EBA欧洲银行-ESBG-response-to-CEBS-consultation-on-diversification_final_4页_202kb

ESBG Position Paper Summary: Response to CEBS Consultation Paper on Diversification under Pillar 2

Core Content

The ESBG (European Savings Banks Group) has responded to the CEBS consultation paper on the technical aspects of diversification under Pillar 2 of Basel II. The paper outlines the proposed technical approach for understanding diversification benefits arising from internal models used by supervised institutions. The ESBG appreciates the opportunity to comment and emphasizes the need for a balanced and principles-based approach in the development of these models.

Main Views and Key Points

1. ICAAP Modeling and Standards

• The ESBG acknowledges that the CEBS paper sets high standards for ICAAP (Internal Capital Adequacy Assessment Process) modeling, verification, and validation.
• However, it highlights that ICAAP is still an emerging topic and that industry standards are in a development phase.
• The ESBG suggests that CEBS should avoid overly specific and ambitious model requirements and instead focus on areas where the most value can be derived.

2. Diversification and Risk Management

• The ESBG supports the recognition that internal incorporation of diversification effects is a key part of accepted risk management methods in banking.
• It stresses that the CEBS paper should clarify whether it refers to all economic capital models or specifically to the measurement of diversification effects.

3. Principles-Based vs. Rules-Based Approach

• The ESBG advocates for a more principles-based approach rather than a prescriptive rules-based one.
• It warns that a rules-based approach may conflict with internal capital models tailored to specific portfolios.

4. Pillar 2 and Pillar 1 Independence

• The ESBG emphasizes that Pillar 2 models are internally driven and should not be constrained by regulatory limitations.
• It argues that Pillar 1 and Pillar 2 requirements should be treated independently to maintain the efficiency of the Basel II framework.
• The paper should not be interpreted as a list of requirements or a roadmap for model approval, but rather as a support document for the ICAAP-SREP dialogue.

5. Proportionality and Supervisory Burden

• The ESBG notes that the paper may impose an additional burden on banks by requiring more information for supervisors.
• It suggests that CEBS should ensure that the costs and benefits of providing supplementary information are equitable.
• The ESBG recommends the introduction of proportionality as an overarching principle to accommodate the varying needs and capacities of smaller and larger institutions.

6. Model Complexity and Data Instability

• The ESBG highlights the challenge of data instability in banking and the statistical bias/variance problem.
• It argues that while complex models (e.g., copulas) may provide a good theoretical fit, they can be unstable in practice due to data scarcity.
• Simpler models, although potentially less accurate, may offer more stability and practicality, especially for smaller institutions.

7. Differentiation Between Institutions

• The ESBG points out that the paper does not sufficiently differentiate between the needs and capacities of smaller and larger institutions.
• Smaller institutions often do not use internal portfolio models and face significant challenges in assessing interdependencies between risk types due to limited data.
• The ESBG recommends that proportionality be integrated into the CEBS paper to ensure a balanced supervisory approach.

Conclusion

The ESBG calls for a more flexible and principles-based approach in the CEBS paper, emphasizing the importance of maintaining the independence of Pillar 2 from Pillar 1, ensuring proportionality in supervisory expectations, and recognizing the practical limitations of model complexity and data availability. The paper should be seen as a support tool for the ICAAP-SREP dialogue, not as a regulatory roadmap.