11 January 2013

EBF response to EBA consultation on prudent valuation

Firstly, a usual concern is the difference in the semantics between the prudential framework and the accounting standards. The EBF is conscious of the problems associated with the definition of the very concepts of fair value and prudent value. Although we do not support the creation of 2 fair values, in the absence of a single definition the EBF urges the EBA to consider areas where the overlap between fair value and prudent value becomes evident and to make allowance for this fact in the RTS. The potential overlapping requirements for risks that are already captured via risk weighted assets (RWA) in pillar 1 is an area that also deserves attention in the final RTS, as the risk of double counting is substantial. The current regulatory reform incorporates a range of conservative measures like stressed value-at-risk requirements that European banks are already applying within the scope of Basel 2.5.

Nevertheless, if it is not deemed possible to meet at the same time the requirements sought in the accounting standards and the prudential regulation, transparency would be essential to reconcile one with the other. For this purpose, the additional elements and changes that the concept of prudent value adds to the accounting definition of fair value as per IFRS13 should be made clear. There should be a clear explanation on the reasons why the fair value of IFRS would not work for prudential purposes.

A recurrent term in the text is the ‘true realisable value’. The RTS should clarify whether the intention is to measure an exit value in an ongoing business, i.e. a sort of fair value with a more conservative approach, or to measure a liquidation value under certain circumstances that does not represent the situation of a going concern business, i.e. a significant departure from the fair value.

The quantitative approach proposed in the discussion paper could lead to false sense of security. The problem with valuation uncertainty is that it is primarily caused by the lack of reliable data, and therefore difficult to quantify. There are at least three contributors to valuation uncertainty: Model, concentration and input parameter uncertainty.

The paper suggests that significant weaknesses in the risk management policies, systems and controls related to valuations relative to the standards set out in the paper should be addressed by a requirement by the competent authority for additional adjustments in Tier 1 capital. This would be a new supervisory measure not seen elsewhere. The pillar 2 of the Basel framework already foresees the supervisory review of an institution’s risk management, systems and controls. Against this backdrop, it would not be appropriate to introduce such a new supervisory measure in a regulatory technical standard.

When drafting the final RTS, EBA should take into consideration the global level playing field by ensuring consistency with the practices and accounting standards of other jurisdictions.

EBF believes that the new prudent valuation adjustments can cause an additional pro-cyclical element in the regulatory capital requirements as the additional valuation adjustments will feed into the dealer prices and might be of importance notably in a crisis situation.

Full response

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