fbf response to thé cebs consultation paper on thé new

FEDERATIONBANCAIREFRANÇAISE

Thé Deputy Director Gênerai

Thursday, April 28th 2005

FBF Response to thé CEBS Consultation Paper on thé New Solvency Ratio: Towards aCommon Reporting Framework (CEBS CP04)

Dear Mr Roldan

Thé French Banking Fédération (FBF) welcomes thé opportunity to comment on CEBS'consultation on Common Reporting (COREP). Thé FBF believes that it is an important issuefor Europe and supports CEBS' objective to introduce a common reporting so as to reducethé banking industry's compliance burden.

Thé target to hâve one single and simplified reporting in thé EU, accepted by home and hostsupervisors, is supported by thé FBF because a common reporting within a banking group ishighly désirable and ultimately achievable against a background of increasing supervisoryconvergence in Europe.

However, thé current draft does not meet CEBS' objective to reduce thé industry'scompliance burden and thé FBF believes that thé steps taken towards thèse aims should bedone in a proportionate manner and on a value-added basis (implementing costs seem tooutweigh potential benefits for thé industry). Thé proposai seems more to consider ailpractices than best practices. It is difficult to understand and too detailed for a reportingscheme, thé purpose of which is not to check each step of thé calculation.

While large groups do not object to a quarterly calculation of thé ratio (as many already doso), they consider it extremely burdensome and useless to produce a full quarterly COREPreporting on thèse calculations. We therefore advocate thé CEBS to:

M. José Maria ROLDANChairmanCEBSTower 4225 Old Broad StreetLondonEC2N 1HQ

limit quarteriy reporting to very large groups and for necessary reporting ,move to a half-yeariy or annually periodicity for spécifie reporting.

Moreover, thé FBF believes that Pillar II information ought not to be included in a commonreporting, Pillar II data should be collected and evaluated in thé course of on-site inspectionsand interviews. There is no standardisation of Pillar II requirements, which dépends on eachjurisdiction. This provides no basis for comparison as is possible with thé current SolvencyRatio and would create an unlevel playing field with non European countries applying théBasel 2 Accord.

Thé FBF underlines thé fact that thé data required under COREP should be aligned withthose of thé FINREP, in order to avoid requiring banks to report thé same figure twice with nojustified prudential rationale.

Thé CEBS recommends using XML/XBRL as a common reporting language for thé solvencyratio. Thé FBF believes that banks ought not to be required to use XML/XBRL in their internaiSystems. Instead, they could use this language only to report finalised data to an externalparty.

You will find in thé appendix attached our detailed comments and proposais on thé questionsraised by thé consultative paper.

Yours sincerely

Pierre de Lauzun

Thursday, April 28* 2005-04-28

FBF RESPONSE TO THE CEBS' CONSULTATION:« TOWARDS A COMMUN REPORTING FRAMEWORK » (CP04)

1. Template ÇA :

Lines 21 to 24 To ensure consistency with révisée! templateCA-IAS=> Thé FBF believes thèse lines shouldbe deleted

Line 26 - Other country spécifie original ownfunds

This requirement bas no link with thé CRDand thé French Banking Commission doesnot intend to implement it at présent.=> Thé FBF believes this Une should bedeleted

Line 31 - Déductions from Original OwnFunds

Déduction rules ought to be reviewed inorder to take into account thé changes setout in thé latest version of thé CRD(déduction 50% in Tier 1 and 50% in Tier 2).

Line 33 - Other country spécifie déductionsfrom original own funds

This requirement has no link with thé CRDand thé French Banking Commission doesnot intend to implement it at présent.=> This line should be deleted

Lines 47 to 51 - Country spécifie coreadditional own funds

Thé FBF proposes to reduce thisrequirement to one line.__________

Lines 60 to 62 - Country spécifieSupplementary Additional Own Funds

This requirement has no link with thé CRDand thé French Banking Commission doesnot intend to implement it at présent.=> This line should be deleted

Lines 64 to 65 - Déductions from AdditionalOwn Funds et Other country-specificdéductions to Additional Own Funds

Déduction rules ought to be reviewed inorder to take into account thé changes setout in thé latest version of thé CRD.

Line 103 - Crédit revaluation reserves This requirement has no link with thé CRDand thé French Banking Commission doesnot intend to implement it at présent.=> This line should be deleted

Line150 - Complément to Pillar 1 overallfloor CR

This requirement is supposed to betemporary (« floor » applied at thé firstapplication)=> This line should be deleted.

Line 152 - Pillar 2 Extra CapitalRequirement (and références to this line inlines 154 and 155)

Thé additional layer of capital requirementimposed by thé national superviser shouldnot be included in thé formula of thésolvency ratio._______________

=> Any référence to Pillar 2 extra capitalrequïrement should be deleted in théformulae set out in lines 154 and 155.

