ASF s Position on possible further changes to the Capital Requirements Directive

ASF s Position on possible further changes to the Capital Requirements Directive -Responses to the Commission services staff working document- INTRODUCTION Question 1 What impact would the changes proposed in each section of this paper have on your activities or activities of firms in your jurisdiction, including costs linked to increase in regulatory capital and any other compliance costs? The impact would be quite important in terms of development and implementation. Question 2 Do you have any views about any aggregate impact of the proposed changes to capital requirements? The aggregate impact of the proposed revision to capital requirements would be financial and economic. It would represent a quantitative increase in regulatory capital for the credit institutions under standardised approach (especially in their real estate activity, housing loans). The consequences would be : - unfair conditions of competition between credit institutions under IRB approach and those under standardised approach; - worsening housing access conditions for first time buyers of credit institutions that are still under standardized approach. Question 3 What is the optimal timing for these measures? Should their application be sequenced? It seems inappropriate to introduce dynamic provisioning (especially for real estate where risk level is quite high at the moment). The counter-cyclical measure for capturing expected losses would have mainly implications for the amounts of funds that banks have available to lend to businesses. 1

PARTIE 1: PROVISIONNEMENT DYNAMIQUE Question 4 The Commission services suggest that the through-the-cycle value adjustment should not count as regulatory capital (see ANNEX 1, suggested amendment to Article 57). Do you agree? If the through-the-cycle value adjustment does not count as regulatory capital, we do have the following observations : The amount of capital is an element of Probability Default (PD) and Loss Given Default (LGD) and serves to cover the credit risk (expected and unexpected losses). Therefore, we do not understand what type of credit risk is in the scope of dynamic provisioning? Expected, unexpected...and which provisioning shall apply? classic, dynamic, own funds... Besides, ASF considers as relevant to take into consideration mutual guarantee (called fonds mutuel de garantie ) which constitutes a part of capital and covers credit risk much further than classic provisioning. As it makes sense that credit institutions have to fulfill their obligation related to capital requirement and through-the-cycle value adjustment, then ASF considers that it would be relevant as well to use regulatory capital and/or dynamic provisioning to face these requirements. This flexibility would stop any regulatory arbitration that may arise in that kind of situation. In fine, these two requirements take aim for ensuring provisions against credit risk. In addition, Pilar II rules and dynamic provisioning guidance should be reviewed by local regulation authorities. As a consequence, for a particular risk category, capital requirements under Pilar I shall be defined according to Basel framework agreement and dynamic provisioning shall take into consideration the cyclical position. Then, Pilar II shall only focus on credit institution s features. Question 5 Should off-balance sheet items be captured under the formula for through-the-cycle expected loss provisioning, given that 'provisions' for off-balance sheet items are not recognised in all relevant accounting standards? Should only assets subject to an impairment test be subject to through-thecycle expected loss provisioning? (See ANNEX 1, suggested Article 74a (2).) ASF s position is to avoid a double dynamic provisioning. If a credit institution is guarantor on a loan distributed by another credit institution, dynamic provisioning should not be required to both institutions. Off balance sheet items may be included into calculation with particular risk weight as it is laid down in Basel II with the CCF. Thus, the scope of this new provisioning should correspond to loans and throughthe-cycle expected loss provisioning should correspond to probability of default of the borrower. A fair competition between the different actors should also be required. For example, regarding joint and several liability (credit secured by a guarantee) used by both bank and insurance activities, dynamic provisioning applicable on sole credit institutions would create a distortion and give preferential treatment to the insurance companies that is not acceptable. Indeed, capital requirements on credit risk laid down in Basel II are much more important than in Solvency II. Add on top dynamic provisioning and unwanted regulatory arbitrations would come up. 2

