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ESBG response: Commission exploratory consultation on Basel III finalisation

ESBG response: Commission exploratory consultation on Basel III finalisation

​​​ESBG response to the Commission exploratory consultation 

on the finalisation of Basel III

​ESBG (European Savings and Retail Banking Group)

Rue Marie-Thérèse, 11 - B-1000 Brussels

ESBG Transparency Register ID: 8765978796-80

Submitted: 12 April 2018

>> Read .pdf version

Dear Sir/Madam,

Thank you for the opportunity to comment on the Commission's exploratory consultation on the finalisation of Basel III. We would like to share with you the following reflections that we hope will be taken into account by the Commission.

0.) ​Introduction

ESBG would like to stress that the Commission's short deadline did not allow our members to analyse into detail the impact of the Basel revision. This consultation comprises sixteen questions, many of which involve complex issues that require extensive calculation exercises to be conducted by institutions. Such exercises could in many cases take several months to carry out, rendering an adequate response to the consultation virtually impossible. It should be noted that the scope for such efforts is exceptionally wide: the consultation covers everything from the standardised approach for credit risk, internal rating-based approaches for credit risk, the credit valuation adjustment (CVA) risk and operational risk frameworks, to the output floor. In this regard, ESBG would like to express its concern that the consultation period was clearly too short to ensure valid, qualitative and substantial responses from a broad variety of stakeholders.

a)     What are your views on the impact of the revisions on financial stability?

In the aftermath of the financial crisis, regulation has become not only more intensive and extensive, but also more complex. Standards of the Basel committee are intended for, and tailored to internationally active banks, which are usually large and complex. As a result, the rules themselves have become large and extremely complex, and the “Finalisation of Basel III" is not an exception.

ESBG believes that its implementation in the EU regulatory framework should reflect the proportionality principle taking into consideration the nature, scale and complexity of the activities of European credit institutions.

In order to keep away from unintended effects to financial stability and minimise the impact on the financing of the economy, the reforms should be implemented following a quantitative impact study (QIS) with current data (note that BIS QIS were carried out using past figures taken from the 2015 balance sheets) and the necessary adjustments to avoid a significant increase in capital requirements at EU level. Therefore, ESBG welcomes the European Commission's announcement to carry out a new quantitative impact study (QIS). In our view, sufficient time should be allowed so that the possible impact on banks may be assessed in a sufficient manner. The implications of the Basel Committee's decisions for European banks and the European economy need to be carefully analysed in detail.

It should not be forgotten in the analysis, the impact the reform will have on risk sensitivity in capital requirements and, more generally, in capital management. Although, improving risk weighted assets (RWA) comparability is a valid objective that needs to be achieved, it is important to be aware that in the search of comparability of capital ratios across banks and jurisdictions there may be a loss in risk sensitivity in bank's capital framework. It is necessary to evaluate if the adequate risk sensitivity of capital requirements has been preserved and to continue reinforcing the use of internal models as a management tool.

Moreover, transitional arrangements allowing gradual adaptation to the new framework are needed. This is particularly relevant as the reforms only include transitional periods for the output floor, however, a significant part from the increase on capital requirements comes from the rest of the agreements. It would be desirable that they were long enough to help credit institutions adaptation to the new framework. For example, the approach used in the Regulation (UE) No 575/2013 (CRR) could be followed: it entered into force on 1 January 1 2014, and after a transitional period will fully apply in 2019.

Ongoing regulatory initiatives are increasingly asymmetric in their impact on the banking landscape. Banking regulation after the global financial crisis has a strong tendency towards increasing the rift between “too-big-to-fail" banks on the one side and “too-small-to-survive" banks on the other. If Basel IV were not to be implemented in a proportionate way this would again penalise smaller and medium-sized banks across Europe to no additional benefit. The rules tend to overburden small institutions. The main problem is the work involved in meeting the requirements and demonstrating that they've been met. Therefore, the new rules will make the regulatory burden even heavier and would act as an additional handicap for small banks. Banks that are already under pressure from many sides like the digitalisation of banking or the low-interest-rate environment.

