Raiffeisen Bank Polska

Minimal initial coverage threshold defined in Article 4(2) of the RTS uses the definition of “the set of relevant exposures” from article 1(3), which discriminates exclusions from the IRB specified in Article 150(1) (c) of the CRR. Exclusions from perspective of materiality and perceived risk profile are not subtracted from the set of relevant exposures as other exclusions are. Shouldn’t these exclusions be consequently, since they are subject to restrictions defined in RTS and they are subject to approval by a competent supervisor? The RTS itself (page 8) provides rationale, that the categories of exposures already exempt under Article 150 should not be taken into account to limit the permanent use of the SA since they fulfil all the necessary criteria to be treated under this approach.
Article 1(1) of the RTS defines risk-weighted exposure amounts for needs of the RTS, as value “calculated in accordance with the approach which that institution uses for the calculation of its risk-weighted exposure amounts and its expected loss amounts”. This means, that IRB institutions use risk-weighted exposure amounts calculated according to IRB (with consideration of PPU and roll-out) and non-IRB institutions (e.g. institutions applying for IRB) shall use SA figures. According to this assumption an institution after being granted permission to use IRB must change its calculation of risk-weighted exposure amounts for needs of PPU monitoring. This may lead to situations, in which immediately after IRB approval, the limits on RWA are not met (due to lower risk-weighted exposure amount in IRB than in the SA). In other words, after the change in the calculation previously immaterial portfolios may become material with regard to RWA limits. It may also result in a drop in IRB coverage below the initial minimum threshold of 50%. The proposed approach may undermine objectivity and stability of regulatory requirements. Calculating RWA according to the SA for needs of Article 150 of the CRR and the RTS should eliminate this problem.
Calculation of the threshold in Article 4(2)(b) of the RTS should include relation to “the total risk-weighted exposure amount of the set of relevant exposures” instead of “the set of relevant exposures”."
Proposed 8%-thresholds for ‘central governments and central banks’ and its rationale are in opposition to the criteria perceived from the perspective of modelling, e.g. if the entire exposure is to one counterparty (one central government) and it exceeds the level of 8% of the exposure value, it still fulfils both conditions provided in point (a) of the article 150(1) of the CRR. The materiality criterion does not provide ‘level playing field’ and may discriminate the actual risk profile among institutions, e.g. one institution from the example above and another institution with exposures to many (immaterial) central governments and central banks not exceeding 8% threshold. Since the rationale for implementing the 8% limit is based on possibility, that “a large number of immaterial counterparties may also give rise to a large total exposure in each of these exposure classes”, therefore the 8% limit should perhaps restrict only such cases.
Alternatively, current construction of article 2(1) of the RTS, which assumes fulfillment of all criteria (a) –(c), may be modified with respect to the rationale provided in the RTS.
The proposed draft RTS provides cumulative thresholds/limits, whereas no definition of the materiality is provided. Does this mean, that a single sub-portfolio excluded under Article 150(1)(c)of the CRR may be deemed immaterial as long as the threshold is not breached?
Point (b) of Article 3 of the RTS includes an error: instead of “the total risk-weighted exposure amount of all relevant exposures to which the institution currently applies the Standardised Approach is equal to or smaller than [8]% of the set of the relevant exposures referred to in Article 1(3)” should be: the total risk-weighted exposure amount of all relevant exposures to which the institution currently applies the Standardised Approach is equal to or smaller than [8]% of the total risk-weighted exposure amount of the set of the relevant exposures referred to in Article 1(3)”.
Proposal 1 seems more accurate, however may be more challenging for supervisors, as far as calculating the IRB capital requirements based on assumed parameters. The first proposal includes also a 15% threshold on PPU (on entire Article 150(1) of the CRR), what exceeds EBA's mandate provided by the Article 150(3) of the CRR.
Local regulations enabled so far exclusions up to 15% of RWA according to the SA in case of criterion in Article 3 of the RTS. The proposed thresholds may put pressure on both IRB institutions and institutions applying for IRB.
In comments to Question 1 the construction of 8% thresholds in Article 2(1) of the RTS was disapproved. However, if this comment is not taken into consideration in final RTS, then the proposed level of 8% (concerning the exposure value, not risk-weighted exposure amount) may seem too stringent for 'central governments and central banks' exposure class in case of some institutions.
Thresholds should be consistent on individual and consolidated basis. However, application of thresholds on consolidated level should put no additional pressure on subsidiaries, i.e. not resulting from individual situation, but resulting from portfolio specificity on the group level. On the other hand, influence on consolidated values of local specifies and approval of IRB scope by competent authorities on local level should be understood and accepted by home supervisors.
Piotr Banasiak
R