This is not a problem, as long as it is indeed not compulsory to use the entire interval for the participating institutions. If institutions have a similar risk profile, they should also pay a similar relative contribution.
We do not agree with the following indicators:
• RoE is probably a more suitable indicator than RoA, as it says more about the capital restoring capacity of a financial institution.
• The NPL ratio is a problematic indicator given definition and policy differences between institutions, which means that it doesn’t necessarily provide a lot of insight in the risk profile. We see more merits in P&L volatility or actual impairments.
• Within capital, much more weight should be given to the CET1 ratio. The leverage ratio should not be made as important as the CET1 ratio as it doesn’t reflect the risk of the assets on the balance sheet at all.
• Likewise, within liquidity and funding more weight should be given to the LCR, at least until the NSFR is formally introduced.
We prefer the CET1 ratio as it is already used in day-to-day management. A serious drawback of the capital coverage ratio as defined on page 38 of the proposal is that institutions can be confronted by shock effects in case the required CET1 ratio changes, for example as result of an SREP.
Not that we are aware of.
Mostly. But we do NOT agree that the bucketing approach would give stronger incentives for banks to improve their risk management than the continuous scale approach. This statement is true for banks, close to a lower risk category, but it is false for those banks that are far away: “It will take that long before we see the results of our efforts that we may just as well not start with it.” The continuous scale approach has the advantage that it gives an incentive to every bank alike. We would therefore have expected the authors to prefer the continuous scale approach.