TFSA Hearing on the Revised Standardized Approach to Credit Risk

6 Mar 2015

On 25 February the International Banking Federation (IBFed) attended a hearing hosted by the Task Force on Standardised Approaches (TFSA), along with 12 other industry associations from around the world. The purpose of the meeting was to discuss the consultation paper on the Revised Standardised Approach to Credit Risk. At the meeting, the TFSA acknowledged that there were some flaws in the proposed approach and indicated that they were looking to industry to suggest improvements. Although they were not able to provide much comfort on the Institute of International Finance’s request for a delay of the quantitative impact study (QIS) deadline, the ultimate timetable for the project may not be carved in stone. The potential for additional QISs was not dismissed and we were pleased to hear that the TFSA was open to dialogue.

At the meeting the industry expressed its dislike of the two-factor approach. Representatives stated that it does not achieve the goal of being more risk sensitive, and produces risk-weighted assets that give the illusion of comparability, while actually introducing distortions when compared to the true underlying risk. The industry highlighted that while it does not support a mechanistic reliance on credit ratings, it does believe that credit ratings are based on rich and valuable data and should be used, where available, in conjunction with other risk drivers. The TFSA indicated that it was not their intent to increase the capital requirements. They invited the industry to provide data to refute the appropriateness of the increases to the minimum risk weights and increases in credit conversion factors that have been introduced in the proposal.

In terms of impacts, the industry warned that despite stated intentions the proposals represent a significant increase in capital. This combined with a floor requirement, could become the binding constraint by which banks would need to price their products, and which would interfere with the incentive to use and develop the advanced models-based approaches for risk management. The industry also warned that residential real estate in particular would be negatively impacted. From an operational perspective, there will be significant data challenges, especially associated with integrating so much customer-centric information into the control environment required for capital calculation.

Given that the proposals will not be simple to implement, and do not appear to increase risk sensitivity or comparability, the industry stressed that it would be best to take a more targeted approach by focusing on only a few key areas where the existing standardised approach is inadequate. Overall, we were encouraged by the TFSA’s openness to consider our feedback. Written submissions are due 27 March.

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