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The Association of Local Banks, Savings Banks and Cooperative Banks in Denmark (LOPI)

We have decided only to submit comments on questions 1, 4 and 5, as these are considered particularly important for smaller banks.

We find it very important that the prescribed method for calculating contributions to the DGS ensure level playing field between larger and smaller banks.

In order to avoid a biased calculation of the overall risk indicator, ARW, it is therefore essential that the calculated ARW is based on key figures and parameters, which are calculated using the same methods in all banks. However, differences in the banks' structure and size means that not all indicators are usable in calculating the banks' contributions to the DGS. Unfortunately this is particularly true for the core indicator “RWA / Total assets” which we consider completely inappropriate to be included in the ARW-calculation, cf. below under question 5.
LOPI considers the proposed risk interval (75-150 pct.) as appropriate.
In general LOPI finds the mentioned ’core indicators’ useful in calculating the overall risk profile (ARW). However, as the ‘core indicator’ must show a fair/accurate picture for all banks, and therefore must be calculated using the same methodology, we find the core indicator RWA/Total assets completely inappropriate and for this reason it should be excluded from the calculation.

Inclusion of RWA/Total Assets" is by definition disproportionately unfavourable for banks under the standard approach as well as disproportionately favourable for IRB banks. This obviously contradicts a principle of level playing field by distorting the calculation of the ARW as two identical banks with the exact same credit risk will show very different key figures for RWA/Total assets, depending on which of the two approaches – IRB or the standardised – they have chosen to use.

In Denmark only 6 (large) banks are using the IRB approach. The remaining (approx. 80) banks are using the standardised approach. Medio 2014 the average RWA/Total assets amounted to 37% for the IRB banks whereas it amounted to 71% for the standardardised banks, a solid indication that the choice of method is vital when calculating the key figure.

The result of using the RWA/Total assets will be that the larger banks’ risk adjustment will be smaller, solely due to their size and structure. The ‘core indicator’ key figure will only be reasonable, if all banks are calculating it using the same methodology i.e. the standard approach.

As an alternative to forcing the IRB banks to undertake these calculations, we would like to propose another ‘core indicator’ to replace the RWA/Total assets. For this purpose average increase in loans over a 2-3 years period could be used, as a high ratio can be seen as an indicator of high risk."
The Association of Local Banks, Savings Banks and Cooperative Banks in Denmark (LOPI)