9
E C B • T h e N e w Ba se l C a p i t a l A c c o r d • A u g u st 2 0 0 3
sense fr om a functional point of view. H owever , a default by a bor r ower on one
obligation may in pr actice also signal defaults on other obligations acr oss the banking
gr oup. T hus it is pr oposed that ther e be an explicit r efer ence to r ecognise the fact that
banks will be allowed to make their own assessments and that super visor s will r eview
them. T he tr eatment of pr eviously defaulted
exposures as non-defaulted and their possible subsequent r eclassification as second
defaulted exposures paragraph 419 could be complemented by a r efer ence to the need
for pr udent inter nal pr ocedur es by banks, including r eviews by the inter nal or exter nal
auditor s and their ability to demonstr ate pr udent tr eatment to their super visor s. In
the same vein, the r e-ageing of facilities and gr anting of extensions, defer r als, r enewals
and r ewr ites to existing accounts par agr aph 420 may r equir e guidance fr om the BC BS
with a view to pr omoting consistency in banks’ practices.
12
W ith r egar d to the length of the under lying histor ical obser vation per iod i.e. 5 year s, it
is stated that, if the available obser vation per iod spans a longer per iod, the latter must
be used par agr aph 425. H owever , it is not clear that long ser ies of histor ical data would
always be mor e appr opr iate because of changes in the por tfolio base, r ating
methodologies or economic cir cumstances. A bank should not have to give equal
impor tance to histor ical data if it is possible to demonstr ate that r ecent data ar e mor e
useful for the estimation of r isk par ameter s. O n the mitigating effect of guar antees wher e
own estimates of LG D ar e used two options ar e given, an adjustment of the PD estimate
or an adjustment of the LG D estimate par agr aph 442. It is not clear why the
adjustment should concer n the PD , or the bor r ower ’s specific r isk. T he adjustment
should be confined to the LG D , which takes into account tr ansaction-specific r isks. T his
would also make the adjustment consistent with paragraphs 359 and 393.
T he r ule stating that a bank cannot assign an adjusted PD or LG D to the guar anteed
exposur e if the adjusted r isk weight would be lower than that of a compar able dir ect
exposure to the guarantor paragraph 444 may be over ly str ingent. A pr udent move
towards a more risk-sensitive approach could be consider ed in this context, based on
fur ther r esear ch on the r isk mitigation of “double default”.
T he wide r ecognition of types of eligible guar antor s
13
which is unlimited for banks under the advanced IRB approach paragraph
445, including the r ecognition of conditional guar antees par agr aph 446, may war r ant
attention, given the fact that the application of the “w” factor , which may in pr actice limit
the number of potential guar antor s other than financial institutions, is no longer found
under Pillar I. An undue pr olifer ation of guar antees pr ovided by non-banks, and
especially by non-r egulated entities which ar e not subject to capital r equir ements, may
r equir e close monitor ing, as it may have an adver se impact on the level playing field and
could give r ise to r eputational r isks concer ning the pr ovision of guar antees in
gener al. T he EC B would welcome close monitor ing by the BC BS of the possible
implications of such wide r ecognition of guar antees by non-r egulated entities and a
possible futur e r eview of the pr oposals. T he intr oduction of limitations may also be seen
fr om a point of view of over all consistency, as the pr ovision of insur ance as a mitigant for
oper ational r isk is limited to insur ance pr ovider s which alr eady ar e r egulated
financial institutions with minimum cr edit rating of “A” or equivalent.
W ith r egar d to the r ecognition of other physical collater al, it is stated that each
1 2 The current text paragraph 4 2 0 makes reference to the fact
that some national supervisory authorities that may issue specific requirements.
1 3 The range of eligible guarantorsprotection is also generous
under the standardised and foundation IRB approaches and includes sovereigns, Public Sector Entities, banks and securities
firms with a lower risk weight than the counterparty and other entities including corporates and insurance companies rated
“A” or better.
E C B • T h e N e w Ba se l C a p i t a l A c c o r d • A u g u st 2 0 0 3
10
super visor should deter mine whether or not collater al meets cer tain standar ds, such as
the existence of well-established liquid mar kets and publicly available mar ket pr ices
paragraph 484. Although supervisors are in a pr ivileged position to assess the liquidity of
mar kets, this may not always be feasible given the natur e of some types of collater al e.g.
inventor ies such as r aw mater ials, goods, etc.. Accordingly, a reference could be added
that banks should utilise available infor mation fr om other competent bodies and author ities
and should be able to demonstr ate to their super visor s that their analysis is based on a
pr udent evaluation of such infor mation. W ith r egar d to the super visor y slotting
cr iter ia for specialised lending SL, banks ar e expected to map their inter nal r atings based
on their own cr iter ia accor ding to five categories paragraph 374. Annex 4 provides
gener al assessment factor s for each sub-class of SL exposur e. W ith a view to pr omoting a
level playing field, fur ther guidance on the way this mapping should be per for med seems
to be war r anted for two r easons. Fir st, ther e is the complexity of the mapping pr ocess, as
the pr oposed tables with super visor y r ating gr ades intr oduce numer ous indicator s e.g.
18 indicator s for object finance that ar e to be classified accor ding to four assessment
categories, namely strong, good, satisfactory, and weak. Second, ther e is the gener alised
natur e of some of the elements against which the assessment is to be per for med. For
example, in the case of object finance exposur es, the differ ence between
satisfactor y and fair mitigation instr uments for assessing the political and legal
envir onment or between satisfactor y and fair insurance coverage for assessing insurance
against damages may r equir e fur ther clar ification.
U nder the foundation IRB appr oach, the pr oposed cr edit conver sion factor C C F for
commitments is set at 75 r egar dless of the matur ity of the under lying facility par agr aph
281. T his compar es with C C Fs under the standardised approach of 20 or 50 for
