{"id":7296,"date":"2009-07-17T13:26:18","date_gmt":"2009-07-17T17:26:18","guid":{"rendered":"http:\/\/www.prefblog.com\/?p=7296"},"modified":"2009-07-17T13:26:18","modified_gmt":"2009-07-17T17:26:18","slug":"c-ebs-releases-counter-cyclical-capital-buffer-position-paper","status":"publish","type":"post","link":"https:\/\/prefblog.com\/?p=7296","title":{"rendered":"C-EBS Releases Counter-Cyclical Capital Buffer Position Paper"},"content":{"rendered":"

The Committee of European Banking Supervisors has released<\/a> a position paper on counter-cyclical capital buffers<\/a>, favouring discretionary supervision (Pillar 2) over Capital Rules (Pillar 1):<\/p>\n

While the mechanisms identified might be alternatively employed in Pillar 1, its use under the Pillar 2 umbrella is still considered the most sensible option at this stage. Pillar 2 allows for flexibility in testing new prudential tools; moreover, an application in Pillar 1 would require further work and refinements.
…<\/b>
With regard to this last point a meeting with rating agencies was organized. They stated very clearly that transparency on capital adequacy is a key issue and it is a precondition for market acceptance of time-varying capital buffers. Rating agencies seem to prefer Pillar 1 solutions, considered more transparent [and] less prone to national discretions; however, they seem also aware that Pillar 2 would allow quicker responses and may be used for testing tools to be subsequently improved and, possibly, implemented under Pillar 1.<\/p><\/blockquote>\n

I suggest it’s not a matter of awareness: it’s a matter of trust. In Canada, of course, we have OSFI with its demonstrated willingness to short-circuit Pillar 1 on the basis of a panicky ‘phone call<\/a>, as well as contemptuous opacity towards the concerns of investors<\/a> (Pillar 3).<\/p>\n

Essentially, the position paper aims at a different methodology for calculating Expected Losses (EL) – see Expected Losses and the Assets to Capital Multiple<\/a>. EL is calculated by the formula<\/p>\n

EL = PD * EAD * LGD<\/p>\n

where PD = Probability of Default
\nEAD = Exposure at Default
\nLGD = Loss Given Default (a percentage)<\/p>\n

What C-EBS is aiming at is:<\/p>\n

the use of mechanisms that rescale probabilities of default (PDs) estimated by banks, in order to incorporate recessionary conditions.<\/p><\/blockquote>\n

Currently:<\/p>\n

The input to the IRB formula is the annual PD expected to be incurred in that grade (computed as the long-run average of one-year default rates).
…<\/b>
As for the LGD, banks are requested to use LGD estimates that are as much as possible estimated for an economic downturn (where these are more conservative than the long-run average).<\/p><\/blockquote>\n

One problem I see with the approach is there does not appear to be an allowance for the term of the exposure. Would a bank dealing exclusively in mortgages with a 5-year term be expected to use the same recessionary PD as a bank with a portfolio of exclusively 30-year mortgages?<\/p>\n","protected":false},"excerpt":{"rendered":"

The Committee of European Banking Supervisors has released a position paper on counter-cyclical capital buffers, favouring discretionary supervision (Pillar 2) over Capital Rules (Pillar 1): While the mechanisms identified might be alternatively employed in Pillar …<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[12,24],"tags":[],"class_list":["post-7296","post","type-post","status-publish","format-standard","hentry","category-interesting-external-papers","category-regulation"],"_links":{"self":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/posts\/7296","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=7296"}],"version-history":[{"count":0,"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/posts\/7296\/revisions"}],"wp:attachment":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=7296"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=7296"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=7296"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}