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QUESTION

CFG/RBS Comments

Q 20: The agencies seek comment on the appropriateness of the 24-month and 30-day time frames for addressing the merger and acquisition transition situations advanced approaches banks may face.

We would favor a more flexible approach, based on the underlying transactions. For small acquisitions, 24 months may be too generous; for larger, complex deals, too onerous. We would prefer the timeframe to be agreed through discussion between regulators and firms, based on the scale, complexity and model approach adopted by any target firm. The EU has suggested a 36 month timeframe, which seems more appropriate.

Q 21: Commenters are encouraged to provide views on the proposed adjustments to the components of the risk-based capital numerator as described below. Commenters also may provide views on numerator-related issues that they believe would be useful to the agencies’ consideration of the proposed rule.

The US are taking a “less prudent” approach than that adopted in Europe (and original Basel II framework) by allowing MSR and PCCR intangibles not to be treated as a deduction to Tier 1 capital.

Q 22: The agencies seek comment on the proposed ECL approach for defaulted exposures as well as on an alternative treatment, under which ECL for a defaulted exposure would be calculated as the bank’s current carrying value of the exposure multiplied by the bank’s best estimate of the expected economic loss rate associated with the exposure (measured relative to the current carrying value), that would be more consistent with the proposed treatment of ECL for non-defaulted exposures. The agencies also seek comment on whether these two approaches would likely produce materially different ECL estimates for defaulted exposures. In addition, the agencies seek comment on the appropriate measure of ECL for assets held at fair value with gains and losses flowing through earnings.

The two approaches are likely to produce materially different estimates since ELGD and LGD are derived from long run historical data on fairly homogeneous pools/segments of data, whereas expected economic loss rates on defaulted exposures are likely to be estimated based on individual appraisals.

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