We think the proportionality principle lacks precision. The flexibility provided to competent authorities to adjust their supervisory assessment should be clarified. As defined in article 1(2), the proportionality principle is a one-way principle through which National Competent Authorities (NCAs) are allowed to strengthen the assessment methodology. We think the EBA should consider the ability for NCAs to set a lighter framework for smaller and simpler financial institutions (for instance monoline product bank subsidiaries).
Though we appreciate that the IRB approach is principally used by larger scale institutions, smaller entities can also be concerned by the EBA’s assessment methodology. For example, this can be the case when several smaller organisations mutualise risk assessment functions or when specialised subsidiary firms apply the IRB approach as part of a group policy. This can be the case of specialised consumer credit and leasing firms.
It is therefore critical to ensure that the methodology is indeed consistent with firms’ technical abilities and resources. It should obviously take into account the various processes in place and build on firms’ experiences. Against this background, we think that the supervisory assessment should mainly be undertaken at consolidated level. Work at entity level should be restricted to what is necessary i.e. to those functions for which subsidiaries may have a margin of discretion.
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.
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.
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.
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.