INTERNAL RATINGS-BASED SYSTEMS FOR RETAIL CREDIT RISK FOR REGULATORY CAPITAL; NOTICE

Thank you for the opportunity to comment on your proposals for implementing the Basel IRB Retail Credit rules within the United States.

By way of background, the Royal Bank of Scotland (RBS) has significant exposure in North America, including Retail and Commercial Banking, Asset Finance and Capital Markets operations. The Group’s largest single US business, measured by assets, is Citizens Financial Group, Inc. (CFG), a Providence-based commercial bank holding company that operates more than fifteen hundred Citizens Bank and Charter One branch offices in Connecticut, Delaware, Illinois, Indiana, Massachusetts, Michigan, New Hampshire, New Jersey, New York, Ohio, Pennsylvania, Rhode Island and Vermont. Whilst CFG, with over $131 billion in assets, falls outside the ‘mandated’ banks, it forms part of the next tier expected to opt-into Basel 2.

Given the geographic spread of the RBS group, with a focus on the UK, Ireland and Europe, we are clearly interested in how the proposals will be implemented both within the US and, importantly, identify where proposals differ from those emanating from the EU and our lead regulator, the UK FSA.

Before turning to specific comments to the questions and standards proposed within your Note, we thought you would appreciate some high-level comments on the proposals. Overall, we commend the clarity of the Note, in particular the separation of standards and guidance notes. We have found this approach most helpful.

However, some of the requirements appear relatively prescriptive, which could encourage a ‘tick-box’ approach to regulation. We believe a more principles based approach would encourage a better dialogue between regulators, which is more likely to achieve the objectives of the Accord. Risk management is, and should be, a mix between art and science – Basel 2 will only work effectively if regulation mirrors this.

Whilst these regulatory standards are designed for a US market, we would like to highlight the importance of consistency around home: host implementation and validation, especially as the Basel proposals are designed primarily for internationally active banks. To highlight one variance, the US days past due default triggers proposed (180 for mortgages and credit cards, 120 for other retail) differ from those chosen by the group’s lead regulator. Whilst we do not expect regulators to align their processes completely, mutual recognition between states will be required to avoid such differences creating practical difficulties and additional burdens. If we cannot get it right (and there are a number of ways of doing this badly) then the goals of Basel 2 will be significantly undermined.

We hope that these comments are useful to you in taking forward your implementation of the new Basel Accord and, as importantly, during your final deliberations at the Basel Committee through the remainder of this year. As highlighted in the attached appendix, a more flexible and pragmatic approach to implementation is in all our interests.

Please do not hesitate to contact me should you wish to discuss any of these points in more detail.

Yours faithfully,

Richard Gossage
Director, Group Risk Management