Publication date: 11 March 2016
The European Banking Federation (EBF) welcomes the second consultative paper on the revision of the Standardised Approach for Credit Risk as it improves certain aspects of the first paper following a quick but thorough analysis throughout 2015. The banking industry and, in particular, the European banks have engaged in the discussion from an early stage and do appreciate the opportunities given to provide with arguments and data that will help the Committee in making well-informed decisions on the many aspects involved.
We would like to outline in this summary, very succinctly, key points that are further developed in the response:
- The re-introduction of external credit ratings is welcomed as it brings risk sensitivity, it enhances comparability and it does not add complexity.
- The due diligence requirement should be reconsidered as it is quite burdensome.
- There is a wide range of corporate exposures without available external ratings that should be treated under the SCRA investment grade option if conditions are met.
- The SME risk weight should be fixed at 75%.
- Purchased receivables would deserve a separate treatment according to their distinct risk profile and following the IRB classification.
- Specialised lending needs more risk sensitivity and to account for the value of the guarantees.
- The loan size criterion for SME definition should be updated.
- The overall risk weights for residential real estate should be reviewed to reflect appropriate risk weights in jurisdictions where structural factors result in sustainably low credit losses associated with the exposures to the real estate market.
- Residential loan splitting by Loan-To-Value (LTV) would add risk sensitivity.
- The value of the property should be updated regularly.
- The proposal for Land Acquisition, Development and Construction (ADC) exposures is overly conservative as it assigns risk weights of defaulted exposures. It needs to be reviewed.
- The fundamentals of the currency mismatch proposal have to be reconsidered from a pragmatic viewpoint with real examples, both for corporate and retail borrowers, such as the ones illustrated in this paper.
- The risk weights for defaulted exposures should be reassessed together with the review of the internal rating based (IRB) models in conjunction with this SA review for the sake of consistency.
- A fundamental review of the concept of commitment should be conducted because a significant part of the cases identified within the scope of unconditional cancellable commitments (UCC) are not actually commitments. In this regard, the accounting framework should serve as a point of reference.
- Credit Risk Mitigation (CRM) techniques are applied in the IRB approach. They should be applicable in the Standardised Approach likewise.
- The treatment of shares of UCITS/mutual funds under the Comprehensive Approach should be made more risk-sensitive.
- Covered bonds issued by a credit institution in jurisdictions with specific covered bonds legislation that fulfils certain strictly defined criteria, may continue to have a preferential risk weight treatment.
- Although not part of this consultation, we suggest that BCBS reconsiders its proposal to introduce a capital floor based on SA, since the leverage ratio effectively achieves the objective of providing a capital floor.