It cannot be in the interest of the European legislator to overburden smaller institutions with rules that were designed for their larger peers. This would intensify the pressure to consolidate.

Regarding the adaption of the international Basel standards in European law, ESBG believes that it is essential that the law reflects national and European particularities. Jurisdictions are free to apply a different set of rules to smaller banks which operate solely within their national market and pose no threat to international financial stability. Most countries already have less restrictive rules for smaller banks in order to ease the operational burden on them. The regulatory approach of the US, for example, is tailored. US regulators have relied upon asset thresholds to apply regulation. The international Basel III standards are implemented for US. “Global systemically important banks" (G-SIBs) and other international active banks with $250bn in assets only. The US tiered model is clearly 'proportionality by exemption' which results in a much narrower set of regulatory rules applied to small and medium-sized banks.

However, the current European approach to banking regulation clearly resembles a one-size-fits-all approach with common binding rules for all banks and virtually no exceptions. The very term 'Single Rulebook' is unambiguous in this regard. Since Basel II and its implementation in the EU, there are detailed technical rules of risk-weighted capital regulation that apply to all credit institutions, even though these rules are oversized for many smaller banks that operate regionally. But a “one size fits all" approach does not always reflect national different banking systems. As such, we think the EU jurisdictions have to apply a less strict set of rules to smaller, only locally active banks that pose no threat to international financial stability. In ESBG's opinion, the Basel framework needs to be adapted for smaller credit institutions under the principle of proportionality.

​b)     What are your views on the impact of the revisions on the financing of the economy?

Taking into account the recalibration – especially the “output floor" - carried out by the Basel Committee in December, capital requirements may increase in Europe (see European Banking Authority's first quantitative impact study of the Basel reform package). It cannot be excluded, that there will be a negative impact on the banking industry's lending capacity.

Although banks must be allowed to achieve the necessary profitability levels so that they can grow their capital base and continue expending their lending to the real economy, with the adoption of the proposed prudential measures, European banks would see their return on equity ratio further drop, significantly.

Therefore, ESBG believes that there is a risk that many banks would no longer be able to perform their intermediation role. It would also lead to reduced dividends, impacting long-term savers, as banks would not easily be able to increase their capital through other means. Eventually, the combination of the factors already impeding bank profitability and additional capital requirements will undoubtedly entail, as an undesired consequence, a selective reduction of risk weighted assets and the increase of bank's costs, which will need to be passed on to customers, be it households, SMEs or corporates.


1.) Standardised approach for credit risk (SA-CR)


a)     What are your views on the revisions? Please provide details.

ESBG is aware that the goal originally set by the Basel Committee to keep the capital requirements stable compared to the current SA-CR is not achieved to a large extent. For example, the capital requirements seem to clearly increase altogether, in particular in the bank and corporate exposure classes, for exposures secured by real estate and for off-balance sheet exposures. Hence, this is no longer just a shift of the capital requirements within the individual exposure classes. According to the systematics, the risk weights should not be used to increase the capital requirements altogether. Other instruments are implemented for this. This is worrying in particular because banks can no longer counteract this tightening of existing regulations by means of allocative adjustments to the credit portfolio, as all exposure classes are affected.

Moreover, we believe it has to be borne in mind that the changes to the SA-CR also have effects on other regulation initiatives. For example, the TLAC/MREL requirements are calibrated on the basis of the leverage ratio and the RWAs. An increase of the capital requirements under the SA-CR might then let the capital requirements all in all increase even further.

Regarding external ratings, in ESBG's opinion, the Commission should continue to rely on external ratings. A rating by a recognised rating agency includes far more information than the parameters suggested in the consultation paper can even begin to provide. An essential advantage of external ratings is the fact that they consistently take account of certain forward-looking components. Consequently, ratings reflect risks of an exposure much more precisely. That substantial added value is completely lost when indicators determined individually by banks are resorted to. Although external ratings had been criticised in connection with the subprime crisis, the ratings of banks and corporates are fundamentally different kinds of rating methods. Furthermore, the Basel Committee itself, when revising the securitisation framework, did not go so far as to completely do without external ratings.

