Response to consultation on Draft Guidelines on the methodology to estimate and apply credit conversion factors under the Capital Requirements Regulation
1. Question 1: How material are the cases for your institution where you would have to assign an SA-CCF to exposures arising from undrawn revolving commitments and thus restrict the use of own estimates of LGDs within the scope of application for IRB-CCF in the CRR3? For which cases would you not have enough data to estimate CCFs but have enough data to es-timate own estimates of LGDs?
Cannot be answered without data.
2. Question 2: Do you have any comments related to guidance on the identification of a relat-ed set of contracts which are connected such that they constitute a facility?
We consider the guidance as insufficient for practical purposes; in 3.5.4, Tz. 56, the GL only give examples of related sets which lack hard criteria („associated with“, „close to“). As contracts may be opened or closed around the date of default, the exact identification and allocation is complex. Given that all contracts will be considered for measurement of the IRB risk position anyway (irrespective of being considered as „related“ or not in the sense oft he above definition) we would plead in favour of keeping the facility definition as simple as possible.
8. Question 8: Are there cases for your institution where the calibration samples should be shorter than the sample used to calculate the long run average (LRA) CCF
No
9. Question 9: Do you have any concerns with the requirements introduced to analyse and mitigate a lack of representativeness for CCF? Do the requirements on the different data samples when observing a lack of representativeness impede your ability to model CCF portfolios?
No; we would however appreciate more concrete guidance regarding the required analyses under 5.3.2 Tz. 48 c (internal policies and external factors) and 48 e (material subsegments of the application portfolio - which dimensions should be used to identify the subsegments, what materiality definition is to be applied).
11. Question 11: Are there any concerns with requiring consistency in the analysis of changes in the product mix with the institution’s definition of facility? Are institutions able to identify and link contracts (partially) replacing other contracts where the closing or repayment of one contract is related to the origination of a new contract? Are institutions able to link new contracts that are originated after the reference date to related contracts existing at refer-ence date? In particular, is it possible in the case contracts that are revolving commitments are replaced by contracts that are non-revolving commitments (e.g. by a term loan)?
As mentioned in our response to question 2, identification and linking of „related credits“ to the revolving commitment are complex and to some extent arbitrary as, in the event of an imminent default, credit accounts might be opened, closed or restructured. Under the current facility definition, all such credits would be taken account in the RWA calculation, even if they are not artificially linked to a revolving commitment. It is also not clear that a facility redefinition or allocation methodology would be conservative in the sense of RWA.
Currently, we are not able to identify whether two contracts are linked or not. Extending our data collection regarding the missing information would bring little benefit but would produce significant effort.
We would appreciate a simplified, objective definition, e.g. along the lines of 3.5.5.a Tz. 79.a-c
12. Question 12: Do institutions consider it proportionate to the risks of underestimation of CCF to perform the identification analysis and allocation procedure? If it is deemed not propor-tional, what would be an alternative approach that is still compliant with Article 182(1b) CRR?
A redefinition of the facility concept and an associated allocation procedure would not be proportionate given the current risk management practice in our institution.
Our interpretation of Article 182(1b) CRR is different. It explicitly refers back to Article 182(1a)(d) CRR which forbids the use of data that has been affected by changes in the product mix. We read this to mean that these types of effects, if present, can be repaired in the data itself by a free choice of means (facility redefinition/allocation being only one of them).
13. Question 13: Do you have any concerns on the proposed approach for the treatment of so-called ‘fast defaults’? In case you already apply a 12-month fixed-horizon approach, do you apply a different treatment for ‘fast defaults’ in practice, (and if so, which one)? Is the ‘fast default’ phenomenon material according to your experience? If yes, for which exposures, exposure classes or types of facilities?
Currently, information is collected for each default at the time of default and 12 months prior to default. For 'fast defaults,' limit information at the time of default is currently used in denominator. Since 'fast defaults' occur very rarely and changes in lines up to the point of default are also rarely observed, we advocate for a more pragmatic solution: calculating the realized CCF solely based on information at the time of default. Extending our data collection regarding the missing information would bring little benefit but would produce significant effort.
