The Luxembourg Bankers’ Association (The ABBL) is the voice of the financial sector in Luxembourg representing the majority of financial institutions on all major issues and notably banking regulation.
As part of it’s implication in the process of the final set of Basel III reforms, the ABBL makes every effort to represent and defend the interests of its members and inform them about the latest developments with regard to this topic.
Furthermore, the ABBL submitted its response to the consultation on the implementation of the final Basel III reforms in the European Union on 30 December 2019.
The European Commission aims to collect through this consultation the stakeholders’ views on specific topics in the areas of:
- Credit risk
- Securities financing transactions
- Operational risk
- Market risk
- Credit valuation adjustment risk
- Output floor
- Centralised supervisory reporting and disclosures
- Sustainable finance
- Fit and proper assessment
In particular, the ABBL raised the following points:
- Credit risk: standardised approach (SA-CR)
- The due diligence required in case of external ratings is highly problematic, because it would impose disproportionate administrative burden to banks, especially to the small and non-complex ones
- Similarly to the treatment of unrated exposures to institutions, the standardised credit risk assessment approach (the SCRA) should be permitted as a fall-back approach for unrated exposures to non-SMEs corporates.
- Real estate financing: we support introducing the Loan Splitting approach while increasing the granularity of the buckets
- Residential properties under construction should benefit from the preferential treatment
- Land acquisition, development and construction (ADC) exposures: this asset class should be made more granular to properly differentiate the riskiest transactions from the less risky ones
- Retail portfolio: the proposed granularity criterion of 0.2% should not be implemented and the current provisions of the CRR2 should be kept unchanged
- The recalibration of CCFs, in particular the introduction of a 10% CCF for unconditionally cancellable commitments (UCCs), will hamper the financing capacities of SMEs
- Operational risk
- The ABBL supports implementing the supervisory discretion to use the Internal Loss Multiplier for banks pertaining to bucket 1, in order to establish a robust connection between capital requirements and sound management of operational risk.
- The existing regulatory provisions concerning the Advanced Measurement Approach should not be applied to small and less complex banks. In this respect, bucket 1 banks should be eligible for a proportionate application of governance and organizational requirements.
- Banks should not be forced to use external losses databases for the purpose of their ICAAP on operational risk, which must remain a self-assessment exercise driven by banks’ risk profile.
- Credit valuation adjustment (CVA) risk
- The existing exemptions from the scope of application of the CVA capital requirement (e.g. intra-group transactions, transactions with non-financial counterparts) should be kept
- Threshold for implementing the simplified approach: the EUR 100 billion threshold proposed by Basel III is the appropriate metric, notably because it will ensure level playing field among EU banks and their competitors of other jurisdictions.
Responding to the consultation marks the first step of the EU legislative process towards implementing Basel III in EU regulation. The ABBL will remain involved in the forthcoming steps, e.g. publication of the EU legislative proposal, negotiations at the EU Council and at the EU Parliament, ABBL advocacy initiatives, etc.
By Gilles Pierre, Head of Banking Regulation, ABBL
Risk Management Conference – 11 December 2019