Q 18: The agencies seek comment on the feasibility of recognizing such pre-default changes in exposure in a way that is consistent with the safety and soundness objectives of this proposed rule. The agencies also seek comment on appropriate restrictions to place on any such recognition to ensure that the results are not counter to the objectives of this proposal to ensure adequate capital within a more risk-sensitive capital framework. In addition, the agencies seek comment on whether, for wholesale exposures, allowing ELGD and LGD to reflect anticipated future contractual paydowns prior to default may be inconsistent with the proposed rule's imposition of a one-year floor on M (for certain types of exposures) or may lead to some double-counting of the risk-mitigating benefits of shorter maturities for exposures not subject to this floor.
Contractually enforceable, pre-default pay downs should be eligible for recognition as part of the recovery process in the ELGD, and LGD estimates. Such recognition will be consistent with the agencies’ safety and soundness objectives. Since ELGD and LGD will be calculated on the basis of adjusted net EAD, we do not believe the imposition of a one-year floor would lead to any inconsistency.We recommend that agencies should give the banks the flexibility to recognise the value in this structure.
Taking the first two questions in turn:
The proposed definitions for Operational Risk, Operational Loss and Operational Loss Events are consistent with our own interpretation. Introducing change would lead to confusion and lead to unnecessary rework.
We recommend the use of the ‘Replacement’ cost of any Fixed Asset affected by an Operational Loss Event as this reflects the actual financial impact on a given business line.
Q 19: The agencies solicit comment on all aspects of the proposed treatment of operational loss and, in particular, on (i) the appropriateness of the proposed definition of operational loss; (ii) whether the agencies should define operational loss in terms of the effect an operational loss event has on the bank’s regulatory capital or should consider a broader definition based on economic capital concepts; and (iii) how the agencies should address the potential double-counting issue for premises and other fixed assets.
We do not have a comment on the third question posed.