Furthermore, the uniform use of external ratings guarantees comparability of capital requirements. This is not guaranteed for different risk drivers.

In addition, please find below ESBG's considerations with regard to specific topics:


Exposures to banks


  • Regarding the Standardised Credit Risk Assessment Approach (SCRA) ESBG has the following considerations:
    • The classification of a bank exposure in Grade B or C depends on its repayment capacity however paragraph 28 is ambiguous when it says “(...) that have a material default risk and limited margins of safety." Clarifications would be needed.

    • One of the triggers to classify an exposure to banks into Grade C is the following: “Where audited financial statements are required, the external auditor has issued an adverse audit opinion or has expressed substantial doubt about the counterparty bank's ability to continue as a going concern in its financial statements or audited reports within the previous 12 months." In our opinion, this trigger will be beneficial to banks based in jurisdictions where audited financial statements are not required, and detrimental for banks incorporated in jurisdictions where they are.


  • In ESBG's opinion, the due diligence process cannot consist of comparing external ratings with a separate internal credit analysis for every single borrower in the form of mapping, for instance. We believe it should be sufficient to check at a higher level – e.g. certain homogeneous groups of borrowers, certain asset classes or possibly only per agency – that the risk weights assigned on the basis of external ratings are appropriate to the risk profile and characteristics of the borrowers. It should also be possible for a central unit to carry out these checks rather than requiring each individual bank to perform the task itself. Any other interpretation would lead to an enormous amount of additional work and expense which, for smaller banks in particular, would be virtually unmanageable. We would appreciate clarification of this point. For the reasons outlined above, we are opposed to due diligence which assesses individual borrowers in more in-depth detail than the credit risk analysis before granting a loan.


ESBG understands the requirement to perform due diligence “on a regular basis (at least annually)" to mean only that the analysis has to be performed at regular intervals, not on an ad-hoc basis. We would ask for clarifications on this point, too, in the interests of consistent implementation and handling.


Exposures to corporates

  • ESBG welcomes the proposal to apply a lower risk weight of 85% for exposures to SMEs, since it recognises the BCBS intention to support SME funding. We nevertheless believe the reduction in the risk weight does not yet go far enough compared to the equivalent requirement in the EU, for example. In the interests of consistency and to avoid overstating the risks of SMEs, a 75% risk weight is needed.
  • The majority of companies within the EU do not have an external rating. Unrated companies would under the revised standardised approach receive a flat risk weight of 100%. Such a risk weight could especially reduce the supply of credit to mid-size companies that do not qualify for the definition of corporate SME's. Banks in jurisdictions that do not allow the use of external ratings for regulatory purposes may assign a 65% risk weight to both rated and unrated investment grade corporates, while a 100% risk weight apply to all other corporate exposures. The highest risk weight in jurisdictions that allow the use of external ratings is 150%. If an investment grade classification based on internal assessment is allowed in jurisdictions that do not allow the use of external ratings, this approach should also be allowed in jurisdictions that allow external ratings. In ESBG's view, IRB banks should be allowed to use their regulatory approved internal ratings for the purpose of classifying corporate exposures as investment grade or even assigning them to the external rating buckets in paragraph 40 of the revised Basel III standard.


Real estate exposures

  • Taking into account that (i) the residential real estate market comprises an important part of the banking book and (ii) non-performing loan rates have not reached high levels during the recent crisis (max 5%-6%), ESBG considers the risk weight increase for this category as not justified, thus it should be reconsidered with the aim of avoiding capital requirement increases and credit reduction.

