Response to consultation on Guidelines on the treatment of CVA risk under SREP
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The responses to the following questions should be read in the light of the above. The solutions proposed in the responses should be considered a “second best” option, since repeal of the initiative is the preferred one.
ABI agrees on the proposed benchmark for assessing the relevance in absolute terms of an institution’s exposure to CVA risk, with reference to the size of the OTC derivative business, calculated as the exposure value for non-QCCP cleared derivatives transactions.
According to the EBA proposal, breaching Threshold 1 per se leads to an institution’s exposure to CVA risk being qualified as “relevant”. Therefore, Threshold 1 capturing 75% of the population implies that 75% of EU banks are assumed to have “relevant” exposures. Strong arguments are needed to prove this, given the huge number of small and very small banks in the EU.
ABI asks for the approach to identifying “relevant” exposures to be reviewed (see also the response to question 4). In order to detect genuinely relevant exposures, the absolute threshold (indicating the size of the exposure to CVA risk) and the relative threshold (indicating the relative weight of the exposure to CVA risk on the total risk exposure) should work together. A simultaneous breach of both the absolute and the relative threshold should qualify banks as exposed to a relevant CVA risk.
In any event, calculation of the proposed ratio would lead to an added burden, due to the inclusion of the exempted transactions. Only banks with a potentially significant CVA risk should be taken into account and asked to perform this calculation (proportionality principle). Taking into account only institutions breaching both an absolute threshold (e.g. based on the CCR exposure) and a relative threshold (e.g. based on the share of CVA out of total own funds requirements) limits the number of banks that undergo the “materiality” check outlined in Section 4.2 of the Consultation Paper.
Analysis of the results of the Quantitative Impact Study will be essential for appropriate calibration of the threshold, since the results presented in the draft impact assessment accompanying the EBA Consultation Paper are based on a relatively small sample.
An appropriate level depends on the approach chosen to identify banks exposed to a relevant CVA risk.
In ABI’s opinion, the proposed approach is rather consistent with the rationale underpinning the EBA Guidelines, with the exception of the inclusion of intra-group transactions. Please refer to the response to question 7.
The inclusion of intra-group transactions would result in double counting of the CVA risk at individual level, where a group of institutions provides centralised market access through one legal entity. In these situations, common in practice, banks would bear a capital charge for the CVA risk for both the external and the internal side of a transaction. This would mean that, in the view of the EBA, this setup is riskier than if each entity within the group were to access the market directly.
At consolidated level, intra-group exposures should not be taken into account and should not lead to any capital charge.
The rationale behind inclusion of intra-group transactions in the calculation is therefore unclear, given that it may discourage centralized risk management and is not in line with consolidated accounting.
ABI underlines that the proposed Guidelines provide for the reporting of information to the supervisor and do not address the issue of disclosure to the market. In ABI’s opinion, in order to maintain a level playing field across the EU, the Guidelines should clearly state that the information should remain confidential and that no detailed disclosure to the market is required. In fact, past experience has shown that, in the absence of common guidelines, the market authorities of the different countries make different choices, placing banks of countries where disclosure is required at a disadvantage.
Question 1: Do you agree with determining relevance of CVA risk by means of assessing the size of an institution’s derivative business using the exposure value for non-QCCP cleared derivatives transactions?
ABI expresses some concerns on the proposed framework and considers the proposal inappropriate as to both motivation and timing. The reasons behind this position are explained in the attached paper.The responses to the following questions should be read in the light of the above. The solutions proposed in the responses should be considered a “second best” option, since repeal of the initiative is the preferred one.
ABI agrees on the proposed benchmark for assessing the relevance in absolute terms of an institution’s exposure to CVA risk, with reference to the size of the OTC derivative business, calculated as the exposure value for non-QCCP cleared derivatives transactions.
Question 2: What are your views on how Threshold 1 should be calibrated?
Threshold 1 should be calibrated in light of the objective of identifying relevant exposures, but proposing a suitable level of the threshold does not seem possible at this stage. The draft impact assessment accompanying the EBA Consultation Paper shows figures based on a relatively small sample, if compared with its reference population. Analysis of the results of a larger Quantitative Impact Study, currently underway, should be a condition for any calibration.According to the EBA proposal, breaching Threshold 1 per se leads to an institution’s exposure to CVA risk being qualified as “relevant”. Therefore, Threshold 1 capturing 75% of the population implies that 75% of EU banks are assumed to have “relevant” exposures. Strong arguments are needed to prove this, given the huge number of small and very small banks in the EU.
