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Other works produced in the last 3 years by the industry and by the public sector confirm the existence of legitimate differences and other differences that are inherent to the market or business and other differences that could be narrowed for the sake of easier comparability.
The EBF is therefore committed to improve the functioning and the image of IRB models as the most accurate tool to calculate regulatory capital requirements commensurate to the risk involved. In this endeavour, the EBA, as well as other policy making institutions, should take into account the cost and timing of the policy measures in order to prioritise those that can achieve further improvement at a lower cost. Nevertheless, a fundamental review of the IRB approach that is related to model options should be done in close coordination with the Basel Committee at a global level.
The action plan that will follow this discussion paper should take into account the developments that the international policy making community is preparing as regards the use of IRB models, in particular the Basel Committee. EBF believes that European institutions should maintain a firm stance in support of risk sensitive models which, after all, have less disadvantages than other blunter solutions like the leverage ratio and capital floors.
EBF agrees that a more prescriptive approach for the conceptualisation and implementation of the different technical components of IRB is, without doubt, a contribution for the mitigation of the current discretion in the calculation of capital requirements under IRB. Although EBF recognises the completeness of the EBA diagnosis under this discussion paper EBF alerts that, not always, previous guidelines or RTS have been sufficient objective and prescriptive to fulfil this ambitious goal.
EBF appreciates EBA acknowledgment that the IRB framework has proven its validity as a risk sensitive way of measuring capital requirements and intends to encourage the institutions to implement sound internal risk management practices and EBF supports EBAs work to analyse measures that could strengthen the trust in internal models. EBF considers it important that IRB continues to be a driver to strengthen banks risk management practices. There must be a right balance between risk sensitivity and simplification. Too high a degree of simplification and conformity in parameters and models could lead to herd behaviour which may increase the vulnerability of the whole financial system.
EBF considers that some of the observed variation is due to banks different risk profiles. This has to be accounted for as EBA considers further harmonisation of practices. Some of these items could be elaborated on in separate consultations to be able to thoroughly analyse and convey well considered input and consequences. EBA should firstly analyse and harmonise the definitions, e.g. definition of default, before model options and other conceptually important drivers of risks are changed.
As the default rules have been applied differently in Europe, changing the rules will have bigger impact to banks that have implemented the 180 days option, thus a common transition period should be allowed for those countries that have to adjust to a new definition. Other important factors that could be harmonised are a coordinated implementation but also common transitional rules in a future regulation. Additional national transitions rules do not support transparency and single rule book.
Just as important as new regulations, is the removal of old supervisory practices, harmonisation of discretionary add-ons and other measures, which should be subject to a continued follow-up by EBA. EBF has learned that it is a challenge, for cross border groups to adjust to national supervisory practices, which also may deviate from the single rule book.
In order to avoid a wider range of supervisory practices, EBF encourages EBA to consider if guidelines should be replaced by regulatory standards. EBF thinks that guidelines leave too wide leeway for supervisors and that is a source of supervisory differences.
The EBF response reflects the expertise and views of its member associations and banks. It includes indications as to the effects that the proposed changes could have in the European banking business and its wider economic environment.