans denominated in foreign currencies.
The approach expressed in Questions 2 and 3 is incorrect also for another reason. For assets secured by mortgages, the relationship between losses on the mortgage portfolio and the risk weights is much more complex than Article 2 of the draft appears to suggest. Loans secured by mortgages are of high quality early in their tenure. Their quality begins to deteriorate after about five to seven years. The level of losses will be completely different on a stable market with a stable and small growth rate than on a market where the growth rate of new loans granted is high and variable. In particular, the introduction of loss limits as referred to in the explanation to Questions 2 and 3 is hard to accept as the draft RTS are to be qualitative in nature, indicating the necessary analysis factors and the procedure for the translation of the results into specific risk weights. However, they must not impose any values. No one should have the impression that the purpose of the RTS is to prevent excessive risk weight increases rather than setting them too low. Therefore, no additional limitations should be imposed on competent authorities, going beyond those specified explicitly in Articles 124, 126 and 164 CRR.
Question 3: Do you agree with the indicative benchmarks for the assessment of the appropriateness of the risk weights and to guide the setting of higher risk weights across immovable property markets in different member states as specified in Article 4(3) and 4(4)? What levels of these indicative benchmarks would be most appropriate and why?
a. The differentiation of weights due to national specificities is by all means reasonable. Although the differentiation of the benchmarks across different countries is necessary, EBA should not interfere with the detailed determinations made by national competent authorities (unless there are dramatic deviations) as that diminishes the responsibility of each bank and local regulator for rational decisions in this area.b. For loss expectation justifying the 35% risk weight of exposures, the lower limit of 0.1% is too low, whereas the upper limit of 1.5% is too high (it could be 0.75%). For the 50% risk weight, the limit could be set at 1.0%.
Question 4: Do you agree with the specification of the term of “financial stability considerations”?
Yes, although the wording of Article 3(1)(a) gives preference to the old European Union member states where the majority of global systemically important institutions are located.Question 5: Do you agree with the other conditions for the setting of higher risk weights? (Please provide your feedback related to the indicative benchmarks (in Article 3(3) and 3(4)) in your response to Question 3 above.)
The entire Article 4 appears somewhat unclear – by definition, competent authorities are supposed to be able to take account of other factors" on the basis thereof, while the provisions in fact boil down again to the setting of benchmarks for the loss expectation."Question 6: Do you agree with the conditions for specification of the exposure weighted average LGD and the LGD expectation? Do you agree with the adjustments allowed to be made to the average exposure weighted LGD on the basis of the forward-looking immovable property market developments? Do you agree that it is not appropriate to set indicative benchmarks for the setting of higher minimum LGD values because of the specificities of national immovable property markets and because of the relationship of the LGD parameter with the other internal model parameters?
a. The average LGD should be statistical in nature and it should not be the benchmark for the specification of indicators in national markets.b. The other qualitative conditions seem to be selected correctly. The quantitative recommendations, however, should be removed. The market for immovable property and loans secured by mortgages on immovable property is very complex, strongly dependent on several national macroeconomic factors. For that reason, unconditionally binding quantitative recommendations will be absolutely inadequate to the actual problem and they may do more harm than good. Moreover, if the solution was so simple as the draft RTS suggest, the legislator would place it in the CRR instead of introducing a national option in the Regulation.
It should be borne in mind that the historical data is often incomparable in the new European Union member states due to the system transformation which they have undergone; therefore, any developments used as the basis for adjustments have lasted not more than about a dozen years.
c. An immovable property market is a local market, with all the consequences thereof. We believe that the specificities of national immovable property markets should be taken into account.
Question 7: Do you agree with the other conditions for the setting of higher minimum LGD values?
Yes, although the sentence in (2)(c) should probably be verified – the setting of higher minimum LGD values should have anti-cyclical and not pro-cyclical effects.Question 8: Do you have any suggestions on the Impact Assessment?
It is a very good thing that the regulator invites suggestions on the effects of the regulation as part of the consultation process. A relevant expert opinion is definitely worth preparing. This would, however, be both time- and work-consuming. This is a task to be performed over a longer period of time, by a larger team of experts.This data set does not seem to be necessary, yet it will do no harm if it is treated as an illustration. It does not seem to be necessary to point competent authorities to the essential variables as the authorities usually perform more complex analyses and they are also familiar with financial stability considerations and their assessment. However, although it is redundant, it may stay if this will improve the quality of the RTS.
It is worth adding the following indicators:
• time needed to complete a sale transaction on the market for a specific type of immovable property;
• the average immovable property debt collection period.
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