IIF Authors

Status: Will be live at 06/25/2018 00:00

IIF Letter on the Regulatory Treatment of Sovereign Risk Exposures

Monday, June 25, 2018

On March 9, the IIF provided a confidential response letter to the BCBS Discussion Paper on the regulatory treatment of sovereign risk exposures. In our comments, we underscored that our comments are exploratory in nature and in the spirit of contributing to an exchange of views with the public sector on what is an extremely complex and multidimensional set of issues (and one on which the views of the private and public sector are both evolving and wide ranging).

Our letter highlight some overarching themes.

  • We support the decision to introduce a regulatory pause before any consideration of changes in policy in this area, considering that any changes to the regulatory treatment of sovereign exposures involves sensitive risk, economic, fiscal and even political matters that are well known by all participants in the discussion and on which they are a wide range of opinions, both within the private and public sectors.
  • We disagree with the possibility to limit sovereign holdings; a number of cascading consequences could otherwise follow for banks, government and markets.
  • In regard to risk weighting, the IIF continues to favor the current approach in the framework for the treatment of sovereign exposures, allowing a choice between an Internal Ratings Based (IRB) approaches and a Standardized Approach, including national discretions. We note that an IRB approach for sovereign exposures should be maintained to preserve the sensitivity of the framework and the credibility of RWA.'
  • There is a range of views within the industry regarding the potential definition of sovereign exposures. This should be carefully considered to take account of the various jurisdictional idiosyncrasies.
  • No change in policy should be proposed without a comprehensive and transparent impact study, comprising effects on banks' capital but also on the broader economy and the functioning of markets.
  • We are concerned that some of the treatments set out in the Discussion Paper could create disparities, especially because some jurisdictions are allowed to use external ratings while other jurisdictions have to rely on the CRC score of the OECD.'
  • On the trading book side, we underscore the inconsistency of having moved to develop new policy and establishing a PD floor. We are asking the Committee to reconsider this floor or alternatively its calibration.

A standalone letter from the three associations (ISDA, IIF, GFMA) was submitted as well, this separate letter only focuses on the proposed FRTB changes and is based on the previous work done by the IIF Working Group on Market Risk alongside those of the fellow trade associations.'