EBF draft response to the BCBS consultation on internal models

24 June 2016

The EBF welcomes the international debate on the use of internal rating based (IRB) models for regulatory purposes.

Key points

In general:

• As a matter of principle, good risk management practices should always take priority over the fair objective of simplicity.
• A prudential framework closely integrated with the business is more reliable, less burdensome and more sustainable over time.
• Work needs to continue in the direction of tackling the sources of inexplicable variation.
• The QIS results should be broken down by portfolios and jurisdictions for a well-informed decision process.
• Too many floors add complexity, hamper comparability and eliminate risk sensitivity.
• Coordination with the new accounting framework is necessary.

In particular:

• The Advanced IRB approach should be permitted for the entire corporate asset class if certain conditions are met that ensure sufficient data for modelling.
• Should the IRB approach be eliminated for bank exposures, a granular set of buckets should be defined to keep some risk sensitivity and the standardised risk weights should be reviewed not to be too conservative.
• Should the IRB approach be eliminated for equity exposures, a granular set of buckets could be defined to keep some risk sensitivity.
• The IRB approach should be permitted for Specialised Lending if certain criteria are met that ensure sufficient data and modelling techniques; for those that move to Supervisory Slotting approach a more granular risk weight bucketing for these exposures is needed, especially in the low risk segments.
• Should the IRB approach be eliminated for specialised lending, the current Supervisory Slotting Approach (SSA) could be used with a more granular set of buckets.
• The case of subsidiaries of large groups should be carefully studied and guidelines elaborated to identify the level of support from the parent company.
• The combined effect of this consultative paper and the revised Standardised Approach for credit risk needs to be evaluated.
• Data pooling could be used to preserve the use of the IRB approach where individual banks data is insufficient.
• The BCBS should reconsider the introduction of output floors. They overlap with the leverage ratio, add complexity, hamper comparability and remove the right incentives for prudent risk management.
• In the case that the BCBS decided to introduce input floors, they should be defined at portfolio level to minimise the distortion of the risk profile of individual clients and exposures.
• The LGD modelling should be defined in accordance with the bank’s recovery practice.
• The time horizon for the estimation of the EAD should be left to each bank’s modelling choice.
• The 50% haircut to non-financial collateral (including real estate) for A-IRB fully and partially secured exposures should be reviewed.
• The concept of unconditional cancellable commitment (UCC) needs to be examined and defined. There should be guidelines to identify those UCC that should keep the 0% risk weight. In particular, it should be made clear that risk limits and unadvised facilities are not commitments. At last, accounting standard should remain the reference of the calculation of RWA.

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