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«Consultation Paper Draft regulatory technical standards on the sequential implementation of the IRB Approach and permanent partial use under the ...»

-- [ Page 1 ] --

26 June 2014

EBA/CP/2014/10

Consultation Paper

Draft regulatory technical standards

on the sequential implementation of the IRB Approach and

permanent partial use under the Standardised Approach under

Articles 148(6), 150(3) and 152(5) of Regulation (EU) No 575/2013

(Capital Requirements Regulation– CRR)

Contents

1. Responding to this consultation 3

2. Executive summary 4

3. Background and rationale 6

4. Draft regulatory technical standards on the sequential implementation of the IRB Approach and permanent partial use under the Standardised Approach under Articles 148(6), 150(3) and 152(5) of Regulation (EU) No 575/2013 (Capital Requirements Regulation – CRR) 11

5. Accompanying documents 17

5.1 Draft cost-benefit analysis/impact assessment 17

5.2 Overview of questions for consultation 26

1. Responding to this consultation The EBA invites comments on all proposals put forward in this paper and, in particular, on the specific questions summarised in Section 5.2.

Comments are most helpful if they:

respond to the question stated;

 indicate the specific point to which a comment relates;

 contain a clear rationale;

 provide evidence to support the views expressed/rationale proposed; and  describe any alternative regulatory choices the EBA should consider.

 Submission of responses To submit your comments, click on the ‘send your comments’ button on the consultation page by 26.09.2014. Please note that comments submitted after this deadline, or submitted via other means may not be processed.

Publication of responses Please clearly indicate in the consultation form if you wish your comments to be disclosed or to be treated as confidential. A confidential response may be requested from us in accordance with the EBA’s rules on public access to documents. We may consult you if we receive such a request.

Any decision we make not to disclose the response is eligible for review by the EBA’s Board of Appeal and the European Ombudsman.

Data protection The protection of individuals with regard to the processing of personal data by the EBA is based on Regulation (EC) No 45/2001 of the European Parliament and of the Council of 18 December 2000 as implemented by the EBA in its implementing rules adopted by its Management Board. Further information on data protection can be found under the legal notice section of the EBA website.

2. Executive summary The Capital Requirements Regulation (CRR) and the Capital Requirements Directive (CRD) specify prudential requirements for banks and other financial institutions, which have been in use since 1 January 2014. The CRR contains specific mandates for the EBA to develop draft regulatory technical standards (RTS) to specify the conditions of application of permanent and temporary uses of the Standardised Approach (SA) by institutions that have received permission to use the IRB Approach (IRB institutions).

Main features of the draft RTS

Article 148(1) of the CRR provides that institutions and any parent undertaking and its subsidiaries shall implement the IRB Approach for all exposures unless they have received the permission of the competent authorities to permanently use the Standardised Approach in accordance with Article 150 of that Regulation. Subject to the prior permission of the competent authorities, the IRB Approach may be carried out sequentially in a number of ways.

Competent authorities are required to determine the time period for implementing the IRB Approach for all exposures, and the conditions against which institutions shall implement the IRB Approach. These conditions should be designed to ensure that sequential implementation is not selectively used to reduce own-funds requirements regarding the exposures yet to be included in the IRB Approach, or in the use of own estimates of LGDs or conversion factors. Although determining the overall time period is solely a matter for the competent authorities, the EBA is required by Article 148(3) of the CRR to develop draft RTS to specify the conditions that competent authorities should use to determine the appropriate nature and timing of the sequential roll-out.

Permission to apply the SA permanently under Article 150(1) of the CRR can only be granted for certain exposures. The EBA is required by Article 150(3) of the CRR to specify the conditions of

application of the permanent use provisions for certain sets of exposure, in particular:

exposures to central governments and central banks, where the number of material  counterparties is limited and it would be unduly burdensome for the institution to implement a rating system for these counterparties;

exposures to institutions, where the number of material counterparties is limited and it would  be unduly burdensome for the institution to implement a rating system for these counterparties;

exposures in non-significant business units, as well as exposures classes or types of exposures  that are immaterial in terms of size and perceived risk profile.

In addition, the EBA is required by Article 152(5) of the CRR to specify the conditions by which competent authorities may permit institutions to use the SA for underlying exposures of the collective investment undertakings (CIUs) that do not belong to the equity exposure class.





The main proposals within these RTS are as follows.

Definition of the maximum levels of exposure permanently allowed under the SA in the  ‘central governments and central banks’ and ‘institutions’ exposure classes, and for immateriality or non-significance reasons. The set of relevant exposures against which the permanently exempt exposures will be measured was defined for this purpose.

Definition of qualitative criteria against which the competent authorities shall assess whether  it would be unduly burdensome to implement a rating system for the ‘central governments and central banks’ exposure class and for the ‘institutions’ exposure class.

Definition of a minimum initial level of exposures (and risk-weighted exposures) to be treated  under the IRB Approach by IRB institutions.

Definition of qualitative criteria against which the competent authorities shall assess  applications of institutions for a sequential roll-out of the IRB Approach.

Next steps After the consultation ends on 26 September 2014, the EBA will assess the responses received and consider whether or not any changes should be made to the draft RTS.

The EBA must submit the draft RTS to the Commission by 31 December 2014.

3. Background and rationale The CRR and the CRD specify prudential requirements for banks and other financial institutions which have been in use since 1 January 2014. The CRR contains specific mandates for the EBA to develop draft RTS to specify the conditions of application of permanent and temporary uses of the SA by institutions that have received permission to use the IRB approach (IRB institutions).

