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CEBS "Guidelines on the implementation, validation and assessment of AMA and IRBA" Summary

Core Content

The Committee of European Banking Supervisors (CEBS) has issued a second draft of its guidelines on the implementation, validation, and assessment of the Advanced Measurement Approach (AMA) and Internal Ratings-Based (IRB) Approach. The Zentraler Kreditausschuss (ZKA), representing German cooperative banks, has provided detailed feedback on these guidelines, highlighting several concerns regarding their compliance with EU legislation, practicality, and proportionality.

Main Views and Key Information

General Remarks

• Objective: CEBS aims to promote a common understanding and consistent application of IRB and AMA among European supervisory authorities.
• Concerns:
  • The draft guidelines fail to address the concerns raised in the first version, particularly by ZKA and other banking associations.
  • Full harmonisation is imposed, which conflicts with the principle of subsidiarity and national flexibility in implementing EU directives.
  • The guidelines exceed the requirements of the Capital Requirements Directive (CRD) and may lead to increased administrative burden for financial institutions, especially small banks.
  • There is a lack of proportionality and consistency, with some sections being too detailed, mathematically unfeasible, or not aligned with industry practices.
  • The internal governance requirements are still impractical and restrictive.

Specific Remarks

Chapter 1 – Introduction

• Section 14b: ZKA requests reasonable transition periods for any changes to the guidelines.
• Section 15a: The scope of EU-Non-EU arrangements remains unclear and needs clarification.

Chapter 2 – Cooperation Procedures, Approval and Post Approval Process

• Section 58: The implementation plan requirements exceed national regulations. It should be clarified that no legal consequences apply to institutions with existing IRBA applications.

Chapter 3 – Credit Risk

• Section 187a: The list of IRB approaches is not exhaustive; RBA, SFA, IAA, and the fallback approach should be included.
• Section 187f: The definition of securitised exposures is misleading; instead, the respective exposure class should be used.
• Section 187r. fff: ZKA rejects the Basel definition of equity exposures and prefers the existing EU directive definition for flexibility and proportionality.
• Section 187u: The Tier 1 capital term is not in the EU directive; Article 57 of the directive should be referenced.
• Section 187x: Convertible bonds should not be classified as equity unless converted.
• Section 188ff: The Annex VII already contains adequate criteria; additional criteria are not necessary.
• Section 219a-b & 239a-d: These sections duplicate BCBS principles and introduce regulatory arbitrariness.
• Section 306: Duplicate data preparation is unnecessary and should be removed.
• Section 312: Exposure data is not usually provided with ratings, making the requirement unpractical.
• Section 340: Hard thresholds for backtesting contradict principle 5 of the guidelines.
• Section 360: Small institutions should not be required to have a separate organizational unit.

Chapter 4 – Operational Risk

• Annex V: The descriptive nature of the content and the lack of clarity suggest its removal.
• Section 417: BIA business lines should not be subject to complex standards unless required.
• Section 429: The CRD allows for permanent partial use, so the CEBS proposal contradicts this and should be dropped.
• Section 445: Cross-checking material accounting data with operational loss data is unnecessary and redundant.
• Section 448: Database descriptions and IT weaknesses are not relevant for data accuracy and should be removed.
• Section 455: Unclear wording leads to ambiguity; it should be deleted.
• Section 456j-l: These sections are descriptive and not precise requirements, or are not covered by the CRD.
• Section 461c: The independence and identical distribution assumption is not always valid; the requirement should be reworded.
• Section 462a: The requirement to sum individual risk measures is unduly conservative and contradicts the Basel principle of a continuum of approaches. It prevents diversification benefits and increases capital charges for AMA.
• Section 463j: All loss events above a threshold are required to be validated, which is bureaucratic and does not improve capital quality.

Conclusion

The ZKA believes that the CEBS guidelines should be limited to high-level principles rather than detailed prescriptive rules. They argue that the current version imposes unnecessary burdens, contradicts the CRD, and lacks proportionality and flexibility. The practicality and consistency of the guidelines are also questioned, particularly in relation to data requirements, modeling techniques, and internal governance. ZKA recommends deleting or revising several sections, especially those that conflict with existing EU legislation or introduce regulatory arbitrariness.