We are cautious towards the competent authorities raising minimum LGD values. This is due to the fact, that such an instrument, even if applied with due care, can turn out to have severe and unforeseen consequences to the level playing field of IRB-institutions. As mentioned there should also be an upper limit to the adjustment of the minimum LGD values.
In addition it is imperative, that such instrument will not be used as an alternative to requirements for adjustment to poor performing internal models. For example, would a muting" of the risk sensitivity of a IRB-model by raising the minimum LGD value be of little use, with potentially quite severe side effects, to a IRB-model which is performing poorly due to model specific details.
We also would like to stress that a substantial increase in the amount of data to be provided by the institutions could be a prerequisite to facilitate the detailed analysis required for competent. This result would be conflicting with the EU Commissions' current objective of reducing the burden on the European financial institutions."
We welcome the requirements for the competent authorities to publicly describe and justify the expected effects of a potential increase in minimum LGD-values, which eventually should lead to enhanced harmonisation.