Response to cP on Guidelines on Credit Risk Mitigation for institutions applying the IRB approach with own estimates of LGDs

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Question 1: Do you agree with the proposed clarifications on eligibility requirements in accordance with Article 181(1)(f) of the CRR?

No

Question 2: Do you agree with the proposed clarifications on the assessment of legal certainty of movable physical collateral? How do you currently perform the assessment of legal effectiveness and enforceability for movable physical collateral?

No

Question 2: Do you agree with the proposed clarifications on the assessment of legal certainty of movable physical collateral? How do you currently perform the assessment of legal effectiveness and enforceability for movable physical collateral?

No

Question 4: Do you have specific concerns related to the recognition of collateral in the modelling of LGD? How do you currently recognise collateral in your LGD estimates?

No

Question 5: What approaches for the recognition of the unfunded credit protection do you currently use? What challenges would there be in applying approaches listed above for the recognition of unfunded credit protection?

We use the modelling approach (art.29a); for the part of exposure secured by UFCP of a no-IRB guarantor we use the risk weight applicable under the Standardised Approach as of art.29b if convenient

Question 6: Do you have any specific concerns related to the issues excluded from the scope of the Guidelines?

Yes. The main concern refers to point 1 shown in the explanatory box. The art. 29b (STD on AIRB) approach must be an option to be choosed in case of convenience and not an obligation. Penalizing the presence of a guarantee could lead to management anomalies of non-activations of guarantees valid for

Question 7: Do you agree with the proposed clarification regarding the parallel treatment of ineligible UFCP and ineligible FCP? How do you currently monitor the cash flows related to ineligible unfunded credit protection and how do you treat such cash flows with regard to the PD and LGD estimates?

No. In order to define the guarantee driver in the estimation of the LGDS model, all the registered guarantees are used without verification of elegibility (the information is not present in the historical series). This approach is conservative: to include in a guaranteed cluster something for which the CRM may not affect recoveries (like ineligible collateral) it put in that cluster positions with higher LGDS because actually unsecured; this approach not affect the unsecured cluster with locations that might instead have a typical recovery process of the guaranteed records. The decision on the two approaches (the above one that is a priori conservative without expensive refinements or the art.31 based on only elegible credit protection but with the effort of monitoring activities and any adjustments) must be a choice of the institute according to its internal evidence.
Only eligible CRM is used in application for the calculation of regulatory requirements

Question 8: Do you agree with the proposed rules for the application of the substitution approach? Do you see any operational limitations in excluding the guaranteed part of exposure to which substitution approach is applied from the scope of application of the LGD model for unguaranteed exposures?

No. In the LGDS model, all the recoveries are included in accordance with the recordings made by the bad loans office; in fact it is the operator to impute cash flows according to the rules of the Civil Code. It's possible to register the origin of the collection but it's not an information directly used in the model in fact the credit protection is included as a cluster to be assigned to the Whole record and the LGDS observed is calculated by facility based on all recovery irrespective of provenience.

Question 9: Do you agree with the proposed rules for the application of the modelling approach?

Yes. No observations.

Question 10: What challenges would you envisage for back-testing the substitution approach? Do you agree that the back-testing should be performed rather at Expected loss level? Do you have any approach currently in place for the back-testing of substitution approach?

We do not use the substitution approach in art29a.

Question 11: Do you agree with the proposed guidance for the estimation of the LGD of comparable direct exposure towards the guarantor? What concerns would you have about the calculation of the risk weight floor?

No. The cases reported are not clear; they would have been welcomed examples on less theoretical cases but more likely to be found in application.

Question 12: Do you consider portfolio guarantees as a form of eligible UFCP? Do they include cases where the guarantee contract sets a materiality threshold on portfolio losses below or above which no payment shall be made by the guarantor? Do they include cases where two or more thresholds (caps) either expressed in percentages or in currency units are set to limit the maximum obligation under the guarantee? How do you recognise the portfolio guarantees’ credit risk mitigation effects in adjusting risk parameters?

No observations.

Name of organisation

GMPS

Contact name

No

Phone number

No