Response to consultation on Guidelines on credit risk management practices and accounting for expected credit losses
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17: “Credit institutions should comply with these guidelines in a manner that is appropriate to their size, internal organization and the nature scope and complexity of their activities, and more generally, all other relevant facts and circumstances of the credit institution and the group (if any) to which it belongs”, and
129: “taking into account the proportionality principle set out in these guidelines, credit institutions which are both smaller and less complex may reasonably rely more on the use of practical expedients”…
As the Basel Guidance on Credit Risk and Accounting for Expected losses (the Basel guidance) was originally developed for internationally active banks, we strongly agree that there needs to be guidance on proportionality. We have no concerns with what is written above. We have, however, the following additional comments:
a) We agree with the comment made on page 60, that this “would not achieve full convergence of practices across credit institutions and Member States, because it would depend on the ability of the credit institutions and the competent authorities to apply the guidelines in a proportionate manner consistently.” As the draft guidelines are worded, there will be considerable diversity of application, unless further (and consistent) guidance is provided by competent authorities. While we appreciate that the provision of such guidance is not easy, some of the ideas set out in the guidance issued by the GPPC may be useful.
b) According to paragraph 19, “When, because of considerations relating to proportionality or materiality, credit institutions choose to adopt an approach to ECL estimation that would generally be regarded as an approximation to ideal measures, such approximate methods should be designed and implemented so as to avoid bias..” It is difficult to see how smaller and less complex banks could assess the possible extent of bias arising from applying practical expedients without investing in complex processes to assess what would have been the expected credit losses calculated using an ‘ideal’ measure. We therefore recommend that the EBA either exempts such banks from complying with paragraphs 19, 122 and 138 of the draft guidelines that refer to bias, or else provides more guidance on how such banks would be expected to comply.
c) Paragraph 17 of the CP refers to “the group (if any) to which it belongs”. As worded, the intent of this is unclear. While we would agree that a small bank that is part of a much larger bank should have more access to modelling and other resources, it is possible that the subsidiary may be immaterial to the larger group, in which case it might not be in the scope of the group’s more sophisticated IFRS 9 programme. In these circumstances, it would seem inappropriate to require the application of IFRS 9 to be more sophisticated than for a similar entity that is not embedded in a wider group. Is it intended that a bank that is part of a group should develop a more sophisticated application of IFRS 9 for its own reporting than is developed for group reporting purposes?
d) It would be helpful to state more explicitly that proportionality can be applied not only in comparing one entity to another but also between portfolios within an entity, based on materiality, risk and data availability.
Question 1: Is the scope of application of the guidelines appropriate and sufficiently clear?
The scope is clear but please refer to our answer to Question 3.Question 2: Is the date of application of the guidelines of 1 January 2018 appropriate?
It is appropriate that the application date be consistent with that of IFRS 9.Question 3: Please provide any comments you may have on the appropriateness of the proposed proportionality approach.
We take the proposed approach to be the views set out in the following paragraphs of the draft guidelines:17: “Credit institutions should comply with these guidelines in a manner that is appropriate to their size, internal organization and the nature scope and complexity of their activities, and more generally, all other relevant facts and circumstances of the credit institution and the group (if any) to which it belongs”, and
129: “taking into account the proportionality principle set out in these guidelines, credit institutions which are both smaller and less complex may reasonably rely more on the use of practical expedients”…
As the Basel Guidance on Credit Risk and Accounting for Expected losses (the Basel guidance) was originally developed for internationally active banks, we strongly agree that there needs to be guidance on proportionality. We have no concerns with what is written above. We have, however, the following additional comments:
a) We agree with the comment made on page 60, that this “would not achieve full convergence of practices across credit institutions and Member States, because it would depend on the ability of the credit institutions and the competent authorities to apply the guidelines in a proportionate manner consistently.” As the draft guidelines are worded, there will be considerable diversity of application, unless further (and consistent) guidance is provided by competent authorities. While we appreciate that the provision of such guidance is not easy, some of the ideas set out in the guidance issued by the GPPC may be useful.
b) According to paragraph 19, “When, because of considerations relating to proportionality or materiality, credit institutions choose to adopt an approach to ECL estimation that would generally be regarded as an approximation to ideal measures, such approximate methods should be designed and implemented so as to avoid bias..” It is difficult to see how smaller and less complex banks could assess the possible extent of bias arising from applying practical expedients without investing in complex processes to assess what would have been the expected credit losses calculated using an ‘ideal’ measure. We therefore recommend that the EBA either exempts such banks from complying with paragraphs 19, 122 and 138 of the draft guidelines that refer to bias, or else provides more guidance on how such banks would be expected to comply.
c) Paragraph 17 of the CP refers to “the group (if any) to which it belongs”. As worded, the intent of this is unclear. While we would agree that a small bank that is part of a much larger bank should have more access to modelling and other resources, it is possible that the subsidiary may be immaterial to the larger group, in which case it might not be in the scope of the group’s more sophisticated IFRS 9 programme. In these circumstances, it would seem inappropriate to require the application of IFRS 9 to be more sophisticated than for a similar entity that is not embedded in a wider group. Is it intended that a bank that is part of a group should develop a more sophisticated application of IFRS 9 for its own reporting than is developed for group reporting purposes?
d) It would be helpful to state more explicitly that proportionality can be applied not only in comparing one entity to another but also between portfolios within an entity, based on materiality, risk and data availability.