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EAPB Summary of Comments on CEBS' 2nd Draft of "Guidelines on the implementation, validation and assessment of Advanced Measurement (AMA) and Internal Ratings Based (IRB) Approaches"

Core Content

The European Association of Public Banks (EAPB) has provided detailed feedback on the second draft of the CEBS guidelines, focusing on the implementation, validation, and assessment of Advanced Measurement Approaches (AMA) and Internal Ratings Based (IRB) approaches. The EAPB represents 20 public banks and financial institutions across Europe, with a combined balance sheet of about EUR 3,000 billion and over 173,000 employees.

The EAPB supports the CEBS objective of promoting a common understanding among European supervisory authorities, but criticizes the current draft for being overly detailed and not aligned with the principle of proportionality. The guidelines are seen as potentially imposing an unnecessary administrative burden on financial institutions, especially smaller ones, and could undermine the level playing field between EU and non-EU banks.

Main Points and Key Concerns

General Remarks

• Harmonisation vs. Discretion: EAPB argues that while harmonisation is important, the guidelines go beyond minimum requirements and fail to respect the principle of subsidiarity and proportionality.
• Detail and Practicality: The guidelines are criticized for being too detailed and not always practice-oriented, which may make them impracticable or mathematically unfeasible.
• CRD Compliance: The guidelines include rules that go beyond the Capital Requirements Directive (CRD), which is not within CEBS' mandate.
• Flexibility and Market Realities: The EAPB emphasizes the need for flexibility in categorizing debt and equity instruments, especially in light of evolving market structures and hybrid securities.

Specific Sections

Chapter 1 - Introduction

• Section 14b: EAPB requests transition periods for any changes to the guidelines to allow for gradual adaptation.
• Section 15a: Clarification is needed on EU-Non-EU arrangements.

Chapter 2 - Cooperation Procedures, Approval and Post Approval Process

• Section 58: The implementation plan requirements are more stringent than some member states' national regulations, and legal consequences should not apply to institutions that have already started the process under national rules.

Chapter 3 - Credit Risk

• Section 187f: The requirement to keep securitised exposures in the retail or corporate class is misleading. EAPB suggests that the originator should calculate risk-weighted exposures based on the respective exposure class.
• Section 187r et seqq.: EAPB opposes the adoption of Basel's definition of equity exposures, preferring the existing EU definition. They stress the need for flexibility in categorizing hybrid securities.
• Section 187u: The use of "Tier 1 capital" is not defined in the CRD, and EAPB recommends using the definition from Directive 2000/12/EC instead.
• Section 187x: Convertible bonds should not be automatically classified as equity unless the conversion is exercised.
• Section 188 et seqq.: Additional criteria for approach selection are not needed, as the existing Annex VII already provides adequate guidance.
• Section 219a-b und 239a-d: EAPB questions the introduction of "hard" thresholds for backtesting, which may contradict the broader principles of validation.
• Section 306: Data duplication for supervisory review is unnecessary and should be removed.
• Section 312: Demonstrating data comparability through exposure population analysis is impractical due to lack of rating data.
• Section 340: The requirement for action upon exceeding internal validation thresholds is seen as overly rigid.
• Section 360: Small institutions should not be required to have a separate organizational unit for control processes.

Chapter 4 - Operational Risk

• Annex V: EAPB recommends dropping this entire section as it is more descriptive than prescriptive and not aligned with the CRD.
• Section 429: The requirement for additional conditions on AMA partial use contradicts the CRD's intent and should be removed.
• Section 445: Cross-checking material accounting data with operational loss data is redundant and should be deleted.
• Section 448: Data documentation requirements are not aligned with data accuracy and should be removed.
• Section 456j: Separating insurance policy losses is unnecessary, and the suggestion to record net amounts is not standard practice.
• Section 456i/j: The introduction of an internal holding period is not justified and not covered by the CRD.
• Section 461c: The assumption that all operational risk losses are independent and identically distributed is overly restrictive and not supported by practical evidence.
• Section 461i/j: EAPB recommends removing the requirement for internal holding periods.
• Section 462a: The requirement to sum individual risk measures is overly conservative and undermines the diversification principle. It should be deleted.
• Section 463j: Validation of all loss events above a threshold is impractical and unnecessary. EAPB suggests validating only material events.

Conclusion

The EAPB calls for a more proportionate and flexible approach in the guidelines, emphasizing the need to align with the CRD and avoid imposing unnecessary burdens on financial institutions. They request the deletion of several sections and the removal of Annex V, as well as the introduction of more reasonable transition periods and clarity on key definitions.