Barclays would not support the introduction of either option 1 or option 2 in their current form. This is because Barclays would recommend a simplified approach, which is a modification of option 1 and option 2. Barclays proposes a modification to reflect the difference in the nature between (a) Retail exposures and small non-retail and (b) Large non-retail, and their consequential risk management. Barclays recommends the following:
(a) Retail exposures and small non-retail exposures: There should be a single defined absolute threshold limit which is consistent across all exposures because it is clear and practical as it enables efficient management of a large volume of small exposures for which the process would be typically automated. A relative threshold is not considered necessary or helpful.
(b) Large non-retail exposures: Unless the absolute threshold is set at a sufficiently meaningful level, there should only be a relative threshold limit for large non-retail exposures as this will reduce the volume of technical defaults which are not actual defaults.
In practice due to the differences in the nature of large non-retail exposures and retail and small non-retail exposures, for risk management purposes a different threshold is required. Barclays recommends the following:
(a) Retail exposures and small non-retail exposures: Barclays does not disagree with the proposed threshold of Euro 200, but consider that there should be flexibility to operate lower thresholds should a bank judge it appropriate for risk management or operational purposes.
(b) Large non-retail exposures: Barclays considers that a proposed threshold of Euro 500 is too small for large multi million Euro exposures and would not be an appropriate measure for default. Barclays considers that there should be a relative threshold for such exposures to reflect the size of the loan and risk.
(c) Errors due to administrative oversight: Barclays supports the introduction of clear and consistent thresholds but notes that current UK interpretation (BIPRU 4.3.61) recognised that errors and mistakes can occur. Where the firm holds sufficient information and evidence that the 90 days past due default trigger is purely administrative in nature, a PD of 1 may be adjusted to the previous recorded PD. Barclays would propose retaining these current procedures for administrative oversights, which are controlled by Credit, regardless of new materiality thresholds.
Without flexibility in interpretation modifications to models and systems will be required which will involve a significant amount of development and implementation time. In practice this is likely to span a few years and so it is important to allow ‘grandfathering’ of current approaches whilst the changes are phased in. If such a ‘grandfathering’ period is not permitted this will lead to strain on resources and operational difficulties both within firms and also for national competent authorities who would be required to review and reapprove all existing IRB models.
At present the full implementation costs are not quantified as to the extent to which firms will be permitted to ‘grandfather’ existing interpretations which are more conservative. If a full rebuild of all existing IRB models is required, it is probable that the implementation costs will have been understated.
It is not wholly apparent how much of the RWA variability in evidence across member states is attributed to the inclusion of technical defaults. All other things being equal (i.e. there is no wide scale restatement of LGD models) for firms such as Barclays, who operate a lower absolute threshold for retail and small non-retail exposures, the level of capital held will fall if a higher default threshold is mandated.
For large non-retail, if the thresholds are maintained at the proposed RTS levels this will result in additional technical defaults and the need to unnecessarily hold capital against technical defaults rather than actual defaults.
At present it is too early to judge what the impact of the draft RTS alone will be.
As the RTS permits competent authorities the scope to set different thresholds, it will not remove RWA variability and will therefore defeat the objective of the proposed RTS.
Barclays agrees that this needs to be considered as part of the overall activity related to Article 178 definition of default and alongside the proposed BCBS measures that are being developed.