Consultation paper on technical aspects of diversification under Pillar 2 (CP20)

Start Date: 27/06/2008 | Deadline: 31/10/2008 | Status: Closed

The Committee of European Banking Supervisors (CEBS) today starts a public consultation on its proposed technical approach to understanding claims for diversification benefits arising from internal models used by supervised institutions for Pillar 2 purposes.

The consultation is open to all interested parties including supervised institutions and other market participants.
The Consultation paper presents current thinking on the areas of supervisory interest regarding an institution's management structure, organisation and internal controls, within the framework of risk diversification effects claimed under Pillar 2. These considerations could form part of a broader assessment of economic capital models where they incorporate diversification assumptions.

The core objective of the Consultation paper is that it should be a flexible tool for use in the dialogue between supervisors and the industry (ICAAP-SREP dialogue), providing a structured way in which to assess diversification claims and to highlight more clearly the particular factors within a diversification framework where supervisors will need to be convinced of the claims' validity.

Given the technical and complex nature of diversification measurement, and the potential for evolution of the underlying models, parameters and risk characteristics, the Consultation paper concentrates mainly on the general qualitative environment in which diversification modelling takes place, and on the quantitative approaches that supervisors may consider when assessing firms' own measures of diversification. CEBS considers this approach to be consistent with the general spirit of the Pillar 2 framework.

Most of the principles laid down in the Consultation paper are derived in part from the following existing CEBS guidelines: Guidelines on the implementation, validation and assessment of Advanced Measurement (AMA) and Internal Ratings Based (IRB) Approaches and Guidelines on technical aspects of stress testing under the supervisory review process. The paper mainly refers to commonly accepted modelling practices and does not necessarily mean that the supervisors will address internal economic capital models used for Pillar 2 purposes with the same intensity of scrutiny as in regulatory approval of Pillar 1 models.

CEBS presents its current views on the topic of diversification for a public consultation which starts today and runs until 31 October 2008. Comments received will be published on CEBS's website unless respondents explicitly request otherwise. Please send your comments to the following e-mail address:

A public hearing will take place on 8 September 2008 at CEBS's premises in order to allow all interested parties to present their comments to CEBS. 

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