In the case our proposal is not taken into consideration, we propose applying one of the following two options: (i) the introduction of a long enough phase-in period, in order to give banks time to adapt to the new requirements, or, (ii) the application of the new requirements only for new residential real estate exposures, and not for legacy ones (it will give banks time to adapt their commercial policies since this kind of loans are usually long term loans). Long-term loans that have already been granted should not be made subject to a new regime in the middle of their life cycle.

  • ESBG believes that the real estate exposure class could be negatively affected if the revision to the Basel III standard is implemented into EU legislation without any adjustments. The concept of a loan-to-value (LTV) based on value “measured at origination" has many drawbacks.

The use of original valuation may drive borrowers to refinance on markets where property values increase. Implications could be lending at shorter loan maturities enabling regular refinancing with new lenders or the taking of other initiatives like property overhauls with the sole purpose of being able to count for increases in property value. The condition incentivises churning of mortgages, effectively the opposite of originate-to-hold. We find it hard to believe that the intention with the revised Basel standard is to create such incentives to the functioning of the markets.

Implementation in the EU must ensure transparency, predictability and be easy to operationalise. This is necessary in order to ensure that the implementation does not incentivise regulatory arbitrage through unintended measures taken by market participants only aiming at capitalising on increasing property values.

Furthermore, the term LTV (at origination) must be comprehensible, predictable and it must maintain a clear connection to economic fundamentals as collateral value is an important component in loan pricing. Banks must be able to explain, motivate and provide transparency in pricing to customers. The revised Basel standard concerning the “at origination" term does not provide the conditions to comply with this prerequisite, since actual risk in the collateral dimension is disregarded and replaced by the arbitrary measure of value-at-origination.

It is not specified in the Basel document how the (relatively common) case of several loans with different origination dates being secured by the same property should be handled. But even in the simple case of only one loan being secured by a certain property becomes very problematic.

  • ESBG strongly advises that the LTV ratio for residential real estate exposures should be calculated using updated property valuations, adjusted upwards and downwards each time a mortgage loan is prolonged. This would increase the level of risk sensitivity and counteract that customers change from one bank to another only for the reason of obtaining a more accurate value of the property. LTV is only a relevant risk indicator when calculated on the basis of the current property value and not the origination value.
  • Regarding commercial real estate exposures, ESBG is of the opinion that the new standardised approach is not granular enough and that the risk weights connected to the LTV-buckets are too high. In this regard, we suggest that the EU implementation of the recently agreed revised Basel standard should secure that commercial real estate market portfolios with demonstrably low historical losses could be treated with a more risk-sensitive approach. The EU should introduce a bucket for LTVs lower than 50%, with a standardised risk weight lower than the proposed 60%. Making the standardised risk weights more granular on lower LTVs, and introducing one or two more buckets below 60, would capture more accurately the risk profile of the commercial real estate portfolios of several prudent and stable banks in large parts of Europe.


Retail exposures

  • ESBG is opposed to a mandatory application of the granularity criterion (0.2% of the overall regulatory retail portfolio) for differentiating between “regulatory retail" and “other retail" exposures. For smaller banks with a small retail portfolio, this criterion would translate into an extremely small maximum exposure amount, substantially undermining their competitiveness. If a bank had a retail portfolio of 200 million euros, for instance, its exposure to a single counterparty could not exceed 400,000 euros. In our opinion, a rule of this kind would have an especially adverse effect on lending to SMEs. Loans to SMEs would become significantly more expensive and/or lending volumes would be significantly reduced. We therefore strongly recommend that it should be possible to demonstrate the diversification of a retail portfolio using methods other than the mandatory verification of the granularity criterion.

The framework includes in some cases regulatory relief at national discretion, which ESBG believes should be implemented through the Commission. 


b)     How would the revisions impact you/your business? Please specify and provide relevant evidence.

ESBG would like to stress that the proposed standardised approach will unnecessarily raise complexity and costs for all EU banks including small and mid-sized ones, which finance a large part of the economy in many EU countries. Please, see below, in implementation challenges for further details.

In addition, an equity risk increase will occur due to the restriction to internal models and the future application of a fixed standardised weight of 250% (400% for speculative shares).

