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Association of German Banks

Question 1: Is the scope of application of the guidelines appropriate and sufficiently clear?
Yes. We support the clearly described scope of application and especially welcome the emphasis on the fact that credit institutions would need to comply with the guidelines on different levels of consolidation under the CRR scope of consolidation (individual, sub-consolidated and consolidated levels).
Question 2: Is the date of application of the guidelines of 1 January 2018 appropriate?
1 January 2018 as the mandatory date of initial application of the final EBA guidelines will be acceptable if, and only if, the additional requirements compared to IFRS 9 set out in this consultation paper are limited to those that are not criticised and opposed in Section 4 of our attached annotated version of the paper.
Otherwise, the remaining period of time until 1 January 2018 will be too short for the implementation (including testing activities) of the additional requirements. The earliest feasible implementation date would be 1 January 2020, in our view.
Question 3: Please provide any comments you may have on the appropriateness of the proposed proportionality approach.
We acknowledge the documentation of the proportionality principle in the EBA’s consultation paper. These principles of proportionality and materiality are already applied in practice and are a part of the regulatory framework, as demonstrated, for example, by the possibility of permanent partial use under the IRB approach, and an accounting principle for useful information in the IFRS Framework.

However, we believe that the proportionality principle should not only apply to credit institutions of different sizes or levels of complexity, but also to subsidiaries or branches and portfolios of banking groups (i.e. this principle should allow subsidiaries/branches with only small portfolios resulting in immaterial effects on potential ECL amounts to use operational relief when implementing the ECL methodology). In our view, the application of proportionality at segment level is not adequately addressed in the consultation paper at present.

Furthermore, we believe considering large portfolios as “material” per se is not a proper application of the materiality principle as stipulated in IFRS. When considering individual portfolios, the applicable materiality principle should instead follow the criteria of the proportionality principle.
Question 4: Do you agree with the draft guidelines which introduce the relevant BCBS Guidance in the EU regulatory framework? Are there additional issues for which the EBA Guidelines should be amended in the context of finalising the guidelines?
In our view, the consultation paper should be adjusted to reflect our detailed remarks set out in the Appendix to these comments. In addition, we would like to highlight the following aspects:
— The EBA mentions that credit institutions may use existing regulatory capital models for the measurement of expected losses as a starting point for estimating ECL for accounting purposes.
— We welcome the fact that some paragraphs reproducing the text of IFRS 9 have been replaced by a reference to the relevant paragraph of IFRS 9. In our view, however, this approach could be extended further. For example, the statement that “credit institutions should ensure that modifications or renegotiations do not obscure increases in credit risk…” (paragraph 124) relates to IFRS 9 preventing preparers from hiding credit deteriorations by modifications or renegotiations of the contractual terms and conditions. This should be appropriately referenced.
Question 5: Do you agree with the impact assessment and its conclusions, having regard to the baseline scenario used for this impact assessment? Please provide any additional information regarding the costs and benefits from the application of these guidelines.
In relation to the impact assessment of the proportionality approach, we believe that Option 2.1 should be chosen, since this is the most principles-based of the three. We strongly believe that the draft guidelines should be based on a set of principles. Such an approach is best suited for application within a broad range of different accounting frameworks, business models and sizes of banks and as such could be adequately applied by each credit institution covered by the scope of the draft guidelines.
By contrast, detailed criteria on the application of the proportionality approach and the introduction of specific exclusions or inclusions (“smaller/less complex” or “systematically important credit institutions”) would lead to reduced flexibility and redundancies. It would also be impossible to take account of all possible cases when specifying specific criteria. In consequence, we believe the costs associated with such exclusions and restrictions would outweigh any potential benefits they might bring.
Question 6: Please provide any additional comments on the draft guidelines.
In addition to our answers/remarks above, we would like to make the following comments on specific paragraphs of the consultation paper:
— It should be clearly stated in paragraph 120 that a comparison of past lifetime PD estimates on initial recognition with the lifetime PDs estimated on the reporting date makes economic sense only if the comparison is made for congruent periods of time (as implied in IFRS 9 B5.5.11). Hence only the former lifetime PD expectations on initial recognition for the (at that time) future period starting at the reporting date can be the basis for the comparison with the current lifetime PD on the reporting date.
— We disagree with the obligation to consider an absolute width of the change in PD when determining significant increases in credit risk (paragraph 109) as IFRS 9 requires an assessment that is relative in nature.
— Regarding the materiality principle, we would like to emphasise that even where large exposures/portfolios are involved, the materiality and sensitivity of the amount of risk provisions should be a more relevant measure than the size of the exposure amount. In consequence, we would recommend deleting the following statement in paragraph 18 to reflect this idea: “In addition, materiality should not be assessed only on the basis of the potential impact on the profit or loss statement at the reporting date under the applicable accounting framework. For instance, large portfolio(s) of highly collateralized lending exposures like real estate mortgages should be considered material.”
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Ingmar Wulfert