We are in broad agreement with the three main categories given. However, we are concerned around the timescales for identification and implementation of necessary adjustments as identified and communicated by competent authorities. As discussed in the consultation, the adjustments of standardised risk weights and minimum LGD floors according to the criteria set out may be pro-cyclical; consideration should be given as to how these adjustments will function in combination with for example, the counter-cyclical capital buffer. Further clarification on how the process would practically define an appropriate LGD would be of benefit.
In principle we agree with the conditions for specification of loss experience and loss expectations consultation in the consultation. However, we feel that it is important to ensure harmonisation and consistency in how specifications are made by competent authorities, in particular considering any judgemental aspects contained in those specifications. We would also encourage consideration on how adjustments made will ensure that standardised and IRB approaches are treated fairly.
We would encourage the EBA to undertake the necessary data collection and surveys, and consult competent authorities in member states in order to set appropriate indicative benchmarks.
We agree with the specification of “financial stability considerations”. We consider that an increased LGD floor may not be the ideal mechanism to control the overall systemic financial stability. However, in circumstances where it is deemed appropriate to increase standardised risk weights or LGD floors, the “financial stability considerations” described will inform the decisions made.
We would like to emphasise that the conditions for setting higher risk weights be clearly defined, and the populations for which increases are made are truly homogenenous according to the criteria specified (including loss experience and expectation). This should help to ensure that proposed increases do not disproportionately increase capital requirements for lower-risk portfolios than higher-risk identified within the same population identified for higher risk weights.
We agree with the conditions for the specification of the exposure weighted average LGD and the LGD expectation, and adjustments allowed to be made to the average exposure weighted LGD on the basis of the forward-looking immovable property market developments. Regarding the setting of indicative benchmarks for the setting of higher minimum LGD values, it is agreed that there are a number of specificities of national immovable property markets, and competent authorities within member states would be expected to have different interpretations of loss experiences and different predictions for future loss expectations; this may limit the usefulness of any indicative benchmarks set. Similarly for institutions within member states, the relationship between the LGD parameter and other internal model parameters will affect the degree to which a higher LGD floor will affect capital requirements of exposures within the homogeneous populations identified.
There are concerns that the setting of higher risk weights and LGD floors may not be consistent across member states, and the EBA is requested to consider measures with which to control for such a scenario and the subsequent effects.
We encourage the same rigour in identifying homogeneous populations for higher minimum LGD values as for those receiving higher risk weights in Question 5.
We agree with the proposal for a cost-benefit analysis. The proposal to collect data of loss experience, immovable property market prices, loan-to-value ratios and the debt-service-to- income ratios is consistent with other data collected for the surveys undertaken for proposals to change the standardised approach and associated capital buffers, and should give meaningful insight and encourage consistency with those proposals.