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ESBG Summary on CEBS Consultation on Concentration Risk Management

Core Content

The European Savings Banks Group (ESBG) submitted comments on the CEBS consultation regarding "CEBS Guidelines on aspects of the management of concentration risk under the supervisory review process." The document outlines ESBG's general support for the CEBS initiative but also includes several critical observations and suggestions for improvement.

Main Views and Key Points

General Comments

• Support for CEBS Initiative: ESBG agrees that unrecognised and unmitigated concentration risk can lead to significant losses in credit institutions and thus supports CEBS's focus on this issue.
• Business Models and Concentration Risk: ESBG highlights the importance of considering banks' business models when assessing exposure and mitigation of concentration risk, as these models can significantly influence the nature and extent of such risks.
• Integration into Existing Processes: ESBG suggests that rather than introducing an extra stress test specifically for concentration risk, it should be integrated into existing stress testing and reporting frameworks. This would enhance efficiency and consistency.
• Qualitative Approaches: ESBG advocates for the use of qualitative methods in conjunction with quantitative ones, especially where appropriate, to account for the limitations and assumptions of risk models.

Recommended Measures

• Capital Requirements: ESBG supports the idea of using capital requirements as a tool to manage concentration risk but stresses that the goal should be to ensure understanding and appropriate action, not just to create additional capital coverage.
• Avoiding Diversification Pressure: ESBG advises against urging banks to diversify their business activities or enter new markets simply to mitigate concentration risk, as this may not be suitable for all banks and could lead to inefficiencies or misalignment with their business models.

Supervisory Transparency

• Transparency in Decision-Making: ESBG urges national supervisors to be transparent in their decision-making processes regarding concentration risk. This would improve comparability across the EU.

Application in the Financial Sector

• Proportionality Principle: ESBG welcomes the adherence to proportionality in the application of the guidelines to credit institutions.
• Focus on Small Lenders: However, it expresses concern that the guidelines may be overly focused on smaller, regionally active lenders, potentially overlooking the benefits of local expertise and knowledge in managing concentration risk.
• Group vs. Individual Entity: ESBG questions whether concentration risk should be assessed at the individual entity level or at the group level, suggesting that a group-wide approach may not be appropriate for all institutions.

Implementation Deadlines

• Clarification Needed: ESBG requests clarification on the implementation timeline, noting that the deadline for national supervisors is 31 December 2010, not for individual banks. This poses a challenge due to the need for significant changes in IT systems and stress testing procedures.

Specific Comments on Sections

• §13: ESBG requests more details on the implementation study's timing and methodology.
• §27: ESBG suggests that the requirement to price risks based on potential market changes should not be interpreted as a need to explicitly price concentration risk, as it may not be measurable with sufficient precision.
• §35: ESBG doubts the feasibility of setting absolute limits for concentration risk and requests clarification.
• §43: ESBG recommends integrating a monitoring and reporting framework for concentration risk into existing risk reporting, rather than creating a separate process.
• §47: ESBG is skeptical about the ability to quantify concentration risk separately from general risk categories and suggests that additional capital allocation based on net exposure may lead to duplication.
• §63: ESBG disagrees with CEBS's view that VaR models are inadequate for capturing market risk concentrations and suggests that they can still be useful for identifying such risks.
• §65: ESBG acknowledges the importance of considering market-related liquidity risk but questions the practicality of setting limits based on changing liquidity horizons.
• §111–113: ESBG supports the recognition of local knowledge and expertise as risk mitigating factors but urges that long-standing regionally oriented retail banks should also be included in this consideration.

About ESBG

• ESBG Overview: ESBG is an international banking association representing one of the largest European retail banking networks. It comprises about one third of the retail banking market in Europe, with total assets of €5,972 billion as of 1 January 2008.
• Focus: ESBG represents the interests of its members in EU institutions and facilitates cross-border banking projects.
• Members: Typically savings and retail banks or associations, often operating in decentralised networks and serving their local regions.
• Mission: ESBG promotes responsible reinvestment and corporate social responsibility within the European and global banking sector.
• Contact:
  ESBG
  Rue Marie-Therese, 11
  B-1000 Brussels
  Tel: +32 2 211 11 11
  Fax: +32 2 211 11 99
  Email: Info@savings-banks.eu
  Website: www.savings-banks.eu