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In the first place, the problem arises from the separate treatment of specific and general credit risk adjustments (CRA) proposed in the draft CRR, in particular in articles 59, 105, 106, 155, 241 and 261 of the regulation. The current Capital Requirements Directive (CRD) envisages a consolidated treatment of CRA irrespective of its nature, be it general or specific. Therefore, the current situation is as follows:
The Basel III standards do not envisage any provision as to the potential separation between specific and general provisions in the computation of expected losses and the associated capital requirements. Notwithstanding this, the draft CRR proposals, as disclosed by the Commission on 20 July 2011, introduce a departure from the Basel III standards by limiting the current CRD treatment to the specific CRA.
In the opinion of the EBF, the current CRD treatment makes more sense given that both types of provision are firstly created with charge to the profit and loss account thus they both reduce the amount of available core equity tier-1.
By and large, provisioning practices in Europe result in specific CRA greater than the expected loss best estimate (ELBE). The incentive to keep the current practices would be eliminated if the separation is put in place.
Besides the above-mentioned rationale, the split of general CRA and specific CRA would give way to a new source of disparity among Member States because the current practices as to the constitution of provisions are, in practice, divergent across countries. It goes without saying that the constraint imposed by the separation of provisions would bring about further divergence across the board, as it is known that provisioning policies differ substantially across Member States. The worst thing is that the separation of provisions would exacerbate the difference between countries by imposing a more restrictive requirement to banks which are actually subject to the most conservative provisioning practices.
The EBF understands that the situation explained above should ideally be resolved by amending the level 1 text (the CRR). For this reason, the EBF proposal to maintain the current CRD joint treatment of provisions will be shared with the Commission at the same time. Nevertheless, the EBF proposes that the EBA takes into consideration the problem described.
Against this background, the EBF proposes an amendment to the draft RTS and several amendments to six articles of CRR.