18 October 2011

EFBS position paper of 18 October 2011

Comments by the European Federation of Building Societies (EFBS) on the European Commission's proposals concerning the implementation of the new Basel framework (Basel III) in European law (CRD IV and CRR).

Various regulatory changes proposed by the European Commission would create considerable uncertainty in terms of the internal ratings based approach – in particular the binding introduction of a leverage ratio limit in the first pillar, the extension of the Basel I floor and the unlimited extension of the LGD floor (Articles 160, 416 ff, 441 and 476 of the proposal for a regulation). The IRB approach would become even less attractive for institutions such as Bausparkassen with a low-risk lending business.

First of all, EFBS would like to mention the philosophy of the regulations of Basel to orientate the amount of assets held by an institution toward the taken risks. Bank supervisors suggest that only institutions which rely on prudentially reviewed internal procedures could in principle assume that the risk management procedure corresponds to the risk level of the existing business structure. The application of the IRB approach demands extensive requirements for credit institutions in conceptual terms and organisational implementation. For instance, internal ratings must play an essential role in the credit approval process, the risk management, the internal capital adequacy and corporate management.

Because of a high effort for internal procedures, EFBS is of the opinion that the choice between the IRB and the credit risk standard approach should remain to the credit institutions. In the past, the IRB Approach has been interesting for many institutions, not only because of the advantages of a more risk-sensitive management method but also because of the financial relief which an institution was able to obtain in terms of the own funds requirement due to the application of the more risk-adequate, though more complex IRB Approach.

EFBS also made some further suggestions for changes.

Full position paper

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