Question 6 At this point, the suggestion is not to include the option for competent authorities to allow internal methods to determine expected losses across an economic cycle. As an alternative to the regulatory approach to calculate counter-cyclical factors, would it be desirable to allow firms' internal methodologies (to be validated by supervisors)? Not allowing internal methods to determine expected losses across an economic cycle is not satisfying and does not follow the spirit line of the current regulation. Basel II principle insists on the following ratio credit risk/cost. Expected loss provisioning should not be imposed by the regulatory approach but result on internal banking methods. Thus, if the bank is under IRB Approach, ex-ante risk would mainly be compared to Probability of Default (PD) * Loss Given Default (LGD), but commercial strategy changes might be occurred. As any risk profile is equivalent to another, as for the same activity in any bank, credit risk is subject to a typology of customers carefully chosen, the regulatory approach suggested here would be unfounded. ASF would like you to pay specific attention to the fact that this methodology for determining the counter-cyclical factors based on a common method must not become a part of the internal notation approach of Pilar I. Question 7 Should the exposure class of Article 86 (i.e. for credit institutions subject to the IRB approach) be used irrespective of the fact that the credit institution may be under the Standardised approach? It may be noted that a mapping between exposures class under the Standardised approach and under the IRB is already used in the prudential reporting system of some Member States. As an alternative, should countercyclical parameters be defined for the 16 exposures classes under the Standardised approach? (See ANNEX 1, suggested Article 74a (1).) Countercyclical parameters and dynamic provisioning shall be further specified for credit institutions under the Standardised approach. Question 8 Please give your views on the following approaches: 1) the Spanish model of through-the-cycle expected loss provisioning; 2) a 'simplified' Spanish model. In particular, we would welcome views on the relative merits of both options in terms of the building up of provisions in a graduated manner over time (See ANNEX 1, suggested Annex IXb). The simplified method seems more coherent with the provisions of Basel II (please see our response to question 5). 3

Question 9 Should new risk categories (as suggested above) be introduced along the lines of the Spanish system or, alternatively, should the current risk categories of the CRD (e.g. credit quality steps in Annex VI) be used? (See ANNEX 1, suggested Annex IXb.) In order to ensure coherence with Basel II, the current risk categories of the CRD shall be maintained even if a relevant scale of values for each risk category is introduced (low, medium and high). Local regulation authorities or credit institution under supervision of the local authorities shall define different factors based on objective measures and depending on level of the risk category concerned. Question 10 Is the 'location of the borrower' (as opposed to the booking of the exposure) the right approach, with a view to avoiding regulatory arbitrage? (See ANNEX 1, suggested Annex IXb 2.) For purpose to avoiding regulatory arbitrage, ASF considers location of the borrower as relevant criteria for consumer credit. Nevertheless, for mortgage loan (or similar guarantee) location of the property concerned shall be more efficient. Risk parameters and cyclical position are further specified by location of the property than location of the borrower. Therefore, we do insist to apply location of the property at least for mortgage loan. Another solution would be to take into consideration, for provisioning calculation, the local law of the loan subscribed. Indeed, an additional risk factor may appear if the borrower does not live in the country where the law of the loan applies. Question 11 Will the data to determine counter-cyclical factors be easily available? Question 12 Please give your views on the methodologies for calculating the through-the-cycle expected loss provisions at consolidated level. (See ANNEX 1, amended Article 73.) Question 13 Please give your views on the scope of disclosure requirements for through-the-cycle expected loss provisioning. (See ANNEX 1, suggested amendment to Annex XII (17).) 4

PARTIE 2 : PRET IMMOBILIER RESIDENTIEL EN MONNAIE ETRANGERE Question 14 Do you consider that the risk weights suggested will be effective in discouraging unsafe practices and irresponsible lending in foreign currency denominated housing loans? ASF thinks that a higher risk weight might be not sufficient enough to prevent unsafe practices and irresponsible lending. In fact, the loan will be still attractive for the customer if the difference between the local currency rate and the foreign one is favourable even if additional cost will be charged. Question 15 Do you consider a loan to value ratio of 50% or less is sufficient objective evidence that the borrower has sufficient private wealth to withstand currency movements and potentially correlated movements in property prices? A loan to value ratio of 50% with higher risk weight exposures illustrates that the exchange risk has nothing to do with credit risk. We do believe that it depends more on the volatility of the currencies of the property and the loan. As a general point of view, in Annex VI 50b and Annex VII 12b, when the borrower has sufficient private wealth to withstand currency movements, ASF considers that the rule shall not apply. As for example, a cross border customer that buys a property in France and borrows in the national currency of its income. PARTIE 3 : LEVEE DES OPTIONS ET DISCRETIONS NATIONALES Question 16 Is this suggested scope of maximum harmonisation in 2006/48/EC and 2006/49/EC appropriate? The new wording of Annex VI - section 9.1- points 45 to 48 by deleting «to the satisfaction of the competent authorities» is not satisfying at all as it challenges in France the discretion for the local authorities to compare mortgage loans to residential loans secured by credit or financial institutions ( prêts cautionnés representing 50% of housing loans market). Therefore, ASF wishes to maintain the previous version. Question 17 Is the suggested prudential treatment for both residential and commercial real estate is sufficiently sound? First of all, residential and commercial real-estate risk must not be confused. Residential real-estate risk is lower than commercial. *Regarding residential real estate, the treatment proposed in Standardised approach is not acceptable. 5