Lines 156 to 171 - Internai capital Pillar 2 information should not be part of théreporting: neither thé Pillar 2 extra capitalrequirement imposed by thé nationalsuperviser nor thé Pillar 2 internai capitalassessed by thé crédit institution.=> Thèse lines should be deleted

2. Template SA

Exposure types Reduce to one template for thé totalExposure classes Reduce to thé 6 « first level » exposure

classes :- Central Governments and Central Banks,- Institutions,- Corporate,- Retail,- Equity,- Other Non Crédit Obligation Assets_____

Column 12 (IAS related adjustments to théexposure value)

It is impossible to reconcile line by lineaccounting data with a breakdown by riskcatégories.=> This column should be deleted

Column 13 (number of obligors) This requirement raises technical difficulties,as some counterparts can be reported inseveral templates, which can induce asignificant bias.It is impossible to fill in thé column for théretail portfolio.Moreover, this datum cannot reliably explainthé diversification of a portfolio, given thatthé ration does not take into account thécorrélation effects.=> This column should be deleted

3. Template IRB

Exposure types Reduce to one template for thé totalExposure classes Reduce to thé 6 « first level » exposure

classes :- Central Governments and Central Banks,- Institutions,- Corporate,- Retail,- Equity,- Other Non Crédit Obligation Assets___

Columns 2-3 and 4 We would like to fill in alternatively columns2-3 or column 4 according to thé type ofexposure class. To impose both has nosensé, for only one is used for a givenportfolio:

PDs in certain portfolios such as

Column 5 (notional amount before netting)

Column 9 (exposure weighted averagematurity value)Column 15 (IAS related adjustments to théexposure value),Column 16 (number of obligors)

retail resuit from thé aggregation ofdifférent internai ratings with différentinternai PDs (thé range is morerelevant)PDs in other portfolios correspond toone single PD grade (and thereforethé average is more relevant).

Crédit institutions do not see thé relevanceof this column, as this amount is notreprésentative of actual risk.=> This column should be deleted=> This column should be deleted

=> This column should be deleted

Same comment as on template SA=> This column should be deleted

4. Template IRB SLOTT

Column 7 (IAS related adjustments to théexposure value),Column 8 (nurnber of obligors)


Same comment as on template SA=> This column should be deleted

S. Templates reporting CRM : SA CRM, FIRB CRM, AIRB CRM and CRM I/O

Général commenta on CRM templates:

While thé required level of détails can be understandable within thé scope of alimited and exploratory approach such as a QIS, it is not justified in thé recurringCoRep reporting.

Moreover, thé implementation and management of a System that provides in acentralised way thé detailed information required in thèse templates would induce asignificant cost for thé crédit institutions, of which thé supervisors should be awarewhen doing their cost-benefit analysis on thèse templates.

- Thé required détails are burdensome for SA and FIRB approaches because they relyon thé principle that "thé covered portion of thé exposure will be reallocated from théoriginal obliger to thé exposure class and risk weight or PD of thé mitigant provider"(COREP Explanatory notes). This reporting principle is not applied in thé riskmanagement of thé crédit institutions. As far as AIRB approach is concerned, thèsedétails are contrary to thé provisions set out in thé CRD, in particular, Annex VII, Part2, §21: "unfunded crédit protection may be recognised by adjusting PD or LGDestimâtes". This provision makes it impossible to reallocate thé covered portion ofthé exposure from thé original obliger to thé exposure class and risk weight or PD ofthé mitigant provider.

A related subject concerns thé adequacy of thé recommended XBRL technology withthé volume of required information: while XBRL is a flexible technology, it isprincipally adapted to small volumes of information. This technical aspect should betaken into account.

SA CRM template

Exposure classes

Columns 1-3

Columns 9-13 (Outflows) and 14-18 (Infiows)

Columns 20-25

Reduce to thé 6 « first level » exposureclasses :

- Central Governments and Central Banks,- Institutions,- Corporate,- Retail,- Equity,- Other Non Crédit Obligation Assets

Already required in template SA=> Thèse columns should be deleted• Crédit institutions do not reallocate thé

covered portion of thé exposure from théoriginal obliger to thé exposure class andrisk weight or PD of thé mitigant provider:they develop typologies according totheir customers' portfolio.

• This requirement imposes a certainorganization of thé methods andexposure classes.

=> Thèse columns should be deletedThé significant volume of information toprovide is to be put in balance with thélimited relevance of thèse data (difficultiesare faced in centralising thé data)=> Thèse columns should be deleted

FIRB CRM templateExposure classes


Columns 21-32

Columns 33-34 (Information about thédistribution of LGD* estimâtes)



Same comment as on template SA CRM=> Thèse columns should be deletedThé significant volume of information toprovide is to be put in balance with thélimited relevance of thèse data (difficultiesare faced in centralising thé data).=> Thèse columns should be deleted jThere are technical difficulties inimplementing distribution functions in thé ITSystems.

