EBA欧洲银行-IIF_CP10_9页_324kb

IIF Working Groups on Capital Adequacy and Operational Risk Comments on CP10 (October 28, 2005)

Core Content

The Institute of International Finance (IIF) has submitted detailed comments on Consultation Paper 10 (CP10) of the Committee of European Banking Supervisors (CEBS), focusing on the implementation, validation, and assessment of Advanced Measurement Approach (AMA) and Internal Ratings Based (IRB) approaches. These comments are provided by the IIF's Working Group on Capital Adequacy (WGCA) and Working Group on Operational Risk (WGOR), collectively referred to as the Working Groups (WG). The IIF emphasizes the importance of a flexible, principles-based approach to supervisory guidance, avoiding unnecessary prescriptiveness that could hinder the development of best practices and increase implementation costs.

Main Points and Recommendations

1. Cross-Border Implications and Home/Host Relationships

• The IIF supports the goal of a global level playing field and urges CEBS to align its guidance with international regulatory bodies such as the Accord Implementation Group (AIG).
• CEBS should adopt principles-based requirements to avoid duplication and inconsistency in cross-border implementation.
• A "fail-safe" provision should be included to respect banks' good-faith implementation efforts before formal supervisory guidance is available.
• Host supervisors should recognize the need for informal arrangements with home supervisors during the pre-application phase.

2. Status and Nature of the Guidance

• CP10 should clearly define the status of the guidance and distinguish between "must have" and "nice-to-have" recommendations.
• The guidance should be concise and avoid repeating or rephrasing the CRD, which could lead to confusion.
• Where necessary, any quotations from the CRD should be verbatim and clearly identified.
• The WG prefers a more streamlined document with cross-references to existing regulations rather than detailed examples that may become de facto rules.

3. Prescriptiveness and Flexibility

• The WG believes that CP10 introduces excessive prescriptive requirements that could limit the flexibility of banks in developing their internal risk management structures.
• They recommend that CEBS focus on high-level principles rather than detailed examples, which may be misinterpreted as mandatory.
• The use test should be interpreted broadly and not as a formulaic check, emphasizing the overall relationship between the bank and its AMA model, rather than specific examples.

4. Governance and Control

• The WG is concerned about overly detailed governance requirements in CP10, which may not be justified and could interfere with banks' ability to design appropriate internal structures.
• They suggest that CEBS should avoid prescribing specific corporate governance structures and instead focus on the outcomes that a sound governance framework should achieve.
• The role of senior management should be emphasized in oversight rather than in the day-to-day operations of risk management functions.

Specific Comments on IRB and AMA Issues

A. IRB Issues

• Documentation Requirements and Self-Assessment: The WG warns against overly granular documentation and self-assessment processes that could impose excessive regulatory burdens. They suggest that sampling and procedural review are often more effective than checking every portfolio or branch.
• IRB Governance and Control: CP10's prescriptive governance requirements, such as the subordination of the head of the control function, may be inconsistent with common bank practices. A principles-based approach is preferred.
• LGD (Loss Given Default): The WG is concerned that Paragraph 233 introduces overly prescriptive requirements that could hinder the evolution of industry practices.

B. AMA Issues

• AMA Allocation (Par. 464): The WG recommends that CP10 be modified to allow allocation of group AMA results to EU subsidiaries of non-EU headquartered banks, in line with Basel Committee guidelines.
• Home/Host Issues (Annexes I and II): The WG supports the broader guidance on the approval process for AMA applications but stresses the need for continued dialogue to ensure effective implementation of the hybrid approach.
• Use Test Principles (Par. 435-437): The use test should be interpreted broadly, focusing on the overall operational risk framework rather than specific examples. The word "continually" in principle 2 should be removed.
• Reconciliation of Loss Data (Par. 442, 443, 445): The WG advises against overly prescriptive data reconciliation requirements and encourages a more flexible approach aligned with internal practices.
• Partial Use (Par. 418): The WG supports the flexible approach to partial use of AMA but recommends modifying Table 2 to allow partial use at the business line level.
• AMA Roll Out (Par. 428-429): The WG questions the necessity of a materiality assessment and suggests that the guidance should focus on collaboration and agreed review processes.
• Data Quality (Par. 444): The principle on data quality is well-reasoned and should serve as a model for other sections of CP10.
• Validation (Par. 452): The WG recommends adapting the AIG High Level Principles on Validation for AMA purposes and modifying examples to reflect AMA validation.
• Insurance (Par. 463): The WG suggests that a haircut is not required if a bank has a defined process for renewing insurance policies, as automatic renewal is often not feasible.
• Role of Management (Par. 470-476): The WG recommends broadening the scope of management responsibility to include all significant changes and new product development, not just new products.
• Operational Risk Management Function (Par. 482-487): The WG supports the flexibility in the organizational structure of the ORMF and its independence, recognizing that different banks may adopt different approaches.

Conclusion

The IIF Working Groups encourage CEBS to maintain a principles-based, flexible approach in its guidance, ensuring that it supports the development of best practices and avoids unnecessary duplication and complexity. They also emphasize the importance of clear differentiation between mandatory and advisory recommendations and the need for a concise, well-structured document that aligns with existing regulations and international standards.