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CEBS Consultation on CP10 Summary

Core Content

CEBS published its tenth consultation paper (CP10) in July 2005, focusing on the implementation, validation, and assessment of Advanced Measurement Approach (AMA) and Internal Ratings-Based (IRB) approaches. The consultation period ended on 30 October 2005, and twenty responses were received, with most published on the CEBS website.

Main Points and Key Views

General Comments on CP10

• Positive Reception: Many respondents welcomed CP10 for its improved transparency regarding supervisors' objectives and expectations for advanced models.
• Cooperation Framework: The proposed framework for cooperation between home and host supervisors was seen as well-reasoned, particularly in paragraph 35, which outlines communication practices.
• Practical Implementation: Respondents appreciated the clarification of practical validation and implementation issues related to AMA, which was seen as a significant step toward its implementation in the EU.

Concerns and Industry Feedback

• Timing Issue: A large number of respondents felt that CP10 came too late to serve as initial guidance. They were concerned that prior preparatory work might now be considered inadequate, and that supervisors could demand additional documents or standards.

  • CEBS acknowledged this concern and introduced a good faith clause (paragraphs 8a and 14a) to allow flexibility for institutions that had already developed their IRB and AMA models.
  • CEBS clarified the relationship between the pre-application and application phases (paragraphs 44a and 72).

• Detail vs. Principles: Some respondents felt that the level of detail in CP10 was excessive and that a more principles-based approach would be preferable. Others, especially from smaller banks, requested more detailed guidance, such as common practices for specific businesses or admissible procedures for PD determination.

  • CEBS adopted a mixed approach, combining detailed examples with high-level principles, to ensure a level-playing field and to address the need for clarity.
  • CEBS clarified that the examples provided are indicative and not exhaustive (paragraphs 5 and 19a).

• Excessive Conservatism: Some critics argued that CP10 was superequivalent to the CRD, introducing requirements beyond its scope.

  • CEBS clarified that the conservatism was largely due to the CRD's wording and that the guidelines are meant to explain and clarify the CRD, not to add new requirements.
  • CEBS emphasized that national supervisors may impose stricter requirements if necessary, as per the EU directive's structure.

• Proportionality: Several respondents called for more emphasis on proportionality, particularly for smaller institutions.

  • CEBS incorporated proportionality considerations and added a "comply or explain" principle in paragraph 356 to allow flexibility.
  • The paper also highlights areas where proportionality applies (paragraph 21).

• Examples and Certificates: There was a request to clarify that examples in CP10 are not exclusive or exhaustive, and some respondents wanted to eliminate examples altogether.

  • CEBS clarified the status of examples in the text.
  • A proposal for a "qualification certificate" to streamline communication between supervisors was considered but not adopted, as CEBS believes the process under Art. 129 (2) already fulfills this purpose.

• Inconsistencies with CP09 and CP03: Some respondents pointed out an inconsistency between CP09 and CP10, particularly in the area of significance.

  • CEBS clarified that CP09 and CP10 are consistent, with CP09 focusing on supervisory cooperation and CP10 on the exemption of IRB approaches.

Specific Comments and Revisions

• Internal Governance: Many respondents found the internal governance elements too prescriptive and restrictive, especially regarding the role of the management body, internal audit, and the independence of the Credit Risk Control Unit.

  • CEBS streamlined the internal governance sections (paragraphs 355–375 for IRB and 469–475 for AMA), using language more aligned with the CRD.
  • The "comply or explain" principle was introduced in paragraph 356 to allow for flexibility.

• Use Test and LGD Estimation: Specific comments were made on the use test and Loss Given Default (LGD) estimation in the IRB sections.

  • These were addressed through amendments to the text, though not all suggestions led to changes.

• Validation of AMA Models: Some respondents requested more detailed guidance on AMA model validation.

  • CEBS acknowledged this and provided clarification, aligning with the Basel framework where applicable.

Summary of CEBS Response

CEBS did not propose significant changes to the framework for the issues related to timing, superequivalence, and prescriptiveness, but made several revisions to address concerns:

• Introduced a good faith clause for institutions that developed models before final guidance.
• Clarified the status of examples as indicative, not exhaustive.
• Emphasized proportionality and added the "comply or explain" principle.
• Streamlined internal governance elements to align more closely with the CRD text.
• Clarified the relationship between pre-application and application phases.

CEBS maintains that its role is to explain and clarify the CRD, not to impose additional requirements. The paper reflects a consensus among supervisors and aims to promote convergence and consistency across the EU.