Concerning ADC exposures, the implementation of the standardised approach at a weight of 150%, in terms of the output floor, will imply a huge gap within methods.


More specifically:


i. How does the revised SA-CR compare to the current approach in terms of capital requirements? Please provide an estimate, if the positive or negative difference is significant in your view, and specify the relevant revision(s).

ESBG would like to stress that the proposed revisions by Basel of the credit risk approach will lead to a significant increase in RWAs across all exposure classes, be they banks and corporate exposures, specialised lending, loans secured by real estate, equity holdings or off-balance-sheet items, etc.

The negative impacts are particularly strong in Europe because these small and mid-sized banks in EU countries represent a large part of the financing of the European economy.


ii. Do the revisions affect certain assets/exposure classes more than others and – if applicable – which of the provisions of the revised framework may create these effects? Please support your view with specific evidence to the extent possible.

There are some exposure classes particularly affected:

​​- Corporates

  • As we already mentioned, the majority of companies within the EU do not have an external rating. Unrated companies would under the revised standardised approach receive a flat risk weight of 100%. ESBG would like to stress that such a punitive risk weight could especially reduce the supply of credit to mid-size companies that do not qualify for the definition of corporate SME's. Moreover, there is an unlevel playing field with jurisdictions that do not allow the use of external ratings for regulatory purposes which may assign a 65% risk weight to both rated and unrated investment grade corporates, while a 100% risk weight applies to all other corporate exposures. 


​​- Real estate exposures


  • In our view, the risk weight increase for this category is not justified. Please, see above our main concerns.


- ADC exposures

  •  In ESBG's view, the increase of the risk weight for land acquisition, development and construction exposures (ADC) to 150%, will jeopardise the ability of the firms in that industry to access funding. We welcome the possibility to risk weighted these exposures at 100% when certain criteria are met, however we consider that the risk weight applied should be in line with the one assigned to the counterparty.

  • Regarding ADC exposures in CRR, ESBG would like to mention the need for a clarification of the definition of 'speculative immovable property financing' since supervisor authorities are interpreting it in such a way that is forcing some credit institutions using Standardised Approach to classify all assets related to land acquisition, development and construction (ADC) – including property development-lending as “Items associated with particular high risk" (according to Article 128(2)(d) CRR), which implies the assignation of a 150% risk weight to these exposures instead of the risk weight applicable to the counterparty.

In our opinion, considering ADC lending as speculative immovable property financing is not adequate because of its nature and risk profile:

    • Assessing its very nature, real estate development activity involves a process of transformation that lasts several years, with a great contribution of added value, when converting land into real estate; a reason why it can hardly be considered as a speculative activity. Also, as regards the definition contained in Article 4 (79) CRR, buying and selling real estate can hardly be considered to be a resale, since a resale implies that the good sold is the same as the good bought, which cannot be applied to a real estate development;

    • From a point of view of it risk profile, a 150% risk weight is being assigned to any real estate developer regardless of the credit quality of the client nor the mortgage guarantees provided (which the regulation considers ineligible) nor the level of reorganization of the transaction. Also, this risk weight far exceeds that applied to other exposures that are much more risky, such as non performing risks provisioned in more than 20%, foreclosed assets, or shareholdings in the same real estate developers.

    • Lastly, it has to be taken into account that the issue exposed above affects only to credit institutions that use the Standardised Approach. Credit institutions that use the IRB Approach are not affected by this issue. This enlarges the enormous and unjustified difference between some institutions and others, and turns the level playing field into a mere aspiration.