As French real-estate market is quite safe, a 35% risk weighted to the part of the loan that does not exceed 40% of Loan-To-Value (LTV) sounds incomprehensible. This rule would give preferential treatment to solvent borrowers and increase the borrowing cost for fisrt time buyers (with a LTV closed to 100%). According to ASF, like the CEBS pointed out in its Second Advice on Options and National Discretions dated on 10 th June 2009, it is necessary to take into consideration that the methodology of dynamic provisioning which already exists under the current CRD does not justify to limit to 40% of the market value of the property concerned, the part of the exposure assigned to risk weight. ASF agrees with CEBS s conclusion that does not incorporate the concern of procyclicality when assessing the prudence of the treatment of real-estate collateral. As procyclicality is a general issue which applies to the recognition of any type of credit mitigation technique, this is not an issue that is specifically related to real-estate collateral. *Regarding the provisions related to the commercial real estate (Annex VIII, Part 1- Points 15 to 19 under IRB approach and Annex VI, Part 1-Points 45 to 60 under Standardised approach), we do agree with the CEBS s observations explaining that the CRE markets within the EU differ considerably and the institutions are required to monitor the values of the properties taken in as collateral and to adjust the value if the market is subject to a significant change in conditions. Thus, the 50% risk weight as defined in Annex VI, Part 1, Point 55, is not acceptable if the condition is calculated on 40% of the market value of the property concerned same as the change of the condition related to the risk of the borrower that must not materially depend on the performance of the underlying property but rather on the underlying capacity of the borrower to repay the debt from other sources. Therefore, for all these reasons, ASF proposes to keep the current drafting of the respective national discretions as national discretions allowing for differences in the local real estate markets, and to add a binding recognition clause. Extract from CEBS s Second Advice: The provision to monitor the value of the property on a frequent basis should ensure a conservative valuation of real estate collateral. Therefore, even, in the event of a downturn of the real estate market in a given country, the requirement to monitor and revalue (if necessary) the property value ensures a prudential treatment of real estate collateral. It should be noted that proper revaluation of property values results in fulfilling the conditions for preferential treatment even under downturn conditions. Even where higher losses under downturn conditions, this does not necessarily increase the losses for the part of the exposure, which is recognised as fully and completely protected by real estate. If the value of a real estate property is adjusted for downturn conditions, the part considered as fully and completely secured by the real estate collateral will be appropriately reduced as well. Therefore, no increase of losses for this part of the exposure will occur. Higher losses for the unsecured part of the exposure under downturn conditions are assumed to be no concern with respect to credit risk mitigation by real estate collateral. In its assessment, the CEBS also discussed the issue of procyclicality as the value adjustment of realestate property, which in downturn conditions leads to an increase in capital requirements to the extend that the value of the collateral decreases, the part of the exposure that becomes uncovered and therefore receives a risk weight of 100% increases. The risk weight applied to the overall exposure therefore gets gradually closer to 100%. 6

The procyclical rise of capital requirements in a time when raising capital might be severely constrained is seen as negative effect of these discretions. However, fixing a risk weight of 100% (for all markets regardless of their development) doses not alleviate the situation in downturn and could be hampering factor in an economic upturn. The impact that deleting the discretions will have in good times should not be overlooked and assessed in particular with regard to real estate collateral provided by small and medium sized companies. Question 18 Is the suggested timeline (2012) for a single definition of default (i.e. 90 days) is appropriate? ASF requests that Member States continue to have a discretion in this area to extend the number of days past due to 180 days both for retail and public sector entities (PSE). 90 days is a too short period due to the existence of legal requirement for French PSE and common practice for lease rental payments to be made on a quarterly basis. Question 19 Do you agree that the Bank Branch accounts Directive 89/117/EEC should be amended so that Member States can no longer require the publication of additional information by branches of credit institutions established in other Member States? ASF-04/09/09 7