Response to second consultation on RTS on estimation and identification of an economic downturn in IRB modelling

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Question 1: Do you have any concerns around the workability of the new approach (e.g. data availability issues, burden on the analysis, split between the definition of the economic downturn and its impact on the internal loss data)?

The list of indicators at Article 2, Paragraph 1 is too long and determines some concerns about the workability of the approach (mandatory list). Even if all of them appear reasonable, the list should be reduced in order to ease the analysis: the need to analyze all of them seems too burdensome for the institution. The problem is not only caused by the availability of the information for all the indicators (i.e. credit losses) but by the consequence that, by using many factors, it is more likely to have many peaks and therefore many impact assessments to be performed according to GL prescriptions. Proposal: either to reduce the list of indicators or to make optional the analysis of the entire list.
For the economic/credit factors applicable to each jurisdiction it would be possible to directly provide the data sources in order to ensure harmonization and not to create differences in these objective measures.
Moreover, if the peaks / troughs of economic factors are not reached simultaneously but they are correlated, the RTS assigns them to the “same downturn period”. The risk of the subjectivity in the interpretation of the results is very high, also due to the fact that the RTS requires not to define an excessively long downturn period. Proposal: in order to avoid discretion within the jurisdiction, the RTS should better clarify how to assign the factors to the same downturn cycle and eventually defines a cap to the overall duration. Solution for a complete harmonization: RTS should directly define the downturn periods for each listed economic factor and each jurisdiction.
The split between the definition of the economic downturn and its impact on loss data does not seem to increment the burden on institution if the previously indicated adjustments are introduced.
Finally, time series too long, for example before Euro, could reduce the representativeness of the downturn and the availability of different time series among jurisdictions could increase the unjustified variability: we think that the 20 years requisite should be clearly adapted in first adoptions so to consider the Euro introduction as a structural break as well as to deal with indicators whose availability does not cover the entire period (for example because the National Bank started the reporting of that indicator after the required starting point).

Question 2: Do you see any issues of applicability of this RTS for estimating conversion factors appropriate for an economic downturn identified in accordance with this RTS?

No, but the CF are not treated in the GL and therefore are still an open point for the quantification of the downturn adjustment. It is clear that the impact assessment on the LGD side is not suitable for CF as well as the fact that an evident relationship between macroeconomic factors and CF is not always detected within internal data. Since the GL tackles for the first time the downturn component in an exhaustive way it seems to be a “lost opportunity” to deal also with CF leaving the institutions with a lot of subjectivity in the estimation of the downturn component as well as the competent authorities without a clear guidance on how to validate it.

Name of organisation

Intesa Sanpaolo S.p.A.