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CEBS Draft Proposals on IRB Summary

Core Content

The Committee of European Banking Supervisors (CEBS) has issued draft proposals related to the Internal Rating-Based (IRB) approach, aiming to refine and update the regulatory framework. These proposals are part of a public hearing process, and CEBS is seeking feedback from participants to assess the impact and feasibility of the suggested changes.

Main Points and Key Information

1. Specialised Lending (IRB 1)

• Proposed Change: CEBS proposes to maintain the current system of preferential risk weights (50% and 70%) for specialised lending (SL) exposures, subject to certain conditions.
• Criteria: The risk weights are assigned based on the bank's underwriting characteristics being "substantially strong" for the relevant category.
• Feedback Request: CEBS invites participants to provide input on the practical criteria used for assigning these preferential risk weights.

2. Protection Providers (IRB 2)

• Current Regulation: Under the CRD, corporate and retail exposures are eligible for recognition of unfunded credit protection providers for dilution risk.
• Proposed Change: CEBS tentatively proposes to remove these provisions from the CRD unless additional feedback is received.
• Alternative Approach: A permissive treatment for other unfunded credit protection providers could be considered, with the possibility of adding them via comitology.
• Feedback Request: CEBS seeks input for a cost/benefit analysis and on the eligibility of other providers.

3. Regulatory Value for M (IRB 3)

• Current Regulation: The CRD allows more favorable treatment for exposures to corporates within the European Community under specific conditions (e.g., consolidated sales and assets below 500 million euros, or real estate-focused institutions with assets below 1 billion euros).
• Proposed Change: CEBS suggests removing these provisions with a 10-year transitional period and grandfathering clauses for existing institutions.
• Impact: This change may have a significant impact on the markets of some Member States, especially on funding for SMEs.
• Feedback Request: CEBS invites participants to provide feedback and substantiating evidence on the potential market effects.

4. Definition of Default (IRB 4)

• Current Regulation: The definition of default includes a threshold for "reasonable level of risk."
• Proposed Change: CEBS proposes to keep the current definitions in place for retail and PSE exposures (90–180 days past due), unlike the SA approach which allows up to 180 days past due until 2011.
• Feedback Request: CEBS seeks feedback on the costs and benefits of maintaining these definitions.

5. Permanent Partial Use of the Standardised Approach (IRB 5)

• Current Regulation: Article 116–119 of the CRD allows IRB banks to use the Standardised approach on a permanent basis under certain conditions.
• CEBS View: CEBS suggests that the wording of Article 89.1 may be improved for clarity and consistency.
• Feedback Request: CEBS invites participants to provide input on the need to distinguish between:
  • Case-by-case supervisory decisions (part of the IRB approval process)
  • General supervisory decisions applicable to all institutions in a Member State's jurisdiction

Conclusion

CEBS is actively engaging with stakeholders to refine the IRB framework. The proposals cover various aspects including risk weight assignments for specialised lending, eligibility of protection providers, regulatory value for M, default definitions, and the use of the Standardised approach. CEBS is open to feedback and is considering whether to retain or remove certain provisions based on the input received. The goal is to ensure that the IRB approach remains both effective and adaptable to evolving market conditions.