CP10 (Full Document) - European Banking Authority

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161. However, this should not give institutions an incentive to adapt their risk management processes to a lower standard in order to fulfil this criterion. The institution should not change the treatment of an exposure in preparation for the IRB approach. As far as Art 86(4)(b) is concerned, a company that is treated by an institution’s sales management as a corporate because it is an important client should not be eligible for the retail exposure class, regardless of whether it is shifted into the ‘real’ retail exposure class for regulatory purposes. 162. Art 86(4)(d) implies that the number of SMEs ‘treated as retail’ is large enough to generate reliable estimates of parameters. This criterion should be evaluated not only in terms of the absolute number of exposures, but also relative to the length and quality of the time series and the quality of the rating system. if the rating system is the same as for corporate exposures It should be possible to validate the rating system for exposures ‘treated as retail’ on a standalone basis, particularly if the rating system is the same as for corporate exposures. The parameter estimates as well as the capital requirements calculations may be derived on a pooled basis, in contrast with the individual parameter estimates that are possible for individual obligors in the corporate exposure class. 3.3.1.1.2. Qualifying revolving retail exposures 163. Annex VII, Part 1, Paragraph 11 of the CRD lists five conditions (indents (a) to (e)), which exposures must meet in order to be assigned to the qualifying revolving retail (QRR) exposure class. 164. The term ‘individuals’ used in indent (a) is equivalent to ‘individual persons’ in Article 86(4)(a). The term ‘revolving’ used in indent (b) is defined sufficiently in the indent. 165. Indent (b) provides that loans must generally be unsecured in order to be included in the QRR exposure class. However, loans in this exposure class may be secured by a general lien that is contractually part of various exposures on the same obligor, as long as the individual exposure is treated as unsecured for capital calculation purposes (i.e., recoveries from collateral may not be taken into account in estimating LGD). The phrase “if the terms permit the credit institution to cancel them [the undrawn commitments] to the full extent allowable under consumer protection and related legislation“ should be interpreted as follows: an undrawn credit line is considered “immediately cancellable” even if consumer protection or related legislation prohibit the institution from cancelling it immediately or set minimum cancellation periods. Compliance with consumer protection regulation should not prevent institutions from classifying exposures that comply with all other criteria as qualifying revolving retail exposures. 166. The EUR 100,000 threshold in indent (c) may be applied at the level of the institution. Subclasses within this exposure class should be Page 40 of 123
differentiated if their loss rates differ significantly. Examples are credit cards, overdrafts, and others. 167. The demonstration of the low volatility of loss rates mentioned in indent (d) must be made at least in the course of the IRB approval process, and afterwards at any time on request. The benchmark level is to be the volatility of loss rates for the QRR portfolio relative to the volatility of loss rates for the other retail exposure subclasses. 168. Institutions should provide data on the mean and standard deviation of the loss rates of all three retail exposure subclasses and the exposure types (credit cards, overdrafts and/or others). The coefficient of variation (the standard deviation divided by the mean) is suggested as a measure of volatility, as it normalizes the standard deviation by the mean. Loss rate should be defined as the realised loss within a fixed period of time, measured as percentage of the exposure class value. Realized losses means writeoffs and value adjustments on the exposures, plus foregone interest payments. 3.3.1.1.3. Retail exposures secured by real estate collateral 169. Annex VII, Part 1, Paragraph 10 of the CRD states that for retail exposures secured by real estate collateral, a correlation (R) of 0.15 shall replace the figure produced by the correlation formula in Paragraph 9. Any retail exposure to which the institution assigns real estate collateral for its internal risk measurement purposes should be classified as an exposure secured by real estate collateral. For retail exposures to which no real estate collateral has been assigned, proceeds from real estate collateral must not be considered for the LGD estimation. 3.3.1.2. Corporate Exposure class 3.3.1.2.1. SMEs in the corporate exposure class 170. In Annex VII, Part 1, Paragraph 4 of the CRD, which requires institutions to substitute total assets for total sales in the modified correlation formula for SME exposures when total assets is a more meaningful indicator of firm size, the term ‘sales’ can be defined as total gross revenue received by a firm from selling goods and services in the normal course of business. For some industries, ‘sales’ needs to be defined more exactly. For example, insurance companies sales should be defined as gross premium income. It is not necessary to come up with uniform definitions, as country specificities may be important. 171. While the CRD requires substituting assets for sales when this is a more meaningful indicator, so far no industry has been identified where this applies. Substitution on a voluntary basis may be possible when the institution can present evidence that this is at least an Page 41 of 123
Page 1 and 2: CEBS CP 10 11 July 2005 Guidelines
Page 3 and 4: ANNEXES ...........................
