European Savings and Retail Banking Group (ESBG)

Very material, as a matter of fact. One ESBG member explains that a large portion of models would require material changes, particularly in respect of the LGD modelling.
With regard to retail and SMEs, we don’t see any operational limits. Regarding large corporates/low default portfolios (LDP), we don’t see operational limits either, but detect obviously unstable measurements.
ESBG believes that benchmarks may not be representative if a different approach is optional when it comes to additional drawings. LGD and EAD should be viewed together for benchmarking purposes if this optionality remains.
d) One ESBG member states that financial ratios are used directly without adjusting them for current economic conditions, hence giving a point-in-time (PIT) effect. With regard to large corporates, they use non-financial information that tends to be through-the-cycle (TTC).

e) This is not applicable to one ESBG member. They use a common master scale (PD-bands into grades) across all their portfolios.

f) They are weighted between normal periods and downturn periods and almost always higher than the observed average default rates, as one ESBG member reports. They typically use 10-20% weight on severe downturn periods.
We agree.

One ESBG member indicates that, as of now, they use non-overlapping windows. Short term contracts are not included.
One ESBG member points out that they partially carry it out in the validation processes.
Yes, mortgage and qualifying revolving retail exposure (QRRE) portfolios rely heavily on behaviour information, including current accounts and days past due.
Yes, we agree.

Furthermore, we believe that without guidance on principles for the quantification of the margin of conservatism (MoC), it is unlikely that there will be consistency across banks. However, we would also like to point out that quantifying and documenting the MoC requires great effort. In some cases, there remain doubts whether it will be feasible to carry out the modifications regarding the estimation of the LGD. In other cases, some information may not be available to institutions, be it that they do not receive it or be it that it does not exist, and burdensome deficiencies assessment, analysis and documentation are to be expected. Moreover, important IT developments are required. In short, there are some operational concerns.

Apart from that, the draft Guidelines require a specific margin for each deficiency as defined in the Article 30: “Any occurrence of any of the triggers referred to in paragraph 25 should result in the application of a margin of conservatism (MoC). Where more than one trigger occurs, a higher aggregate MoC should be applied […]”. We think that it should be possible to apply one MoC if the identified deficiencies are related. In this case a separate evaluation of the MoC would lead to double cover of the deficiencies which are interconnected. It also might be difficult to find an appropriate methodology to estimate the impact of a particular deficiency separately from other deficiencies and other factors impacting the estimation. Hence, ESBG thinks that a common margin for related deficiencies should be allowed.

Considering all this, ESBG is not entirely convinced that the costs and benefits of quantifying and documenting the MoC are perfectly balanced.
European Savings and Retail Banking Group (ESBG)