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QUESTION

Q 14: The agencies seek comment on this proposed definition of default and on how well it captures substantially all of the circumstances under which a bank could experience a material credit-related economic loss on a wholesale exposure. In particular, the agencies seek comment on the appropriateness of the 5 percent credit loss threshold for exposures sold or transferred between reporting categories. The agencies also seek commenters’ views on specific issues raised by applying different definitions of default in multiple national jurisdictions and on ways to minimize potential regulatory burden, including use of the definition of default in the New Accord, keeping in mind that national bank supervisory authorities must adopt default definitions that are appropriate in light of national banking practices and conditions.

Q 15: In light of the possibility of significantly increased loss rates at the subdivision level due to downturn conditions in the subdivision, the agencies seek comment on whether to require banks to determine economic downturn conditions at a more granular level than an entire wholesale or retail exposure subcategory in a national jurisdiction.

CFG/RBS Comments

The inclusion of 5% credit losses recognized in a sale or in an anticipated sale (characterized by held for or available for sale) introduces an unnecessary burden on banks in data collection and management. This requirement increases the number of defaults required. Additionally, any loan placed on non-accrual status, if sold at a loss, is captured in loss given default calculations. Such rules could severely restrict well reasoned, sound portfolio management practices since asset sales occur frequently for reasons other than disposing of problem loans.

We recommend that agencies consider applying the retail exposures default definition to “retail small business loans” since this segment is managed similarly to retail portfolios.

Although we broadly agree with the other changes proposed to the definition of default since they reflect the way most banks measure defaults, we are concerned that, for international institutions like ourselves, this creates significant implementation challenges given the differences in default definitions applied between jurisdictions.

We support the idea that the banks be given the flexibility to determine downturn conditions at a more granular level than the entire wholesale or retail exposure subcategory in a national jurisdiction. We would not support a mandatory treatment.

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