    • Therefore, ESBG proposes deleting the reference to development and/or construction from the definition of article 4 (79) CRR. If, finally, it is decided that real estate development should be considered as items with particularly high risk, we consider that it should be expressly included in CRR, avoiding its association with terms like “speculative" or “reselling" that do not fit its nature (through the introduction of a new item (e) in Article 128(2) and its corresponding new definition in Article 4).

c)     Where do you expect particular implementation challenges and why? Please specify

The implementation of the new standards are likely to be challenging. These new standards imply significant changes in bank's internal processes that will now need to be adjusted. Moreover, the introduction of the aggregate output capital floor, with the need to disclose capital requirements under the standardised approach also introduce significant compliance costs. Combining restrictions to parameters estimations, input floors and output floors can also end up introducing undue complexity to the framework. The higher granularity of the standardized approach act in the same way. This approach is increasingly granular due to the fact that it also serves to define the floors for the Internal-Rating Based Approach (IRBA). This will lead to higher IT and compliance costs especially for banks who would find it too costly to adopt internal models, and for whom the standardised approach was meant to be less complex.

Although the Commission's consultation focuses on the impact of the Basel III finalization package, ESBG also believes that the impact of the new market risk framework (FRTB) and the new methods for counterparty credit risk should be taken into account as it is particularly challenging. In December 2017, it was decided at Basel level to postpone the implementation of FRTB and to extend the implementation date to 1 January 2022 (also entry into force of the Basel III finalisation package). Background of the postponement is the complexity of the new market risk framework, with a need to address certain specific issues through the BCBS.

In terms of market risk (FRTB), the foreign exchange (FX) structural risk treatment is very burdensome. The currency risk of shareholdings in less liquid foreign currencies goes from a weighting of 8% to 30% while the new consultation paper considerably lowers this weight.

In this regard, the Commission's proposal to transform Basel FRTB standards into EU law within the ongoing CRRII/CRDV package should be scrutinised. In ESBG's view, since the future binding effect of BCBS recommendations remains unclear, a potential regulatory gap should not be widened.

The due diligence requirement to ensure that the external ratings appropriately and conservatively reflect the creditworthiness of the bank counterparties is also challenging:

  1. ESBG believes it is necessary to take into account that in many occasions banks apply standardised methods due to their difficulty developing internal models, and this requirement if transposed into law in an uproportionate way could end up implying the development of an internal rating system..

    We do agree that banks shall ensure that they have an adequate understanding at origination and on a regular basis of the risk profile and characteristics of their counterparties in order to provide credit even if they use external ratings to assess creditworthiness. Nevertheless this should not be understood as imposing burdensome requirements that would entail the development of internal rating systems what would be particularly overburden to small and medium banks. Therefore, ESBG suggests adapting this due diligence requirement in terms of proportionality and not exceed what is necessary to assure that banks are duly committed with having a proper knowledge of their counterparties.

    To achieve this objective the BCBS requires to have in place effective internal policies, processes, systems and controls to ensure that the appropriate risk weights are assigned to counterparties. However, the characteristics of such policies, processes, systems and controls are not clear. Due to this, ESBG thinks it is important to clarify and align them with current procedures of internal risk management (Pillar 2) always in a proportionate manner.

2.) Internal ratings-based (IRB) approaches for credit risk


a)     What are your views on the revisions? Please provide details.

​ESBG supports the aim of reducing unjustified variability in RWA (as RWA divergence across countries in Europe has endangered capital ratios comparability) but doesn't share the Basel Committee approach, as in our opinion it lacks risk sensitivity. Internal models have an important role in risk management and capital adequacy, and restricting their use is not the right approach for us. It would be better to focus on improving the valuation and approval process, in order to ensure that quality levels are more homogeneous across countries and entities. In this regard the ECB approach through the Targeted. Review of Internal Models (TRIM) seems much more useful and is probably enough to preserve risk sensibility management while reducing unjustified dispersion in RWAs.

We also have to take into consideration the situation of those banks currently using standardized approaches for measuring credit risk. There are a clear correlation between the usage of internal models and capital requirements: the higher the percentage of internal models, the lower the capital requirements for the entities. Due to this, and in the current context of increasing capital requirements and reduced interest rates, ESBG believes that it is of paramount importance for the improvement of the level playing field that the development of internal models is encouraged and the validation process is not subject to any kind of limitation that prevent credit institutions now using a standardized approach to move forward towards an internal models one.

