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CEBS Consultation on Concentration Risk Management: NVB Summary

Core Content

The Netherlands Bankers' Association (NVB) provided feedback on the CEBS consultation paper 31 regarding the management of concentration risk under the SREP (Supervisory Review and Evaluation Process) framework. The NVB supports the general idea that banks must be aware of concentration risks and have systems in place to monitor and manage them. They emphasize that this should be integrated into the ICAAP (Internal Capital Assessment and Analysis) process under Pillar II, which allows for a firm-specific approach.

Main Views

• Concentration Risk Management: NVB believes that concentration risk should be managed in three steps: measure concentrations, gain knowledge, and act upon the knowledge. This leads to capital add-ons for concentration risks and potential reductions for diversification benefits.
• Pillar One vs. Pillar Two: Pillar One assumes perfectly diversified portfolios, so concentration risk should be addressed under Pillar Two. The guidance should not be overly descriptive but rather serve as an example for individual implementation.
• Phased Implementation: NVB appreciates the suggestion that the implementation of concentration risk management guidelines should be phased and allow for flexibility, as noted in paragraph 12 of the consultative paper.
• Solo vs. Consolidated Basis: NVB questions the value of solo-level concentration risk monitoring, especially when concentrations are guaranteed by the group. They suggest that solo-level requirements, if present, should be addressed in the SREP dialogue and by the college of supervisors to ensure consistent implementation.
• Role of People Over Models: NVB emphasizes that concentration risk management should be driven by people rather than solely by models. While models are useful, they should be complemented by experienced risk managers who can identify non-model-based risks such as contagion and unexpected developments.

Key Information

Existing Processes

NVB notes that several concentration risk management processes are already in place:

• Managing concentrations by geography, sector, and product type
• Adhering to large exposures regulatory requirements
• Conducting high-quality stress tests

These processes help in understanding the second-order effects of concentration risk and allow institutions to take appropriate action.

Integrated Approach

NVB supports the idea of an integrated approach to concentration risk across all risk categories (intra- and inter-risk concentrations). However, they suggest that this should be introduced in stages, starting with per-risk-type analysis and then moving to a firm-wide view once the institution is capable of managing individual risk concentrations effectively.

ICAAP and Capital Planning

NVB agrees that concentration risk should be adequately considered within ICAAP and capital planning frameworks. They support the idea of assessing the amount of capital required based on the level of concentration risk in the portfolios.

Reporting and Communication

NVB acknowledges the challenge of reporting concentration risk, especially when aiming for a holistic view. They believe that banks should take the lead in shaping their approach and then convince the regulator of its adequacy and alignment with prudential requirements.

Models and Indicators

While NVB agrees with the need for models and indicators to capture interdependencies, they caution that these should be supported by competent risk managers. They also highlight that full diversification models are difficult to assess for effectiveness compared to more standard models like PD, EAD, and LDG.

Conclusion

NVB's feedback highlights the importance of a firm-specific, phased, and people-centric approach to managing concentration risk. They support the integration of concentration risk into Pillar II processes and encourage a balanced use of models and human expertise to ensure effective risk management.