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Proportionality
The consultation paper establishes that credit entities should ensure that the application of these Guidelines considers their “nature, scope and complexity of their activities and, more generally, all other relevant facts and circumstances of the credit institution and the group (if any) to which it belongs”.
EBF understands that this principle is to be applied individually to each entity within a consolidated group. Each of these entities may operate in different geographies, with different products and have a different mix of portfolios than other subsidiaries of the same financial group.
Taking other approaches to proportionality, especially those based on the size of the consolidated group, could lead to an unlevel playing field and an unfair competition in the local market in which each subsidiary operates.
This interpretation is consistent with other paragraphs of this guideline, which already contemplate the existence of differences among the legal entities that compose a consolidated group, even at portfolio level within those units. For instance, regarding the implementation of Significant Increase in Credit Risk assessment, paragraph 98 of these guidelines states that “The need for consistency should not be interpreted as a requirement that the practice be identical across a group”. Supporting this point, EBA’s Guidelines also mention that “within a consistent framework there may be differences across jurisdictions and products”. Hence, it seems reasonable that the application of proportionality principle takes into account the diversity of portfolios and credit entities, even when those entities operate under the same consolidated group.
To avoid misunderstandings, EBF would appreciate an explicit clarification of the interpretation of the application of the proportionality principle in the final Guidelines and its application at the segment level.
Materiality
EBA’s Guidelines completed the principle of materiality as defined in the final version of BCBS guidelines by adding this reference in paragraph 18: “under the applicable accounting framework” which we support.
EBF is however of the view that the resulting EBA Guidelines’ wording would not be in alignment with accounting framework as IAS 1 states that: “Material Omissions or misstatements of items are material if they could, individually or collectively, influence the economic decisions that users make on the basis of the financial statements”. In this sense, IAS 1 definition neither restricts the use of methodology to estimate materiality nor states which classes of exposures should be considered as material. IAS 1 definition seems more reasonable as the concept of materiality in the implementation of an expected credit losses model should not be necessarily linked with those large and highly collateralized exposures.