ABI asks for the approach to identifying “relevant” exposures to be reviewed (see also the response to question 4). In order to detect genuinely relevant exposures, the absolute threshold (indicating the size of the exposure to CVA risk) and the relative threshold (indicating the relative weight of the exposure to CVA risk on the total risk exposure) should work together. A simultaneous breach of both the absolute and the relative threshold should qualify banks as exposed to a relevant CVA risk.
Question 3: Do you agree with determining relevance of CVA risk by means of assessing the share of own funds requirements for CVA risk to the total risk exposure amount?
ABI agrees with the proposed benchmark for assessing the relevance (in relative terms) of an institution’s exposure to CVA risk, based on the ratio of own funds requirements for CVA risks to the total risk exposure amount.Question 4: Do you agree with the approach provided for the determination of materiality of CVA risk?
The EBA envisages a “materiality threshold” based on the ratio of hypothetical own funds requirements for CVA risks to the hypothetical total risk exposure amount, where “hypothetical” means calculated including exempted transactions. The proposed approach seems reasonable, provided that banks exposed to a relevant CVA risk are identified as outlined in the response to question 2.In any event, calculation of the proposed ratio would lead to an added burden, due to the inclusion of the exempted transactions. Only banks with a potentially significant CVA risk should be taken into account and asked to perform this calculation (proportionality principle). Taking into account only institutions breaching both an absolute threshold (e.g. based on the CCR exposure) and a relative threshold (e.g. based on the share of CVA out of total own funds requirements) limits the number of banks that undergo the “materiality” check outlined in Section 4.2 of the Consultation Paper.
Question 5: What are your views on how ‘x%’ (Thresholds 2 and 3) should be calibrated?
The level of the thresholds should allow institutions where the CVA risk is truly material to be identified.Analysis of the results of the Quantitative Impact Study will be essential for appropriate calibration of the threshold, since the results presented in the draft impact assessment accompanying the EBA Consultation Paper are based on a relatively small sample.
An appropriate level depends on the approach chosen to identify banks exposed to a relevant CVA risk.
Question 6: Do you agree with the scope of derivative transactions to be included into the calculation of hypothetical own funds requirements for CVA risk?
ABI believes that banks should not be required to apply the CVA risk capital charge to exempted transactions (intra-group transactions; transactions with sovereign counterparties; transactions with non-financial counterparties below the EMIR clearing threshold; transactions with pension funds).In ABI’s opinion, the proposed approach is rather consistent with the rationale underpinning the EBA Guidelines, with the exception of the inclusion of intra-group transactions. Please refer to the response to question 7.
Question 7: Do you agree that intra-group derivatives transactions should be explicitly included into the scope of calculation? If not, what do you think could be a credible alternative treatment of the CVA risk of intragroup transactions?
In ABI’s opinion, intra-group transactions should be excluded from the scope of the calculation.The inclusion of intra-group transactions would result in double counting of the CVA risk at individual level, where a group of institutions provides centralised market access through one legal entity. In these situations, common in practice, banks would bear a capital charge for the CVA risk for both the external and the internal side of a transaction. This would mean that, in the view of the EBA, this setup is riskier than if each entity within the group were to access the market directly.
At consolidated level, intra-group exposures should not be taken into account and should not lead to any capital charge.
The rationale behind inclusion of intra-group transactions in the calculation is therefore unclear, given that it may discourage centralized risk management and is not in line with consolidated accounting.
Question 8: Do you agree with the approach provided for the determination of supervisory benchmark for material CVA risk?
The approach outlined seems reasonable and consistent with the EBA’s objectives.Question 9: What are your views on how ‘y%’ (Threshold 4) should be calibrated?
As the EBA itself acknowledges, Threshold 4 should be set to a level that does not reverse the exemptions set out by the EU legislator.Question 10: Do you agree with the approach provided monitoring of CVA risk by competent authorities and EBA and data to be provided to competent authorities for this monitoring?
The proposed approach seems reasonable.ABI underlines that the proposed Guidelines provide for the reporting of information to the supervisor and do not address the issue of disclosure to the market. In ABI’s opinion, in order to maintain a level playing field across the EU, the Guidelines should clearly state that the information should remain confidential and that no detailed disclosure to the market is required. In fact, past experience has shown that, in the absence of common guidelines, the market authorities of the different countries make different choices, placing banks of countries where disclosure is required at a disadvantage.