ESBG would like to encourage the initiatives to move ahead towards a more harmonized interpretation and application of the IRB approach reducing differences in RWA which are not explained by distinct risk profiles or management practices. When saying this, we recommend to be mindful in terms of burden for banks, implementation timelines, and to follow the principle of proportionality. Besides that, we propose to align with other regulatory, but also accounting, like the guidance on accounting for expected credit losses.

The EBA has already initiated a comprehensive project to revise the IRBA with “Future of the IRBA". The adjustments refer to:

  • The prudential assessment of the IRB requirements;

  • The failure definition;

  • The estimation of the risk parameters;

  • The credit risk mitigation techniques.


All adjustments should be implemented by the end of 2020 by the institutions.

When implementing the requirements of the Basel Committee, it must be ensured that the individual topics are not in conflict with the EU's technical standards and guidelines. ESBG therefore suggests carefully examining of the extent to which individual requirements of the committee – such as the risk parameters – have to be implemented by the CRR at all.


b)     How would the revisions impact you/your business? Please specify and provide relevant evidence.

Unfortunately, the short deadline of the Commission's consultation did not allow our members to analyse into detail the impact of this revision. This also applies to the next questions in this section.


More specifically:

i. How do the revised IRB approaches compare to the current approaches in terms of capital requirements? Please provide an estimate, if the positive or negative difference is significant in your view, and specify the relevant revision(s).

ii. Do the revisions affect certain assets/exposure classes more than others and – if applicable – which of the provisions of the revised framework may create these effects? Please support your view with specific evidence to the extent possible.


c)     Where do you expect particular implementation challenges and why? Please specify



3.) CVA risk framework


a.) What are your views on the revisions? Please provide details.

​In ESBG's view, the basic approach for calculating capital requirements for credit valuation adjustment (CVA) risk is very burdensome (due to the considerable weight increase compared to the current standard method) and representing a loss of granularity with respect to the credit quality of the "non-investment grade".

​For one of our members, the capital requirements under BA-CVA is about three times the current capital requirements for the current scope (only FC and NFC+). The lack of granularity of the “non-investment grade" category, the treatment of non-rated counterparties, the higher risk weights and the use of SA-CCR for the exposure at default (EAD) calculation make BA-CVA very punitive.

In ESBG's view, BA-CVA is very punitive but SA-CVA requires a huge investment in IT systems in order to calculate the sensitivities needed.

ESBG would like to stress that the current treatment misaligns hedging practices and capital requirements. Net Trading Income depends on the CVA generated by all counterparties, but the credit derivatives that hedge CVA arising from non-financial counterparties (NFCs) are not eligible hedges because derivatives to NFCs don't require capital requirements for CVA. The current treatment discourages to hedge the CVA risk from derivatives to NFC: if the exemption carries on, a solution should be given for these credit derivatives because they consume capital requirements for market risk as “naked" credit derivatives when they are an economical hedge indeed.

4.) Operational risk framework​

a) What are your views on the revisions? Please provide details.

ESBG believes that the standardised measurement approach (SMA) may represent a huge increase in capital requirements. For some of our members which were not previously using the advanced measurement approach (AMA) models this could imply an in-crease above 40%. This is mainly due to both the volume modification and the new coefficient of the Business Indicator Component. Additionally, to a lesser extent, due to the loss multiplier (based on the operational losses of the last 10 years).

The effort for simplicity has resulted in a loss of granularity and predictive capacity, i.e. sensitivity to risk, without considering the sunk costs regarding to the implementation of the previous model. Moreover the new model does not provide incentives to proper management of operational risk.

In ESBG's view, the Basel Committee's revisions to the operational risk framework are an improvement over the initial proposal which was made in 2016. Nevertheless, some open questions remain regarding relevant income components, which are not clearly defined and would benefit from being linked to Financial Reporting Standards (FINREP) positions. Such link would, indeed, facilitate transparent and comparable reporting and calculation as opposed to each institution doing internal mapping which may result in inconsistencies.


b) How would the revisions impact you/your business? Please specify and provide relevant evidence. 

