EBA欧洲银行-JC-2014-004-28Final-Report-Mechanistic-References-to-Credit-Ratings29_31页_770kb

Summary of EBA, EIOPA and ESMA Final Report on Mechanistic References to Credit Ratings

Overview

This report by the European Banking Authority (EBA), European Insurance and Occupational Pensions Authority (EIOPA), and European Securities and Markets Authority (ESMA) addresses the issue of mechanistic references to credit ratings in their guidelines and recommendations. It is based on the Joint Consultation Paper (JCP) JC-CP-2013-02, published on 7 November 2013, and aims to identify and revise any references that may lead to sole or mechanistic reliance on credit ratings.

The report is driven by Article 5b(1) of the Credit Rating Agencies (CRA) Regulation, as amended by the CRA3 Regulation. This article mandates that the EBA, EIOPA, and ESMA remove or revise any references in their guidelines and recommendations that could lead to sole or mechanistic reliance on credit ratings by competent authorities, sectoral competent authorities, financial institutions, or other market participants.

Feedback Statement

• The JCP received 22 responses, mostly from credit rating agencies, investors, and financial sector associations.
• Stakeholders generally support the approach of removing mechanistic references to credit ratings.
• Some respondents, particularly credit rating agencies, expressed concern that the JCP might suggest a ban on credit ratings, which the ESAs clarified is not part of their mandate.
• The ESAs amended the definition of "sole or mechanistic reliance" based on stakeholder feedback to ensure clarity.

Definition of 'Sole or Mechanistic Reliance'

• Definition adopted: Sole or mechanistic reliance on credit ratings occurs when an action or omission is based on any rule that solely or mechanically relies on credit ratings (or outlooks) without any discretion.
• This definition was reached during CRA3 Regulation negotiations and has not been formally included in the CRA Regulation before.
• The ESAs emphasize that ratings are just one of several factors to be considered, not the sole determinant.

Examples of Provisions with References to Credit Ratings

EBA Examples

• CEBS Guidelines on Stress Testing (GL32): Stress testing methodologies can be aligned with the standardised framework, and rating migration can be inferred from internal risk estimations.
• High Level Principles for Risk Management: Institutions may set target credit ratings or returns, but these should be consistent with capital and liquidity regulations.
• Guidelines on Operational Risk Mitigation Techniques: Insurance companies with a minimum claims paying ability rating of A or equivalent are accepted, but the assessment should be based on internal evaluation.
• Compendium of Supplementary Guidelines on Operational Risk: Similar to the above, ratings are not the only consideration for assessing credit quality.
• Guidelines on the Application of the Supervisory Review Process under Pillar 2 (CP03 revised): External rating goals, market reputation, and strategic goals are considered in capital adequacy assessments.
• Revised Guidelines on the Recognition of External Credit Assessment Institutions (ECAI): The mapping of ECAI ratings to credit quality steps is central to the standardised approach (SA), but the process is not purely mechanistic.

EIOPA Examples

• EIOPA has not identified any current guidelines with mechanistic references to credit ratings.
• Annex III provides a list of provisions in the Solvency II Directive that include credit rating references.

ESMA Examples

• EMIR (Regulation No 648/2012): Collateral acceptance and CCP investment rules avoid over-reliance on ratings, requiring internal assessments and objective methodologies.
• Prospectus Guidelines: No current guidelines from ESMA contain references to credit ratings.

Guidelines and Recommendations Currently in Force (Non-Mechanistic)

• The following guidelines and recommendations are not considered to involve sole or mechanistic reliance on credit ratings and thus are not subject to revision:
  • CEBS Guidelines on Stress Testing (GL32)
  • High Level Principles for Risk Management
  • Guidelines on Operational Risk Mitigation Techniques
  • Compendium of Supplementary Guidelines on Operational Risk
  • Guidelines on the Application of the Supervisory Review Process under Pillar 2 (CP03 revised)
  • Revised Guidelines on the Recognition of External Credit Assessment Institutions

Guidelines and Recommendations with Mechanistic References (Proposed Action)

EBA: Standardised Approach and Mapping

• The standardised approach (SA) in the CRD III and CRD IV legislation relies on credit quality steps (CQS) determined by mapping ECAI ratings.
• The mapping process considers quantitative and qualitative factors, such as historical default rates and differences in default definitions.
• The CQS are less granular for securitisation exposures, with only five CQS under the long-term SA.
• Proposed action:
  • EBA, EIOPA, and ESMA should review and remove references to credit ratings that could lead to sole or mechanistic reliance.
  • The CRD IV introduces additional tools and requirements to reduce reliance on external ratings, such as allowing institutions to apply higher risk weights than those under the SA.
  • The EBA will publish biannual reports on the use of external ratings in legislation and how to reduce such references.

Conclusion

• The ESAs aim to eliminate sole or mechanistic reliance on credit ratings by revising their guidelines and recommendations.
• They emphasize that ratings are not the sole basis for decision-making and that internal assessments are encouraged.
• The report outlines current references to credit ratings and proposes amendments to ensure that regulatory texts do not inadvertently promote mechanistic reliance.
• The definition of "sole or mechanistic reliance" was adjusted to better reflect stakeholder concerns and avoid misinterpretation.

Annexes

• Annex I: Impact Assessment on reducing sole or mechanistic reliance on credit ratings.
• Annex II: References to credit ratings in the Solvency II Directive.