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Finance Finland

The uncertainty about loss expectation of immovable properties comes especially through the risk associated with the collateral. All factors related to the characteristics of the immovable property markets and the riskiness of the exposures need to be considered for exposures secured by mortgages on residential property or commercial immovable property. In addition, the location of the collateral and national laws, for example loans to housing companies which are addressed to the owners of the flats, affect the riskiness and loss expectation.
Macroeconomic key variables are troublesome in adjusting the loss expectations upwards or downwards because it would probably require an on-going evaluation by the regulator whether the reasoning for minimum LGD values still holds.
It is unclear to which extent climate related risk would affect institution specific risk weights. Climate risks may affect the institution’s portfolios in complex ways, or they even may not have any effect to a particular portfolio at all.
It is too early to consider climate related risks in the determination of loss expectation: data on these types of risks is still limited and international/national climate related policies are still being negotiated.
We are thus in an opinion that data and information should be gathered more, and comprehensive impact study made before there may be any conclusions how climate related risks should be taken into account and what is the right regulative response to it.
Assessing the market conditions etc. is relatively straightforward, but the open question is how the assessed systemic risk would be introduced as part of a specific LGD model. The LGD estimates should be based on institution’s loss history, and thus affected by the lending standards, conditions, collateralization, and recovery policies the institution is using. Of course, recovery policies are also affected by the national law. It is not clear how the supervisor would introduce these different aspects to institution-specific LGD model with a simple minimum LGD estimate. If these are introduced, it should be clarified how this is done in a way which will allow transparent comparison between different EU countries.
Benchmarking to other member states, although interesting, is quite troublesome. Member states have very different lending standards, and the real estate market can also differ considerably. This may make it necessary to consider the market specificities which then also makes it an absolute necessity to include in the RTS that authorities must open the reasoning for the decision including what is exactly the risk according to which the risk weights or LGD parameters must be changed and the quantification of the risk and how it is transformed to risk weights and LGD parameters. Without this information the legal means to exercise the rights to effective judicial protection cannot be achieved.
Additional reporting should be avoided. Banking sector is already producing massive amounts of data to supervisory authorities and to the central banks. That existing data should be utilized instead of introducing new reporting requirements.
In IRBA models, MoC (Margin of Conservatism) is always considered. If uncertainty in LGD estimates, for example regarding climate risks, is already considered in the MoC component, it should not affect the minimum LGD level. Alternatively, it could be considered, that some systemic risks are reflected in MoC, which would also be more precise for example regarding areal distribution of loans.
Finance Finland