AIRB CRM templateExposure classes


Columns 21-31



Same comment as on template SA CRM=> Thèse columns should be deletedThé significant volume of information to

Columns 32-33 (INFORMATION ABOUTTHE DISTRIBUTION OF LGD*ESTIMATES)

provide is to be put in balance with thélimited relevance of thèse data (difficultiesare faced in centralising thé data).=> Thèse columns should be deletedThere are technical difficulties inimplementing distribution functions in thé ITSystems.

CRM I/O templateThé FBF wishes to delete thé template:

See comments on other CRM templates.In particular, it is technically impossible for « retail » and « equity » portfolios(especially « inflows »)

6. Templates reporting securitisation : SA SEC 1, SA SEC 2, IRB SEC 1, IRBSEC 2 and OTH 5 SEC

SASEC1 : Columns 8-1 2SA SEC 2: Columns 11 -15IRB SEC 1 : Columns 6-10IRB SEC 2 : Columns 9-1 3

IRB SEC 1 and 2 : Columns 28-29 (IAA)

IRB SEC 1 and 2: Notes (h) and (k)respectively (« for interest rate and currencyswaps they should provide thé exposurevalue »).OTH 5 SEC : Coiumn 20

Thèse columns should be replaced by théCCF 0%, 20%, (plus 50% for théstandardised approach), which cover théminimum granularity set out in thé draftCRD.Thèse Columns should not be shaded forunrated exposures (both for investors andoriginators): Banks should be able to useIAA, even when thé exposure is temporarilydrawn.Derivatives do not corne under securitisationreporting, but under market risk reporting.=> Thèse footnotes should be deletedfrom this template.Same comment.=> This column should be deleted

7. Templates reporting « Equity » : IRB EQU 1, IRB EQU 2 and IRB EQU 3

IRB EQU1Column 14 (Value adjustments andprovisions)Column 15 (IAS related adjustments to théexposure value)


=> This column should be deleted(although this approach will not beimplemented in France)__________

IRB EQU2Column 6 (Value adjustments andprovisions)Column 7 (IAS related adjustments to théexposure value)______________



IRB EQU3Column 2 (Of which: Affected by théminimum PD/LGD limit)Column 6 (Value adjustments andprovisions)Column 7 (IAS related adjustments to théexposure value)




In accordance with article 23 of Annexe VII,

Part 1 and articles 22 to 25 of Annexe VII,Part 2, it seems to us that template EQU 3is incomplète: Unes should be added inorder to mention minimum floors toPD/LGD. It is worth noting that thèse floorsare différent from thé RW under théStandardised Approach (IRB EQU 2).

8. Templates reporting market risk : MKR-IM, MKR-IM Daily, MKR SA TDI,MKR SA EQU, MKR SA FX, MKR SA COM and TB SA SETT

No spécifie comment._____________________ |

9. Templates reporting operational risk : OPR, OPR LOSS and OTH 4 OPR

OPR 1. This template should be disclosed onan annual basis (December, 31st)

2. Why requiring 7 semesters whereasthé « relevant indicator » is calculatedon 6 semesters? We therefore thinkthat one semester should bedeleted and that 3 years should berequired instead of 6 semesters.

3. Thé transition to IAS will distort théaverage of thé semesters on thédatum « Gross Income ». This datumwill not be relevant as long as théimpact of thé transition is not over.

4. Gross incomes should not includeintra-group incomes.

5. «AMA mémorandum items» :We do not understand thé différencebetween thé data « of which: due toexpected loss » and « expected losscaptured in business practiceexcluded from capital requirements ».We believe that only one of thèserequirements should be kept.

6. «AMA mémorandum items» :« AMA due to allocationmechanism »: How is this datumdefined? Why requiring an allocationfor a reporting at group level?We understand that thisrequirement does not concerngroups that are supervised on aconsolidated basis. We would like

7to hâve this point clarified in thétemplate.

In practice, thé breakdown by « AMAbefore insurance and expected loss »,« expected loss » and « capitalalleviation from insurance » has nosensé for a reporting of an entity thatis consolidated within thé group.___

OPR LOSS This template should be disclosed onan annual basis (December, 31st)

This reporting requires statistics onamounts and number of operationalrisk losses by regulatory business jlines. Thèse requirements raisepracticability concerns. Thé proposedbreakdown by business lines is not inline with thé practice in banks: thébreakdown, for each individual loss byBasel theoretic business line is bothburdensome and incompréhensiblefor thé persons in charge of declaringthé incidents, and thereby veryinaccurate. This breakdown brings noadded-value for banks.

