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CFG/RBS Comments

Q 30: The agencies seek comment on wholesale and retail exposure types for which banks are not able to calculate PD, ELGD, and LGD and on what an appropriate risk-based capital treatment for such exposures might be.

Firms should be allowed to define and use reference (benchmark) portfolios based on internal analysis. These portfolios could then act as proxies to which mapping rules or functions could be applied to derive or assign PD, ELGD, and LGD factors. The proxies would represent exposure pools for new products or for portfolio segments without sufficient history or products/segments which are in run-off mode). The basis for defining reference portfolios could be internal analysis or industry (external) benchmarks.

Q 31: The agencies seek comment on the appropriateness of permitting a bank to consider prepayments when estimating M and on the feasibility and advisability of using discounted (rather than undiscounted) cash flows as the basis for estimating M.

Banks should be allowed to use appropriate prepayment assumptions when estimating M, consistent with the rule permitting the use of best estimates of “future interest rates” in computing cash flows. Empirical evidence exists to demonstrate the relationship between interest rates, prepayments, and average life of the facility. Undiscounted cash flows may also be more appropriate, given their alignment with funding methodology.

Q 32: The agencies seek comment on whether the agencies should impose the following underwriting criteria as additional requirements for a Basel II bank to qualify for the statutory 50 percent risk weight for a particular mortgage loan: (i) that the bank has an IRB risk measurement and management system in place that assesses the PD and LGD of prospective residential mortgage exposures; and (ii) that the bank’s IRB system generates a 50 percent risk weight for the loan under the IRB risk-based capital formulas.

Citizens have few exposures in these asset classes. We believe that the requirement can be met with relative ease.

Q 33: The agencies seek comment on all aspects of the proposed treatment of one-to-four family residential pre-sold construction loans and multifamily residential loans

No comment.


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