With reference to the European Commission´s proposal to decrease the margin of flexibility of the minimum weights for risk categories and core risk indicators, Deposit Insurance Fund, Czech Republic (DIF) finds the EBA´s proposal (all minimum weights equals to 60% of the total weight) appropriate to DIF´s specific conditions. The DIF faces risks associated with the sector of financial institutions like credit unions, saving banks and small commercial banks. Since its establishment the DIF has disbursed compensation of deposits in 17 cases and all of them represent credit unions and small commercial banks. Business model and credit risk standards of these small financial institutions differs significantly from the core banking sector in the Czech Republic. From our point of view, high harmonisation of the risk measurement model across the EU member countries, especially with respect to different institutional and historical backgrounds of the small financial institutions sectors whose risk specifically exposes DGS, could lead to a lower efficiency of the rating system.
The DIF could not support the European Commission´s opinion that EBA Guidelines are not in line with the intention of the legislator as the Directive 2014/49/EU (the Directive) anticipates a significantly higher level of flexibility enabling DGS to use their own risk-based methods. The Directive defines only general characteristics of a risk-based model which has to be approved by a competent authority.
With respect to the mentioned significant differences of financial institution credit profile, the DIF supports the possibility to use a wider Aggregate Risk Weights range (more than 200%). As a reference point, according to Moody's default data a bank rated BB+ has one-year expected loss more than 9 times higher than an A rated bank. For a BB- rated institution, the expected loss is 25 times higher than for an A rated bank. Another argument for higher difference of the ARW range is a significant gap between contribution of the small high-risk financial institutions to the DIF financial reserves and costs connected with defaults of these institutions. Historical data of the DIF show that small high-risk financial institutions represent around 2% of the overall financial sector contributions but 100% of disbursed compensations.