Q 12: The agencies seek comment on this proposed timetable for implementing the advanced approaches in the United States.
The timing of implementation is a matter for the US authorities. The three year transition period, with associated floors, may give rise to competitive advantages to EU banks (either within the EU or using a branch structure within the US), given the slightly more beneficial (and shorter) floors proposed within the CRD.
Q 13: The agencies seek comment on this aspect of the proposed rule and on any circumstances under which it would be appropriate to assign different obligor ratings to different exposures to the same obligor (for example, income-producing property lending or exposures involving transfer risk).
The NPR requires each obligor to have a consistent probability of default (PD) rating, with an LGD that reflects the estimated outcome in the event of default. With regards to our US Government entity asset/receivable financing portfolios, we believe that literal interpretation creates significant problems, because requiring the same PD rating does not reflect these circumstances:
The nature of government financing results in a different structural risk profile, despite sharing the same ultimate borrower.
Some transactions include the risks of Termination, Non-Renewal and Non-Appropriation while other transactions are funded with multi year authority substantially mitigating those risks. Transactions may include performance risk, creating reliance on third party contractor performance, resulting in the risk of partial off-set and abatement of the underlying government obligation.
Such contracts may terminate and/or become subject to litigation, throwing the specific obligation into a non-performing status. A practice of treating all Government obligations equally under Basel 2 could result in such deals being marked as non-accrual, notwithstanding the performance of the majority of other transactions.
To reflect the special nature of these facilities, we believe a special override should be provided within the Basel 2 rules for US Government and related financings. This would allow an institution with appropriate, well thoughtout and documented policies and processes to raise or lower the PD within a borrower identity to reflect such specific circumstances. We urge the agencies to reconsider this treatment, and introduce an override procedure that recognizes such anomalies.