We would like to provide areporting in accordance with ourinternai organization, and notaccording to a standardizationimposed by supervisons, whichwould necessarïly be artificial andinduce additional developmentsthat would outweigh thé expectedbenefits as regards analysis ofoperational risks. A mapping couldbe provided to connect thé bank'sinternai catégories with thé businesslines standardised by thé BaselCommittee,

If an incident has an impact on morethan one business line, it is possiblede breakdown thé loss in order toallocate it to several business lines. Itis not possible to such breakdown forthé number of incidents. Do we hâveto report one incident per businessline?

Furthermore, we would like to reportonly losses that are validated becausethey hâve been either recorded orvalidated during thé year, according tothé bank's organization.________

8

I 5. Thé threshold applied in datacollection (Column N° 10) maydépend on thé type of event or ofactivity. They can differ from oneentity to another. We believe it wouldbe reasonable to use a singlethreshold within thé group.

6. What is thé définition of a « Grossloss »: Estimated original amount ?Amount before recovery? includingaccounting provisions ? This point

___ought to be clarified.____________OTH 4 OPR This template should be disclosed on

an annual basis (December, 31st) ;

We do not understand thé purposeand thé use of this template, which:

Is confused,Raises many questionsIs burdensome without any usefor banks.

We therefore propose to delete thistemplate.

Producing this reporting for eachentity of a group would imply thécentralisation of a potential number ofdetailed individuel incidents, which isprohibitive (it could representhundreds or thousands of incidents fora group). According to us, thisreporting of major event losses shouldbe limited at thé group level, andshould not be required at a sub-level.

We believe that operational riskincidents of a group should treatedless be through statistical studies thanthrough a case by case monitoring,which corresponds to a riskmanagement approach. It seemsreasonable to us that banks shouldprovide a simplified reporting on theirmajor losses, thé détails beingprovided to thé superviser in thécourse of on-site inspections.

We therefore would like thétemplate OTH 4 OPR to be deletedand replaced with an annualreporting of thé 10 major losses ofthé group, with thé followingéléments:

Thé estimated loss amount onDecember, 31st, before taking intoaccount thé effects of insuranceThé location of thé incident (in théorganization of thé group andgéographie)Thé date at which thé incident wasdetectedThé internai référence of thé incidentThé (optionai) breakdown by types ofevent. Significant loss events arecomplex by nature and do not easilymap with thé classifications proposedby thé texts, which do not make aclear distinction between causes,events and effects.A (optionai) description in few words,which often can explain thé incidentbetter than thé proposedclassification.

10. Other templates: OTH 1 IND, OTH 2 SECT and OTH 3 AFF

OTH 1 IND

Column 12 : exposures of thé trading book

Columns 16-26

Columns 27-28-29

OTH 2 SEC

Column 12 : exposures of thé trading book

Is redundant with thé reporting ongross exposures, which it willeventually replace. Only one of thèsetemplates should be provided.Threshold should be defined inrelation with thé size of thé créditinstitution

This variable explicitly refers to thécalculation of market risk in Directive 93/6 : itis impossible to give thé information bycounterpart.=> This column should be deletedThé breakdown of CRM by major risk is notavailable, because it is not internally used inthé crédit institutions.=> Thèse columns should be deleted

See comments on templates SA and IRB=> Thèse columns should be deleted

This

We do not wish to hâve astandardised définition of sectors,which would lead to impose anartificiel breakdown that would not berelevant as regards thé sectorialmonitoring and thé organisations ofthé crédit institutions. Moreover, itwould multiply thé sectorial reportings(Pillar 3, annual report) that would bedone according différentclassifications. This incurs anunnecessary cost.variable explicitly refers to thé

Columns 16-26

Columns 27-28-29

OTH 3 AFF

__________________________10calculation of market risk in Directive 93/6 : itis impossible to give thé information bycounterpart.=> This column should be deleted

Thé breakdown of CRM by major risk is notavailable, because it is not internally used inthé crédit institutions.=> Thèse columns should be deleted

See comments on templates SA and IRB=> Thèse columns should be deletedThis template raises several technicalproblems (collecting information from foreignsubsidiaries, volume of information,inconsistencies) :

It is possible to provide capitalrequirements and capital in localstandards by entity (articulation withIAS prudential filters?). But it wouldbe inconsistent to report at thé sametime contributions to consolidatedrisks and individual regulatory capital.

- Thé template raises problems onreporting requirements for marketrisk, operational risk and equity (inparticular, VaR cannot be brokendown by entity)

- A half-yearly (or even annual)periodicity would be adéquate.

=> Thé FBF proposes to replace thistemplate with thé individuel reporting ofsubsidiaries that are supervised on anindividual basis.

fbf response to thé cebs consultation paper on thé new

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