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CEBS Consultation Paper (CP43) Summary: Non-Eligibility of Entities Producing Only Credit Scores for ECAI Recognition

Core Content

This consultation paper (CP43) addresses the regulatory issue of whether entities that produce only credit scores should be eligible for ECAI (External Credit Assessment Institutions) recognition. The letter is written by Axesor, a Spanish company that provides unsolicited credit ratings on SMEs using credit scoring tools. Axesor argues that the current legislative proposal to exclude such entities from ECAI recognition is problematic and lacks a balanced approach.

Main Views

Axesor emphasizes the importance of credit scoring tools in the context of regulatory capital calculations and highlights the following key points:

• Unlevel Playing Field: The current proposal creates an uneven regulatory environment between credit rating agencies (CRAs) and entities that only produce credit scores, which undermines transparency and fairness for both supervisors and the market.

• Legislative Gaps: The lack of legislation on credit scoring is not a valid reason to prohibit its use in regulatory capital calculations. This is highlighted by the fact that other methodologies, such as property appraisals in Spain, are already regulated and supervised, even though they are not as complex as credit scoring.

• Misplaced Focus: The regulatory focus on the methodology of credit scoring is misplaced, as it assumes that expert analysis by analysts is inherently more valuable than automated credit scoring models. This overlooks the potential of credit scoring to offer better predictive power and efficiency, especially in large portfolios.

• Efficiency and Objectivity: Credit scoring tools are more efficient and objective than traditional credit rating methodologies, particularly for SME portfolios, which are numerous and complex. Traditional methods are impractical for rating over 80,000 Spanish companies with bank debt exposure exceeding €1 million.

• Contradiction in Regulation: Axesor points out a contradiction in the regulatory stance: while credit scoring tools are supported for use by banks under IRB (Internal Ratings-Based) methodologies, they are restricted for ECAI recognition, despite the similarity in the principles used to develop these tools.

• Proposed Solution: Instead of banning the use of credit scores for capital purposes, Axesor supports the creation of a specific supervisory framework that focuses on the accuracy and predictive power of credit scoring models. This would enhance risk management practices and align with the principles of conservatism and fair regulatory treatment.

Key Information

• Entity: Axesor, a Spanish limited company.
• Activity: Issues unsolicited credit ratings on Spanish SMEs using credit scoring tools.
• Regulatory Context: Directive 2006/48/EC and the CEBS's proposal on ECAI recognition.
• Main Issue: Whether entities producing only credit scores should be eligible for ECAI recognition.
• Statistical Example: Over 80,000 Spanish companies with bank debt exposure exceeding €1 million.
• Proposed Framework: A tailored regulatory and supervisory framework for credit scoring tools to ensure their reliability and effectiveness.

Conclusion

Axesor advocates for a more nuanced and pragmatic approach to the regulation of credit scoring tools. They believe that the current proposal is overly restrictive and fails to recognize the value and efficiency of credit scoring in managing credit risk, especially for SMEs. The company supports the development of a specific supervisory framework that ensures the quality and reliability of credit scoring models, rather than a blanket ban on their use for capital purposes. This would allow for better risk management and fair regulatory treatment across the financial sector.