Response to joint Consultation on draft Implementing Technical Standards on the mapping of ECAIs’ credit assessments

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Q2. Do you agree with the proposed definition of sufficient for the number of credit ratings and the rest of the requirements imposed for the calculation of the short-run default rate when a sufficient number of credit ratings is available?

• Article 3 (2) – Similarly to our comment regarding Point 19 above under Q1, AFME members believe that a period longer than 3 years should be used.
• Article 4 (b) – Further clarity is required on the quantification of “sufficiently numerous”
• Article 5 – The article proposes to count withdrawn ratings at 50% in the denominator. AFME believes that if there are grounds to think that the ratings were withdrawn due to imminent default, they should be considered as defaults. This would imply that the withdrawal should count at 100% in the numerator. Additionally, more clarity is sought why 50% has been chosen for the calculation. We recommend a more accurate weighing methodology to better reflect when in the observation period the withdrawal was made.

Q4. Do you agree with the proposed options to calculate the quantitative factors when a sufficient number of credit ratings is not available?

The method for calibration of the default rate by the ECAI and in particular the suggested rule to assess the minimum size of the pool used for calculation of the default rate should not be limited to the unique approach “number of rated items to be greater or equal to the inverse of the expected long-run default rate”. In this particular case various approaches are possible and should be allowed, such as:
• Bayesian inference to take properly into account the prior estimate (“expected long-run default rate”) and the observed distribution;
• Monte Carlo simulations or boot-strapping to calculate proper confidence intervals around values in the available data history.

Q5. Do you agree with the proposed use of the default definition used by the ECAI as a relevant factor for the mapping? Do you agree with the proposed assessment of the comparability of the default definition of an ECAI? If not, what alternatives would you propose? Do you think that the adjustment factor depends on certain characteristics of the rated firms such as size and credit quality and if so, how can this be reflected?

No comments

Q6. Do you agree with the proposed use of the time horizon of the rating category as a relevant factor for the mapping? Do you agree with the proposed use of transition probabilities to identify the expected level of risk during the three-year horizon?

No comments

Q7. Do you agree with the proposed use of the range and meaning of credit assessments as a relevant factor for the mapping? Do you agree with the proposed restriction of this factor to adjacent rating categories?

No comments

Q8. Do you agree with the proposed use of the risk profile of a credit assessment as a relevant factor for the mapping?

• Article 12 – We believe that the minimum standard for assigning creditworthiness should not be limited to just size, sector and geography. AFME believes that the metrics for size should be better defined and that historical and projected financial performance should also be considered.

Q9. Do you agree with the proposed use of the estimate provided by the ECAI for the long-run default rate associated with all items assigned the same rating category as a relevant factor for the mapping? Do you agree with the proposed role played by this factor depending on the availability of default data for the rating category?

No comments

Q10. Do you agree with the proposed use of the internal mapping of a rating category established by the ECAI?

We would like to confirm that the internal mapping for specialised ratings, such as short US municipal ratings, would also be captured by this provision.

Q11. Do you agree with the proposed specification of the long-run and short-run benchmarks? Do you agree with the proposed mechanism to identify a weakening of assessment standards?

• On back testing and monitoring of the mapping breach, we believe that the principal objective of the ITS should state: “an objective breach-criteria (for example default rates breaching the benchmark by a magnitude that is material in the context of the firm’s own portfolios and over a notably long and stable period) must be defined by the institution. The mapping must be back-tested regularly against the breach-criteria as described in the regulatory approval process.
• Regarding the formula for confidence interval, we understand that it’s a binomial confidence interval. However, we recommend that the EBA seeks for a more robust approach than the addition of two defaults to the populations. This methodology will lead to higher tolerances for the strongest rating categories which seems inappropriate.

Q12. Do you agree with the analysis of the impact of the proposals in this CP? If not, can you provide any evidence or data that would explain why you disagree or which might further inform our analysis of the likely impacts of the proposals?

We agree with paragraph 34 of the Cost Benefit Analysis that the main impact of this regulation will be that on the capital requirements of banks. We would note that the impact will not be confined to the standardised approach, since ratings are used in other parts of the regulatory framework – for example the ratings based approach for securitisation, collateral and guarantor eligibility and large exposures exemptions.

Without the publication of the associated mapping tables, it is therefore impossible for us to comment on the impact of the draft ITS.

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AFME