Response to consultation on Regulatory Technical Standards on assessment methodology for IRB approach

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Question 2: Do you agree with the required independence of the validation function in Article 4(3) and Article 10? How would these requirements influence your validation function and your governance in general?

We think this requirement is ill-suited for specialised subsidiary entities. Validation functions are typically piloted by mother companies. Requiring that independent validation functions be implemented at subsidiary entity level would be, for many companies, a major shift in the application of the IRB approach. We strongly believe that this requirement should be reassessed taking into account the various business models making use of the IRB approach. We believe it is worth stressing that the costs involved in the implementation of completely independent validation and credit risk control units that are appropriately staffed and trained would be disproportionate for smaller entities. We would therefore support the introduction of a “comply or explain” procedure for governance related requirements which would allow obliged entities to showcase their internal systems to their national supervisors.

Question 4: Do you agree with the required number of default weighted average LGD calculation method introduced in Article 51(1)(b) and supportive arguments? How will this requirement influence your current LGD calculation method? More generally, what are your views as to balance of arguments for identifying the most appropriate method?

The underlying reasoning for the introduction of default-weighted Loss Given Default (LGD) is valid. In particular, we think this is particularly relevant for low default portfolios (cf. item (v)). However, we strongly believe that the use of exposure-weighted LGD should remain allowed for retail portfolios. We think the use of default-weighted LGD would not be workable and indeed counter-productive for pool of loans showing very low Exposure At Default (EAD) and LGD. Here again, it is worth highlighting the potential major implications this new rule would have on smaller organisations. For those firms using exposure-weighted LGD, this would imply redesigning all their LGD models and segmentations. Should the EBA nevertheless confirm the introduction of default-weighted LGD, obliged entities should remain allowed, for the purpose of the calculation of default weights, to assess the average LGD after withdrawal of the non-material exposure defaults.

Question 5: Are the provisions introduced in Article 52 on the treatment of multiple defaults sufficiently clear? Are there aspects which need to be elaborated further?

We do not have any specific comments on this. However, Eurofinas and Leaseurope wish to draw the attention of the EBA to the increasing number of definitions and references to defaults (i.e. draft RTS on the materiality thresholds of credit obligation past due, further EBA work under Article 178 of the Capital Requirements Regulation, BCBS standards, etc.). As mentioned at the EBA 9 February 2015 Public Hearing, we would support a general clarification by the EBA on this topic.

Question 7: Do you support the view that costs for institutions arising from the implementation of these draft RTS are expected to be negligible or small? If not, could you please indicate the main sources of costs?

We strongly disagree that costs for all institutions will be negligible. As previously mentioned, specialised subsidiary entities will be directly concerned by this initiative. We believe that the proposed assessment methodology will have important operational, organisational and cost implications for these organisations. Fairness commands that the specificities of specialised business models be recognised in the RTS, in particular concerning the explicit ability of national authorities to adjust this assessment to subsidiary and smaller entities.

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Eurofinas & Leaseurope