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CEBS Consultation Paper Summary: Recognition of External Credit Assessment Institutions

Core Content

This document is a response from the Austrian Bank and Insurance Division to the CEBS Consultation Paper 7 on the recognition of External Credit Assessment Institutions (ECAs). The comments are made on behalf of the entire Austrian banking industry and focus on the recognition process, methodology, independence, and coordination of ECAs under the Capital Requirements Directive (CRD).

Main Points

1. The Recognition Process

• General Principles:

  • The supervisory authority, which also oversees banks, is responsible for assessing and supervising ECAs.
  • Banks retain ultimate responsibility for selecting appropriate ECAI ratings for risk weighting.
  • A joint approach by supervisory authorities across Member States is recommended for applications filed in multiple states.
  • Clear obligations for transparency and disclosure in recognition decisions are emphasized.

• Issue with Subsidiaries:

  • The CEBS statement that a bank may not use ratings from its own subsidiary is problematic.
  • The Directive (Article 81) does not explicitly address whether an ECAI can be a subsidiary of the bank.
  • Independence of the subsidiary in rating preparation should be ensured through appropriate measures, and it should not be automatically deemed dependent.

2. Common Understanding of ECAI Recognition Criteria

• Methodology:

  • The technical criteria for recognition are well-designed.
  • However, they may hinder the entry of new ECAIs into the market due to the emphasis on track record and reputation.
  • A methodology is considered compliant with the Directive if:
    1. It provides detailed credit risk assessment, incorporates risk-influencing factors, and is consistently applied.
    2. Or, if no statistics are available, it is still considered reliable by financial experts.

• Independence:

  • The independence of an ECAI should be assessed on a case-by-case basis.
  • Ownership by government, large banks, or trade organizations does not automatically imply dependence.
  • What matters is whether the ECAI has mechanisms in place to ensure independence in the rating process.

• Ongoing Review and Transparency:

  • The Directive already includes comprehensive provisions for ongoing review and transparency.
  • CEBS's improvements to these regulations are welcomed and should be implemented.

3. Mapping of ECAIs

• The general principles of mapping are supported.
• It is welcomed that the mapping process does not impose additional eligibility requirements on ECAs.
• The recommendation to use the Basel Committee's revised Basel II framework for benchmarking and monitoring ECAIs is endorsed.

Key Information

• Article References:
  • Article 10, 11, 16, 19, 81, 84, 118, 119 are highlighted as critical points in the discussion.
• Recommendations:
  • Supervisory authorities should adopt a coordinated approach for cross-border applications.
  • A process facilitator should be selected based on clear criteria to avoid disputes.
  • National supervisory authorities should agree on a standard recognition procedure and only conduct new evaluations in specific cases.
• Interpretation Criteria:
  • Detailed interpretation criteria should be established by supervisory authorities.
  • These should be reviewed and updated based on practical experience.

Conclusion

The Austrian banking industry supports the CEBS Consultation Paper's efforts to improve the recognition process for ECAs. They emphasize the importance of independence, transparency, and consistency in the rating methodology, while also calling for fairness and accessibility for new entrants in the market. The proposal is seen as a step toward a harmonized and efficient implementation of Basel II across the EU.