The implementation of this RTS (along with the GL) would be unduly burdensome and complex to maintain such a framework in the model lifecycle process and would create a labyrinthine system as the analysis of period downturn must be done for each economic factor, each downturn period, each type of exposure / asset class etc… We think that some flexibility should be left to banks in order to accommodate the granularity and diversity that banks may have in their classification.
As for the 20 years period for economic factors, they may not be available for all types of data, especially related to commercial real estate asset classes
Also, the most concerning point is how we would correlate the economic factor series with the internal loss data:
• As articles 145 and 176 CRR require a 3 or 6 years of historical data approach, it could be considered that the RTS is illegal or at least un fair
• The internal realized LGD will not be available for twenty years of historical data.
• The link between LGDs and economic downturn is partially covered by the counter-cycle buffer required by the macro-prudential authorities
• The link between LGDs and economic factors may not be simple or evidenced using statistical models
Institutions may face strong multiplicity / iteration in order to respect regulatory requirements and would welcome strong incentives to maintain a risk-sensitive framework and avoid unnecessary burden. Especially, we foresee the settlement of a more harmonized “downturn estimation”, which is as of today complex to implement, interconnected with:
• Determination of ECL using IFRS 9 models and its possible review with a new “downturn” approach
• The consistent implementation of IRB Repair program within ambitious timeline and the related supervisory process (2-step approach when applicable, application for model changes…)
• Overlaps with macro-prudential policies which require counter-cycle buffers to tackle the economic downturn
• Rationale for prior experience and data storage requirements which is based on a 3-years approach
• The challenge to keep a consistent framework with the use of internal models, in the context of the finalization of Basel III agreements and especially its European transposition
• The possible application of prudential backstop in NPL and its indirect impact on ELBE / LGD-in-default
We think that flexibility and efficiency are primordial in such context, in order to keep within institutions, existing methodologies which already work especially when they do not show any form of arbitrage and do not understate the final level of LGDs.
Most of comments made on the LGD’s side work for the CCF’s side. As for CCFs, the link between CCFs and economic factors will be even harder to evidence using statistical models.
Additionally, we suggest that the GL should mention explicitly that they do not apply to conversion factors in order to insure an harmonized understanding of the supervisors, as it is mentioned in the GL on PD-LGD estimation and treatment of defaulted assets.