Q 3: The agencies seek comment and supporting data on the appropriateness of this limit.
There is a difference in accounting standards that govern the establishment of the ALLL in the US and their UK equivalent, provisions.
In the US, Citizens follows the US guidance for establishment of reserves which contemplates a longer time horizon and progress through the credit cycle. In the UK, the calculation of reserve amounts (provision) is based on known and identifiable existing conditions in the portfolio currently, in accordance with International Accounting Standard 39 (IAS39). The result is that the ALLL reserve amount for US purposes is higher than the provision amount for UK purposes.
The difference in treatment will result in US ALLL exceeding the Basel EL measure over a one-year time horizon (ECL), although we are unable to estimate the difference between the two data sets. Citizens have not, based upon its historical credit profile, experienced ALLL amounts in excess of the 1.25% limitation. However, it is generally believed to be well below the 0.06% limit. We do not believe this limitation will be a factor in determining the amount of ALLL qualifying for Tier 2 capital, and believe this limitation to be appropriate.
Q 4: The agencies seek comment on the use of a segment-based approach rather than an exposure- by-exposure approach for retail exposures.
RBS supports the use of a segment (or pooled) based approach, in line with the original Basel proposals. This approach is now reflected in our Group Risk Data Warehouse and capital calculation engine.