Page 5 and 6: to use these approaches. 6. The gui
Page 7 and 8: IRB approach can be given only if t
Page 9 and 10: approaches for regulatory purposes
Page 11 and 12: purposes, when the group has submit
Page 13 and 14: efficient running of the process, u
Page 15 and 16: and/or 105 of the CRD, subject to t
Page 17 and 18: 58. Institutions intending to move
Page 19 and 20: translated, supervisors will organi
Page 21 and 22: 76. The issues that supervisors are
Page 23 and 24: holding company, the competent auth
Page 25 and 26: · A new approval process shall not
Page 27 and 28: · Institutions may not be ready to
Page 29 and 30: 2. Asking institutions to notify su
Page 31 and 32: 116. ‘Immaterial’ should refer
Page 33 and 34: 128. The EU Council has proposed th
Page 35 and 36: should start with inputs, and those
Page 37 and 38: to be only broadly compliant with t
Page 39: institutions to be able to identify
Page 43 and 44: payments are originating from the s
Page 45 and 46: any of its subsidiaries in full, wi
Page 47 and 48: 197. As a general rule, the rating
Page 49 and 50: · Their discounting method results
Page 51 and 52: grades. In this case, all of the re
Page 53 and 54: of challenges, including choosing t
Page 55 and 56: 228. In principle, supervisors do n
Page 57 and 58: prices on defaulted exposures, and
Page 59 and 60: LGD estimation, they have to be tak
Page 61 and 62: The exposure value for the followin
Page 63 and 64: investigating the potential drivers
Page 65 and 66: advisable in some circumstances not
Page 67 and 68: terms) the proof of consistency wit
Page 69 and 70: 302. The information used in credit
Page 71 and 72: exposures to obligors or facilities
Page 73 and 74: Pooled data sets for good predictiv
Page 75 and 76: inputs to the IRB approach. Supervi
Page 77 and 78: used to quantify the risk parameter
Page 79 and 80: years for the economy as a whole, a
Page 81 and 82: · Institutions must be able to bri
Page 83 and 84: Benchmarking the outputs of interna
Page 85 and 86: model, and the internal use of the
Page 87 and 88: systems” (Annex VII, Part 4, Para
Page 89 and 90: · Examining reports from Internal
Page 91 and 92:
organisational point of view (e.g.,
Page 93 and 94:
conclusions are wellfounded. Inte
Page 95 and 96:
401. The role played by the CRC fun
Page 97 and 98:
subsidiary, or by different subsidi
Page 99 and 100:
way of a formal notification). The
Page 101 and 102:
· The rollout plan should have a
Page 103 and 104:
Principles and examples 1. The purp
Page 105 and 106:
etween systems, recording of data t
Page 107 and 108:
· The definition of an appropriate
Page 109 and 110:
incorporate forwardlooking elemen
Page 111 and 112:
· Approving proactive risk managem
Page 113 and 114:
frequency and format of the interna
Page 115 and 116:
· Development of internal processe
Page 117 and 118:
· Understanding the extent and nat
Page 119 and 120:
‣ If not, inform the other superv
Page 121 and 122:
the decision. ‣ Agree on the proc
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