Response to consultation on RTS on conditions for capital requirements for mortgage exposures

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Question 2: Do you agree with the conditions for specification of the loss experience and the loss expectations? Do you agree with the adjustments allowed to be made to the loss experience on the basis of the forward-looking immovable property market developments?

Loss experience and loss expectation as key factors risk making the standards procyclical. See the attached letter/blogs for further information on this analysis and suggestions for improvement. In addition, the standards now do not specify the timing of either going up or down in setting risk weights/LGD's. Though this could be deduced from the impact assessment, this could be made more clear in the standards themselves if this specific indicator is maintained, and to maintain a level playing field should be made binding if only to shelter the authority in charge from political and short term media pressure. The lowest risk weight/LGD should be reserved for the depth of the crisis, not for normal times.

Question 3: Do you agree with the indicative benchmarks for the assessment of the appropriateness of the risk weights and to guide the setting of higher risk weights across immovable property markets in different member states as specified in Article 4(3) and 4(4)? What levels of these indicative benchmarks would be most appropriate and why?

No, as the benchmark chosen appears to work in a procyclical manner. See the attached letter/blog for more information and suggestions.

Question 4: Do you agree with the specification of the term of “financial stability considerations”?

No. These do not appear to clearly specify what is the main purpose of these standards: dampen immovable property markets, protect the banking sector, specific banks or the entire financial sector, or all or none of these. The main purpose should be set out, with other factors ranking lower. The role of ESCB/central banks and ESRB/national financial stability organs-warnings should also be specified, and the weight given to such if they go counter to micro prudential bank supervisory purposes. The correct wording should follow from a clearly ranked goal for going up or down in risk-weight and LGD-setting. See the attached letter/blogs.

Question 5: Do you agree with the other conditions for the setting of higher risk weights? (Please provide your feedback related to the indicative benchmarks (in Article 3(3) and 3(4)) in your response to Question 3 above.)

No, also see the answer to question 3, and the attached letter/blogs.

Question 6: Do you agree with the conditions for specification of the exposure weighted average LGD and the LGD expectation? Do you agree with the adjustments allowed to be made to the average exposure weighted LGD on the basis of the forward-looking immovable property market developments? Do you agree that it is not appropriate to set indicative benchmarks for the setting of higher minimum LGD values because of the specificities of national immovable property markets and because of the relationship of the LGD parameter with the other internal model parameters?

No. See the answers above for most issues. Specifically, it is not correct to not set indicative benchmarks for LGD. There is now no level playing field between standardised banks and IRB banks on this issue, and no level playing field between IRB banks. It appears that banking supervisors are unclear whether for IRB banks the correct route is through this lever (which would be transparent), or through either the model approval process or the pillar 2 process. This leaves too much arbitration by the banks and national authorities, and a lack of transparency.

Question 7: Do you agree with the other conditions for the setting of higher minimum LGD values?

No, see the answers to earlier questions relating to unclear goals and unclear results, and the attached letter/blog

Question 8: Do you have any suggestions on the Impact Assessment?

Yes. Preferably a scenario analysis should be performed and published as to the moments in time e.g. in the period 2000-2014 when national supervisors would have wished they would have used this lever, how they would have used it, and the estimated first and second round effects of such increases or decreases. This exercise would help specify the correct indicators for action. See the attached letter/blog.

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Prudential Supervision