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Spanish Banking Association (AEB)

The AEB would be in favor of Option 2 (recognition of default after both thresholds are breached), as explained above, and additionally: the amount of the absolute thresholds and the variety of thresholds should be both increased to adjust them to regulatory portfolios; to allow entities to apply exceptions evaluated by expert judgement in the materiality analysis; and the voluntary use by entities of more restrictive criteria should be allowed.
The AEB considers that the European Banking Federation proposed figure for the relative threshold is reasonable. Additionally we believe that a better approximation could be to define one threshold for each regulatory portfolio and that absolute thresholds should be higher than the ones proposed in the draft.
The Spanish Banking Association (AEB) considers that a term of 2 years is reasonable under the conditions indicated in the previous sections, i.e. allowing institutions to use more restrictive criteria and considering that the establishment of the threshold does not constitute a significant change.

Otherwise, the time required would be longer, for the following reasons:

• The changes would imply significant technological developments that take time to implement. Similarly, the time required for the accreditation and validation of the developments mentioned would have to be considered.

• The processes of recalibrating the IRB models of all the portfolios could mean 1 to 2 years of calculations, documentation, reviews (audit and validation) and governance.

• If the impact of the change is considered significant, the recalibration and review of the models would have to be signed off by the competent supervisor. This has also its own timeframe that should be factored into the implementation period. Some jurisdictions may take as much as a year for a supervisory review.
As indicated with regard to the timetable in the previous answer, the costs will depend on the definitive text of the regulations, and could be very high if the aspects discussed with regard to the possibility of considering more restrictive criteria and not classing the establishment of the threshold as a significant change are not borne in mind.

It may also be reasonable to allow institutions to opt for some implementation expedients, as long as they do not cause a significant deviation from the proposed materiality threshold or they are proven to be more conservative than the approaches proposed. For example:

- Institutions may choose to include all past due amounts, rather than only those 90 days overdue, in the numerator.

- Apply the new threshold for capital calculations leaving historical estimations calibrated with the entities’ previous materiality definitions (i.e. a prospective implementation) provided that the previous materiality definitions are more conservative.
The potential impact depends very much on the final decisions adopted, in line with our answers to Q3 and Q4.
David Sanchez