Response to consultation on RTS on specialised lending exposures
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In view of the above, out of the two proposed assignment methods, CBA prefers Option 2 and would be in favour of setting the minimum allowed factor weight as low as possible, even allowing the weight to be set to 0% where appropriate rationale for this is provided (e.g. factor Political and legal environment for a portfolio of exposures fully located in the same jurisdiction).
From CBA point of view, another reasonable approach that could be used to combine individual factors into final assignment to a category would be the creation of an own internal model that would reflect the bank's specific portfolio, but be based on assessment of mandatory factors / information areas, and the ultimate output of which would not be PD and LGD estimates but rather one of the regulatory categories. As part of such a model, the bank would propose specific mapping between the model's preliminary outputs (e.g. score, or some PD-equivalent measure) and the final assignment to a regulatory category. The advantage of this approach would be the possibility to gradually improve the underlying internal model, with the subsequent possibility to promote the model from a slotting approach to a regular IRB approach.
Question 2: What would be the preferred approach for the combination of the factors into a final assignment to a category? What are the advantages and drawback of either approach? Are both options equally clear or should further guidance be provided? Are there other approaches that could be used to harmonise how the different factors are combined into a final assignment for the risk weight?
CBA disagrees with Option 1, whereby the overall assignment would be at most one category better than the assignment of the worst single factor. This method does not reflect the fact that the individual factors / areas of information have different degrees of relevance for different types of specialized lending projects and/or portfolios. In case this method were applied, significant information would be lost from the overall assignment, while at the same time users responsible for assigning exposures to categories would be directly motivated to distort the assessment of individual factors. Also, Option 1 would discourage banks from creating more sophisticated and granular assessment methods, as each additionally assessed criterion could only lead to a worse assignment, and never to a better one. Compared to the current situation, implementation of Option 1 would lead to increased capital requirements, which however would not be driven by real riskiness of the portfolio in question.In view of the above, out of the two proposed assignment methods, CBA prefers Option 2 and would be in favour of setting the minimum allowed factor weight as low as possible, even allowing the weight to be set to 0% where appropriate rationale for this is provided (e.g. factor Political and legal environment for a portfolio of exposures fully located in the same jurisdiction).
From CBA point of view, another reasonable approach that could be used to combine individual factors into final assignment to a category would be the creation of an own internal model that would reflect the bank's specific portfolio, but be based on assessment of mandatory factors / information areas, and the ultimate output of which would not be PD and LGD estimates but rather one of the regulatory categories. As part of such a model, the bank would propose specific mapping between the model's preliminary outputs (e.g. score, or some PD-equivalent measure) and the final assignment to a regulatory category. The advantage of this approach would be the possibility to gradually improve the underlying internal model, with the subsequent possibility to promote the model from a slotting approach to a regular IRB approach.