Background to these draft RTS These draft RTS detail a number of provisions in the CRR on the circumstances in which IRB institutions may combine the use of the IRB and Standardised Approaches for credit risk. In summary, the provisions that are relevant to these RTS are as follows.

Article 148 of the CRR states that the IRB Approach must be used for all exposures unless  permission permanently to use the SA has been granted by the competent authorities under Article 150 of the CRR.

Implementation of the IRB Approach may be carried out sequentially across different exposure classes, within the same business unit, across different business units in the same group, or for the use of own estimates of LGDs or conversion factors (for exposures to corporates, institutions and central governments and central banks) where prior permission has been granted by the competent authorities.

Permission to implement sequentially is subject to the setting of a time period over which sequential implementation shall be carried out, and other conditions to ensure that sequential implementation is not used to reduce capital requirements. The EBA is required to develop draft RTS to determine these other conditions.

Article 150 of the CRR defines a number of categories of exposures for which competent  authorities may grant permission for partial use of the SA. A number of these sets of exposures are subject to the conditions of application in regulatory technical standards. The

exposures involved are as follows:

• exposures to central governments and central banks, where the number of material counterparties is limited, and it would be unduly burdensome for the institution to implement a rating system for these counterparties;

• exposures to institutions, where the number of material counterparties is limited, and it would be unduly burdensome for the institution to implement a rating system for these counterparties;

• exposures in non-significant business units, as well as exposure classes or types of exposures that are immaterial in terms of size and perceived risk profile.

Article 152 of the CRR details criteria for the risk weighting of exposures underlying collective  investment undertakings (CIUs). In certain circumstances, an augmented SA can be used for the underlying exposures. However, permission to use the SA under Article 150 of the CRR is still required in these cases and the conditions according to which competent authorities may grant permission are to be specified in RTS.

Being able to apply the SA to certain exposures permanently, and implement the IRB approach for other exposures sequentially, does not constitute a new provision in the solvency framework.

Articles 85, 87 and 89 of Directive 2006/48/EC previously provided for these possibilities in a similar (if not identical) manner.

Given that the three mandates (Articles 148(6), 150(3) and 152(5) of the CRR) and the proposed RTS for each of them are interrelated, Section 4 of this document presents a single legal text.

The subsections below summarise the rationale for the proposed policy choices.

Permanent use of SA The conditions of application of Article 150(1)(a) to (c) of the CRR refer to the permanent use of the SA by IRB institutions. Given that the IRB Approach has been calibrated under the assumption that all exposures should be treated under that approach, except for the other cases contemplated in Article 150(1)(d) to (j) and Article 150(2) of the CRR, only two reasons can justify the combined use of both approaches on a permanent basis. On the one hand, the degree of risk associated with exposures treated under the SA should be limited. This should guarantee that the use of the SA by IRB institutions does not result in an underestimation of their required level of capital. On the other hand, the implementation of a rating system should not be unduly burdensome. This responds to the necessary efficiency of the IRB implementation and therefore is not related to the level risk underlying the exposures.

To specify these conditions, the EBA considers that a combination of quantitative and qualitative criteria ensures the desired objective and, at the same time, contributes to the harmonisation of the rules applied across the EU.

Quantitative criteria The number of material counterparties should be limited for exposures to central governments/banks and institutions (Article 150(1)(a) and (b)). The EBA considered that a quantitative definition of the terms ‘material’ and ‘limited’ should be proposed. However, since a large number of immaterial counterparties can also lead to an excessive amount of risk in the exposure class, the EBA also considered setting a maximum amount of risk in the exposure class, defined in terms of both exposure value and risk-weighted exposure amounts.

In the more general case of business units and exposure classes or types of exposures (Article 150(1)(c)), they should be immaterial in terms of size and perceived risk profile to qualify for the permanent exemption. Consideration was given to setting an overall limit for the total exposure level allowed under the SA, for sub-limits by exposure class/type of exposure/business unit and for a mixture of the two. An overall limit would be the least burdensome for institutions.

In view of the ‘size and perceived risk profile’ criteria, the EBA considered that such limits should be set in terms of both exposure value and risk-weighted exposure amounts.

In all cases, the total amount eligible for the SA should be measured as a percent of the total level of exposure that should initially be treated under the IRB Approach (the ‘set of relevant exposures’). Therefore, the categories of exposures already exempt under Article 150 should not be taken into account to limit the permanent use of the SA since they fulfil all the necessary criteria to be treated under this approach (e.g. the exposures to Member States that meet the requirements in Article 150(1)(d)). Only the definition of ‘material’ counterparty has been specified differently, i.e. in terms of eligible capital of the institution, because nothing suggests that it should be linked to the ‘set of relevant exposures’.

The proposed thresholds will determine the maximum level of exposure (and risk-weighted exposure) that is allowed for IRB institutions to be eligible for the SA. When measured in terms of the ‘set of relevant exposures’, this maximum amount will be the same across all IRB institutions.

However, when measured against other metrics (e.g. total balance sheet or the institution’s total own funds), this will be directly linked to the specific circumstances of each institution.

Qualitative criteria

Qualitative criteria have been specified to determine whether the burden of implementing a ratings system would be justified by the potential benefits of doing so. These criteria refer to those features of the modelling process that determine the overall cost of the IRB implementation such as the technical and operational possibilities of developing a rating model.



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