More specifically:


Which approach for the calculation of the operational risk requirement do you use at the moment? 

One of our members currently uses the AMA for fourteen entities, covering about 75% of its total assets, while its remaining entities are on the Basic Indicator Approach (BIA).

ii. How does the new approach compare to your current approach in terms of capital requirements? Please provide an estimate, if the positive or negative difference is significant in your view, and specify the relevant revision(s). 

One of our members is currently in a material model change process with the Joint Supervisory Team (JST). The following analysis relates to the expected own funds requirements of the proposed AMA model.

The new approach is comparable to our member's BIA plus proposed AMA model (under regulatory review) own funds requirements. It's preliminary own funds requirements under the new approach would be around EUR 14 bn in terms of RWAs vs around EUR 14.5 bn for proposed AMA model plus BIA capital.


c) Where do you expect particular implementation challenges and why? Please specify.


ESBG believes the biggest challenge to be the room for interpretation in selecting relevant accounts for calculation of the Business Indicator Component (BIC). This can easily be remedied if EBA specifies which FINREP positions are relevant. This would facilitate quick implementation, guaranteed comparability of risk and finance data and ensure that existing “reporting" streams are utilised as opposed to creating a separate “OpRisk" reporting stream.

From the model related amendments proposed in Basel III, the OpRisk poses comparably lower implementation complexity. Therefore, in our opinion, a phased approach for Basel III allowing the risk-sensitive standardised approach to be introduced earlier is considered feasible.


5.) Output floor


a)     What are your views on the revisions? Please provide details.

In ESBG's opinion, introducing capital floors for IRB models based on the output of the standardised framework, may limit the incentives of credit institutions to continue developing and implementing new internal models.

It sends contradictory signals to the markets, as in other regulatory areas the usage of internal models is currently being fostered, i.e. IFRS 9 and the calculation of provisions based on expected loss models.

The output floor also has a direct impact on internal capital management: changes in the RWA for a single risk type or exposure class do not necessarily lead to identical changes in total capital requirements. In ESBG's view, this complicates the capital requirements planning and also the causal allocation of the (net) impact on the total capital. Equally, a risk-adjusted pricing of transactions is made more difficult.

Finally, the fact that the standardised approach is commonly applied by small and less complex banks makes it difficult to justify that it will also be applied as a floor by complex banks that apply use internal models. Reaching both objectives may prove difficult.


b)     How would the revisions impact you/your business? Please specify and provide relevant evidence.


More specifically:

i. What would be the impact of the revised output floor in terms of capital requirements when compared to the application of the revised internally modelled approaches? Please provide an estimate, if the impact is significant in your view, and specify the relevant driver.

ii. Does the application of the revised output floor affect certain assets/exposure classes more than others and – if applicable – which of the provisions of the revised framework may create these effects? Please support your view with specific evidence to the extent possible.

No comments.


c)     Where do you expect particular implementation challenges and why? Please specify.

No comments.


About ESBG (European Savings and Retail Banking Group)

ESBG represents the locally focused European banking sector, helping savings and retail banks in 20 European countries strengthen their unique approach that focuses on providing service to local communities and boosting SMEs. An advocate for a proportionate approach to banking rules, ESBG unites at EU level some 1,000 banks, which together employ 780,000 people driven to innovate at 56,000 outlets. ESBG members have total assets of €6.2 trillion, provide €500 billion in SME loans, and serve 150 million Europeans seeking retail banking services. ESBG members are committed to further unleash the promise of sustainable, responsible 21st century banking.

European Savings and Retail Banking Group – aisbl

Rue Marie-Thérèse, 11 ■ B-1000 Brussels ■ Tel: +32 2 211 11 11 ■ Fax: +32 2 211 11 99 ■

​Published by ESBG. April 2018.


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Basel III