Erhvervs-, Vækst- og Eksportudvalget 2015-16
ERU Alm.del Bilag 318
Offentligt
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Basel Committee
Centralbahnplatz 2
4051 Basel
Switzerland
MINISTER FOR BUSINESS AND
GROWTH
Dear chairman Stefan Ingves
The Danish government appreciates the opportunity to comment on the
consultative document “Reducing variation in credit risk-weighted assets
– constraints on the use of internal model approaches”.
First of all, I would like to thank you for our constructive meeting on 22
th
April where I had the opportunity to express the Danish views on the pro-
posal, including our strong concerns for the Danish mortgage credit sec-
tor.
Overall, we generally support the Basel Committee’s objective of reduc-
ing the complexity of the regulatory framework, improving comparability
and addressing excessive variability in the capital requirements for credit
risk. However, at the same time we have serious concerns regarding ele-
ments of the proposal and the implications for the diversity of credit insti-
tutions’ business models and the functioning of financial markets. We are
particularly concerned that the proposal will inadvertently affect market
segments with demonstrated low risk.
In particular, we have strong concerns regarding a significant negative
effect on the Danish mortgage credit institutions due to their low risk
business model, where the average loan impairment charge has been 0.2
per cent over the past 30 years while the corresponding average for com-
mercial and savings banks has been 1.0 per cent. The proposal will, in its
current form, most likely increase capital requirement substantially and
generally decrease risk sensitivity with direct consequences for risk man-
agement. Furthermore, decreasing the risk sensitivity gives the credit in-
stitutions incentives to shift their portfolios towards higher risk assets.
Generally, it
is in our view very important that non-risk weighted capital
requirements only serve as a back stop to risk-based requirements. Risk-
based capital requirements – when properly regulated and supervised – pro-
vide appropriate incentives for credit institutions and they promote efficient
capital allocation to the benefit of our economies.
MINISTRY OF
BUSINESS AND GROWTH
Slotsholmsgade 10-12
1015 Copenhagen K
Denmark
Tlf.
+45 33 92 33 50
Fax.
+45 33 12 37 78
CVR-nr. 10092485
EAN nr. 5798000026001
[email protected]
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I understand that it is not the intention to increase the overall capital re-
quirements. While a simple recalibration might achieve this aim overall,
we are concerned that a simple recalibration will not duly recognise the
inherent low risk nature of some business markets and business models.
On this background we strongly urge the Committee to thoroughly ana-
lyse the consequences of the proposal, including the quantitative impact
study (QIS) and the consultation responses.
The views of the Danish government are described in more detail in the
attached annex. Below our main comments are summarised.
Generally, the Danish government neither support the proposed revised
Basel floor nor the input floors on the parameters in the internal models.
In the consultative document the Committee briefly mentions its plans to
replace the current Basel I floor with a permanent output floor based on
the revised standardised approach. We would like to stress that the use of
an output floor limits the risk sensitivity of the framework, hence creates
incentives for banks to shift their portfolios towards higher risk. Further-
more, we see an imminent risk that the Committee’s aim not to signifi-
cantly increase overall capital requirements can be severely undermined
by a permanent output floor based on the standardised approach unless
the consequences are thoroughly analysed.
The Committee mentions that the interaction between input floors, output
floor and the leverage ratio will be considered. This is in our view very
important as we believe that the introduction of a leverage ratio by and
large addresses the same concerns as an output floor (risk weights become
too low and do not reflect true risks).
Moreover, when it comes to input floors the Committee proposes to set
exposure-level floors on IRB-model parameters. We generally agree with
the Committee’s line of reasoning, including in particular that national
specificities and banks’ incentives should be taken into account. Howev-
er, we fail to see how this is reflected in the concrete proposal.
Specifically, we anticipate that the QIS will show a huge effect from the
loss given default LGD floors on the Danish mortgage system. It is im-
portant to stress that we do not see justification for such an effect given
the actual loss history of these institutions and the specific features of the
Danish market. Following this, we find a floor on exposure level for ex-
posures secured by real estate problematic, as it targets demonstrably low
risk exposures. Please see the attached annex for a more thorough de-
scription of the Danish mortgage system.
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Against this background, we strongly urge the Committee to take another
approach to the calibration of the parameter floors and to abandon the use
of floors on individual exposure level, especially for exposures secured by
real estate.
Lastly, the Committee proposes to abandon the use of banks’ own esti-
mates of model parameters for Specialised Lending (SL). It is our under-
standing that this change is based on the Committee’s concerns about the
modellability of such exposures, e.g. due to lack of data or correlation
between creditworthiness of the borrower and the value of the asset being
financed. Overall, we are concerned that this proposal will lead to an un-
warranted increase in capital requirements, a loss of risk sensitivity and as
a consequence incentive for banks to shift their portfolios towards higher
risk. This increase in capital requirements will most likely have a negative
effect on social housing in terms of higher housing costs.
We therefore strongly urge the Committee to take a more granular ap-
proach which allows the use of the advanced IRB-model for the sub-
category “Income Producing Real Estate” if the institutions can document
the availability of sufficient historical data and fulfil all requirements for
IRB modelling.
As always, we stand ready to answer any questions you may have in rela-
tion to these comments.
Yours sincerely,
Troels Lund Poulsen