Response to consultation on Regulatory Technical Standards on assessment methodology for IRB approach

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Question 2: Do you agree with the required independence of the validation function in Article 4(3) and Article 10? How would these requirements influence your validation function and your governance in general?

In principle we agree that the validation function should be independent from the credit risk control unit. The new draft RTS might however use slightly different definitions which could impact the current independence. We would like to propose to uphold the existing validation function structures, via grandfathering of the existing structure up until the moment when an internal framework receives a complete reworking (and subsequently supervisory approval).

Question 3: Are the provisions introduced in Article 49(3) on the calculation of the long-run average of one-year default rates sufficiently clear? Are there aspects which need to be elaborated further?

The provisions are not completely clear. Further clarification is needed on what defines a complete economic cycle, on how representativeness should be demonstrated and on what are deemed to be acceptable reconstruction methods.

Question 4: Do you agree with the required number of default weighted average LGD calculation method introduced in Article 51(1)(b) and supportive arguments? How will this requirement influence your current LGD calculation method? More generally, what are your views as to balance of arguments for identifying the most appropriate method?

Yes, we agree with using the default weighted average LGD calculation. . As outlined under (ii) on page 80 of the draft RTS, the default weighted average should be taken for reason of consistency with respect to calibration approaches applied for other risk parameters.

Question 5: Are the provisions introduced in Article 52 on the treatment of multiple defaults sufficiently clear? Are there aspects which need to be elaborated further?

We welcome the additional guidance given in Article 52 of the draft RTS. However, we would ask for more clarity on the definition of ”limited timeframe”. The RTS provides one example stating that if two defaults are observed within four months, it is expected that they will be counted as one default for PD and LGD computation, with the date of the first observed default. To achieve the goal of consistency in model outputs and comparability of RWAs, we would welcome a clear definition of ‘limited timeframe’ instead of giving an example.

Question 6: Are the provisions introduced in Article 60 on the treatment of eligible guarantors for the purpose of own-LGD estimates sufficiently clear? Are there aspects which need to be elaborated further?

The provisions introduced in Article 60 are sufficiently clear.

Question 7: Do you support the view that costs for institutions arising from the implementation of these draft RTS are expected to be negligible or small? If not, could you please indicate the main sources of costs?

We support the main objective of the RTS which from our perspective appears to move towards harmonising supervisory methodologies and to provide more guidance and clarity on interpretations of various Articles of the CRR. The costs of adjusting systems and policies accompanying the changes need to be taken into account. The exact impact will depend on further clarifications on definitions and questions we have raised in our consultation response. Once we know what, for instance, “material portfolios” and “reasonable discrepancies” are, we will be able to forecast a clearer impact assessment.

Question 8: What are the main benefits for institutions that you expect by the adoption of these draft RTS?

In addition to the guidance and clarifications already given by the draft RTS, which is helpful, standardisation of supervisory practices is welcomed. Notably, we support the specific proposal on calculating the shortfall on the IRB (Article 73 (h)). This together our request for additional clarifications that we have put forth in this response, the draft RTS should provide the necessary harmonisation within the European context.

Question 9: Do you expect that these draft RTS will trigger material changes to the rating systems (subject of the RTS on materiality of model changes)? If yes, could you please indicate the main sources of the changes (please list the relevant Articles of these draft RTS)?

The implementation of some of the requirements of this RTS will likely trigger changes within rating systems. As stated in our answer to question 7 the exact impact will depend heavily on further clarifications on definitions and questions we have raised in our consultation response. Below a list of some of the main changes and the corresponding articles referred to in our response:
- Article 4: outsourcing, depending on the definition and scope of outsourcing.
- Article 10 and Article 11: could lead to changes in the validation process.
- Article 28, 1 (b): regarding retail exposures, in case of no limitation of this paragraph to non-retail exposures as is provided for by article 172 and 178 of the CRR should be factored.
- Article 28, 3 (b): in case of acquisitions.
- Article 52: the requirements outlined in the article could trigger high implementation effort changes in the source systems and underlying data.

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Deutsche Bank