European Union:
EU Authorities Raise Concerns About Proposed Data Waiver For Non-Performing Loans
08 June 2018
Shearman & Sterling LLP
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On June 1, 2018, the European Banking Authority and the European
Central Bank wrote to the European Commission, the European
Parliament and the Council of the European Union expressing
concerns about the impact of proposed data waivers for
non-performing loans. The letter refers to a proposal put forward
by certain stakeholders, in particular the Bank of Italy, that
losses due to the sale of NPLs should be permanently eliminated
from the dataset used for the Loss Given Default (LGD) estimation
for the firm disposing of the NPLs. The proposal is based on the
belief by some stakeholders that the disposal of NPLs and the
corresponding capital release is hindered by the regulatory
framework for internal models, in particular the requirements in
the Capital Requirements Regulation for LGD estimation.
The EBA and the ECB do not support the introduction of such data
waivers and argue that the losses should be appropriately reflected
in the assessment of risk. The EBA and ECB do not consider that the
build-up of NPLs in the EU banking sector is extraordinary because
it has taken place in other cyclical downturns. Furthermore, the
EBA and the ECB are of the view that the introduction of the
proposed waiver would lead to an underestimation of LGD and
inadequate capital requirements. This would provide preferential
treatment to banks which have accumulated high levels of NPLs,
creating regulatory arbitrage. Finally, the EBA and ECB highlight
that the current regulatory regime already allows waivers where
appropriate.
The letter is available at: https://www.eba.europa.eu/documents/10180/2101654/Joint+letter+with+ECB+to+Olivier+Guersent%2C%20Roberto+Gualtieri+and+Jeppe+Tranholm%E2%80%90Mikkelsen+on+the+considerations+on+the+LGD+waivers+under+the+IRB+framework+-+01062018.pdf/b8440766-117f-4723-a305-903064aacc4c.
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