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European Savings and Retail Banking Group (ESBG)

We agree with the proposal (To use either accounting value or fair value) but some of our members prefer to use the accounting value (see also answer to Question 3).
We agree with the proposal.
In general, the accounting values are used for determination of the exposures of banking book positions. Although in some special cases fair values for certain type of instruments (e.g. bonds) are taken into account in Pillar 2 framework (even if treated at amortized costs) we think that the accounting value is the best common basis for the Pillar 1 framework of banking book positions.

Accounting values are updated at least monthly. Fair Value calculation of banking book positions de-pends on the type of instrument. For traded instruments like bonds, the fair values are generally updated daily, but at least monthly. For non-traded instrument like loans and deposits, a fair value calculation is following the quarterly IFRS reporting frequency.

The foreign exchange component is updated on a daily basis.
ESBG thinks that the inclusion of items at historic costs as a Delta 1 positions is in general overly con-servative. As these positions do not revalue with FX-movements, an efficient hedge for risk weighted assets (RWAs) generated from historic costs item is impossible. Impairments due to FX movements depend on many parameters and the risk of impairment due to FX movements may be remote.

In addition, the Delta 1 approach is in contradiction to the proposed treatment under the internal model approach where the risk of impairment due to FX should be modelled by the bank, see also Question 9.

Inclusion of items at historic cost is directly connected to the EBA Draft Guidelines on the treatment of structural FX under 352 (2) of the CRR. Regulatory approval for exclusion of items at historic costs generate an overly complex, resource and time consuming process.

Additionally, we see a possible overlap between inclusion of subsidiaries at historic costs and systemic risk buffer and O-SII buffer that would lead to double coverage of the same risks.

Finally, we would recommend allowing the full exclusion of items at historic costs or to establish criteria for reduced risk weights depending on probability for FX induced impairment.
We would like to point out that items at historic costs are currently not included in Pillar 1 capital re-quirements. These items are included in the Pillar 2 framework.
For some of our members, at consolidated level the items in FX held at historical costs are not material. Whereas at solo level participations in subsidiaries held at historical costs are material (between 5-10% of solo balance sheet).
ESBG agrees with the proposal.
We agree that a risk adjusted treatment for historic cost items in the internal model approach is a suita-ble framework for fostering management of this risk type. Despite the fact it is increasing the complexity of the internal model it is still superior to a Delta 1 approach as foreseen for the standardized approach. See also the answer to Question 4.
There is no detailed concept available, but we think that the accounting standards are the basis for such a model. We expect that the model can be based on similar techniques as currently applied for event-driven tail risk quantification.
Given the lack of detailed analysis at this stage we cannot give a detailed estimate However, we expect that the standardized approach is in general more conservative than an internal model approach. Delta 1 approach will result in more conservative exposures in the standardized approach and, in addition, the diversification benefits between currencies might be more pronounced in the internal model.
ESBG agrees.
European Savings and Retail Banking Group (ESBG)