Certainly, proposed guidelines will have significant impact, particularly with regard to provisions on LGD in-default and ELBE.
We don’t find any substantial operational limitations with regard to the requirement to calculate the one-year default rates at least quarterly for the purpose of monitoring of the appropriateness of the PD estimates. However, we need clarification with respect to the obligation of credit institutions to update their IT systems with the new information they receive on a risk driver or rating criterion (par. 39(a)). In particular, the timeframe provided for in draft GL (i.e. three months) refers to the period starting from the publication of financial statements by the obligors (i.e. companies)? In such a case, especially with regard to the corporate portfolio, the envisaged timeframe is particularly limited and it is recommended to be extended.
The HBA considers that the proposed arrangement pursuant to which interest and fees are capitalized after the moment of default is not the appropriate one, since it reduces recovery rates in an unjustified way. Hence, we propose that the EBA should adopt an approach, which would provide that interest and fees capitalized should be included in the denominator of the realised LGD.
Introducing maximum PD levels may reduce variability, but it is likely to cause other implications, such as reduced differentiation of risk within pools and rating grades. Variability can be justified when a credit institution has the means (data and methods) to produce more efficient credit risk models.
As far as the non-overlapping windows approach is concerned, in cases of corporate portfolios with few observations in some pools, we consider appropriate the observed average default rate to take into account the number of observations ensuring, thus, the appropriate adjustment.
The proposed requirement with regard to the application of appropriate adjustments and margin of conservatism in respect of model development and calibration entails significant operational burden for credit institutions, particularly from an IT perspective. Since it is operationally difficult for credit institutions to quantify the margin of conservatism, it would be plausible and efficient to allow credit institutions to treat model risk in the context of Pillar II by making use of the internal capital.
Ensuring harmonisation and consistency across all regulatory products is necessary. For that reason, we would propose alignment between the arrangements laid down in par. 90 of the draft GL and the provisions contained in the EBA GL on definition of default, which provide for a probation period of three (3) months.
In addition, credit institutions should be allowed to make adjustments on the representativeness of data (par. 109) that lead to decrease in LGD estimates, when specific actions or decisions are taken. That possibility applies mainly to credit institutions having experienced a prolonged downward period and it is reasonably estimated that a reversal is due to happen.