We wonder whether the definition of UIOLI captures the different forms of UIOLI actually seen in transactions, like losses being allocated in the period the credit event occurs (rather than the period the loss is actually realized) and 12 months rolling UIOLI.
We do not agree. Institutions should have the option to use a model depending on the specific characteristics of a transaction and asset class.
If this option is not available, institutions would also have to use the Simplified Model Approach, since they will never know beforehand whether they can provide all the input required for the Full Model Approach for future transactions.
We also have a problem with the annual review provisions. Especially for the Simplified Model Approach such a review seems unnecessary burdensome.
If there is no possibility to choose one of the approaches depending on the specific circumstances (see our answer on Question 2), we would prefer to have one method.
First of all, we would like to point to the fact that the cumulation of different asset models (WAM, SRT, SES) makes structuring of transactions extremely complex.
Furthermore, we notice that the determination of payments under Art 3 is a cumulation of conservative assumptions:
-unchanged drawing until maturity under revolvers
-no amortization of replenished exposure
-expected prepayments not to be taken into account
This sums up to an unrealistic and unnecessary uneconomic outcome.
As alternatives we suggest:
-use credit conversion factors for drawings under revolvers
-replenished exposures amortizing in line with initial exposures
- expected prepayments to be taken into account
We note that the IRB models sometimes require regulatory add-ons and are generally based on a margin of conservatism. So this again leads to an overstatement of the actual risks.
We agree with the calculation as proposed in Article 6 (average of the 3 scenario’s). The front- and backloaded scenario’s could produce rather extreme outcomes, like in a situation where the EL% exceeds the SES% in the first or last period and consequently the loss absorbing capacity will be lower over the full period. An average of scenario’s would at least dampen this effect. Also, we do not see any correlation between one of the scenario’s and the actual materialisation of losses that would justify a preference for a scenario-based approach.
No, we think it should be based on the average of the 3 scenario’s in both Models. Our answer on Question 6 applies in this regard to both UIOLI and trapped.
With regard to the WAL we refer to our comments on Art 3. A WAL calculated
based on conservative assumptions with regards to drawings, amortization and prepayments, will be unrealistic.
Using a scalar would not do right to the amortization characteristics of the underlying portfolio.
We understand from our members that the proposed scalar leads in certain cases to materially different exposure values between the 2 Models
Both the current regulatory practice based on 1yr EL, as the proposed alternative rolling window approach are approaches strongly supported by our members. Both approaches are also more in line with the intention of the CRR (Art. 248) than the 2 approaches of the Consultation Paper.
We do not agree with the overly conservative treatment as proposed and would strongly suggest to continue the current supervisory practice or any alternative producing comparable outcomes.
In our view, the approach to capitalize all future EL in the proposed models will lead to uneconomical results and will eliminate the option to use SES.
We strongly suggest to continue using the method as currently applied by the ECB (one year EL), or a comparable alternative.
Any alternative approach should be based on the following conditions:
-a level playing field between true sale and synthetic transactions
-no capitalisation of future interest margins.
Any other comment:
We miss any kind of grandfathering provisions or at least a phase in period,
which is especially problematic where (i) the exposure value has to be calculated based on a complicated asset model for which internal checks and validations have to be in place and (ii) originators have to decide on an approach to be used for all current and future transactions.