Otherwise, it would have to be specified how to handle accounts that have been open for less than twelve months in the RWA calculation, as consistency would require using the first limit available.
Additionally, it should be clearly stated whether these scenarios can be excluded from the RoI.
16. Question 16: Are there any concerns related to the allocation mechanism described in these GL?
Yes. These concerns are in line with our statements under questions 2, 11 and 12. The complexity seems not proportionate to the number and volume of cases; the data structure of the RDS would need to be rebuilt from scratch; the resulting facility definition might not be consistent internally, let alone in an external comparison; it is not clear that it is even conservative or unbiased and there is a risk of double-counting exposures.
20. Question 20: Do you think that the relative threshold is an appropriate approach to restrict the use of the alternative CCF approach for those facilities in the region of instability? Do you think it is appropriate to define a single relative threshold per rating system or are there circumstances where multiple relative thresholds would be warranted? Do you see a need to use an absolute threshold in addition to the relative thresholds?
Concrete criteria should be defined how to determine this threshold.
21. Question 21: Do you consider the guidance sufficiently clear in relation to the requirement for institutions to set up a policy to define a threshold value?
Yes
23. Question 23: Do you think that, for the facilities in the region of instability, and/or for fully drawn revolving commitments, a single approach should be prescribed (e.g. one of the ap-proaches above defined in the Basel III framework), or that more flexibility is necessary for institutions to use different approaches they deem most appropriate for these facilities?
We would welcome a more flexible approach. The Basel III LF approach seems more appropriate for measuring EaD in the RoI, and potentially also for commitments that fall under the definition of Tz. 61.b
24. Question 24: If such flexibility is indeed warranted, what is the technical argumentation why prescribing a single alternative approach for these facilities is not suitable? Which cases or which types of revolving commitments could not be modelled under the approaches pre-scribed? Are there types of revolving commitments that could not be modelled by any of the approaches described in the Basel III framework?
In the model estimation phase, realized CCFs might result in better discriminatory power when using the LF approach in particular in the RoI; where the facility is (almost) fully drawn, or where there are data quality issues. In the application phase, the review of estimates might produce better results also under the same circumstances.
25. Question 25: Which of the three approaches described in the Basel III framework is pre-ferred in case a single approach would be prescribed?
As a single approach for the RoI the LF approach would be preferred
26. Question 26: For the purpose of the long run average calculation, are there any situations where such intermediate exposure weighted averaging at obligor level would lead to a dif-ferent outcome (that is unbiased) with regard to the CCF estimation? How material is this for your portfolio?
The alternative approach might lead to a bias towards obligors with few facilities. An obligor with many facilities would enter the average only once. This could lead to inconsistencies in the facility-level definition of CCF.
34. Question 34: Are there examples where the haircut approach should be considered the most appropriate approach for estimating the downturn CCF?
The haircut approach is not appropriate for downturn estimation in the CCF context, as input data cannot typically be meaningfully adjusted. The general approach should be to use observed effects rather than estimated effects, otherwise the MoC will be unjustifiably high. It is generally observed that the CCF tends to have a countercyclical effect. Clear criteria should be defined under which circumstances it is appropriate not to have a downturn add-on.
36. Question 36: Have you observed, or do you expect a (statistically significant) correlation be-tween economic indicators and realised CCFs? If so, do you expect higher or lower levels of CCFs observed in the downturn periods compared to the rest of the cycle? Do you have pol-icies in place that restrict or, on the other hand, relax the drawing possibilities in the down-turn periods?
It is generally observed that the CCF tends to have a countercyclical effect.
37. Question 37: The possibility to have no downturn effect on CCF estimates is restricted to the case where observations are available during a downturn period. Which alternative meth-odologies could be used to prove the non-existence of a downturn effect on CCF estimates, in the case where no observation is available during a downturn period?
Finally, it should be noted that using the downturn period from the LGD estimation would be sensible, as otherwise unnecessarily high downturn effects on the RWA arise, which implicitly assume a multi-crisis and are therefore very unrealistic overall.