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EBF Position Paper Summary: CEBS Consultation Paper on Technical Aspects of Diversification under Pillar 2

Core Content

The European Banking Federation (EBF) has issued a position paper in response to the CEBS Consultation Paper on the technical aspects of diversification under Pillar 2. The paper outlines the EBF's concerns and recommendations regarding the approach taken by CEBS in addressing diversification in the context of supervisory practices across the EU.

Main Comments and Concerns

1. Acknowledgment of Diversification as a Key Principle

   • The EBF emphasizes that diversification is a fundamental element of sound risk management.
   • They believe that banks should be incentivized to implement diversification effectively.

2. Disappointment with the Consultation Paper

   • The EBF finds the Consultation Paper disappointing because it appears to suggest that supervisors may not approach diversification benefits in a benign or supportive manner.
   • They argue that the paper does not clearly distinguish between areas of supervisory interest and those that should not be prioritized.

3. Scope and Focus Issues

   • The paper's scope is too broad, covering general ICAAP topics that have already been addressed in previous CEBS guidelines (e.g., CP03 revised).
   • The EBF suggests that the paper should be more focused and better differentiate between areas directly related to diversification and those that are not.

4. Need for a Conceptual Framework

   • The EBF recommends that the paper include a conceptual framework explaining how regulators view diversification from various perspectives:
     • Geographic
     • Business mix (retail, wholesale, etc.) / Cross sector
     • Across legal/regulated entities
     • Across risk types (inter-risk)
     • Within risk types (intra-risk)

5. Proportionality and Differentiation Between Institutions

   • The EBF highlights the need to differentiate between the needs and capabilities of smaller institutions and large, internationally operating banks.
   • They suggest that smaller banks should not be required to use internal portfolio models for Pillar 2 purposes and could instead use summation methods for aggregating risk types.

6. Group Dimension and Cross-Border Supervision

   • The EBF calls for a stronger emphasis on the group dimension in the SREP process.
   • They stress the importance of a cooperative framework between home and host authorities when dealing with cross-border banks.
   • The review should start at the group level, with subsidiaries examined in the context of the group's overall risk profile.

7. Pragmatic Approach to Diversification Benefits

   • The EBF argues that supervisors should adopt a more pragmatic approach when assessing diversification benefits, rather than solely relying on statistical methods.
   • They point out that due to the lack of data, some models, such as those for operational risk correlations, may need to rely on expert judgment.

Key Recommendations

• The Consultation Paper should clarify that diversification is a key principle of risk management and provide appropriate incentives for banks to implement it.
• It should be more focused and distinguish between areas of supervisory interest and those that are not.
• A conceptual framework should be included to explain the different dimensions of diversification.
• The paper should not overly focus on the transferability of financial resources.
• Supervisors should adopt a more flexible and pragmatic approach when evaluating diversification benefits, especially when data is limited.
• The group dimension should be emphasized, with a focus on group-level assessments before examining subsidiaries.
• The principle of proportionality should be applied, allowing smaller banks to use simpler methods for aggregating risk types.

Conclusion

The EBF supports the CEBS initiative to provide consistent guidance on diversification within the Pillar 2 framework but believes that the Consultation Paper needs significant improvements in clarity, focus, and proportionality. They urge CEBS to ensure that the guidance fosters convergence in supervisory practices while respecting the internal risk management strategies of banks.