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Citizens Financial Group
Citizens Financial Group response to the Interagency Proposal on the Classification of Commercial Credit Exposures (Docket # 05-08)
For institutions that use or plan to use PD, LGD and EL, the Interagency proposal has merit. However, a number of questions remain before the benefit or cost can be determined. The proposal clearly attempts to deal with more of the complex scenarios of commercial lending which are not adequately addressed under the current rating system.
It is important that any such changes to the regulatory rating system be consistent with the Basel II rating methodologies and capital/reserve calculations that a number of institutions are close to implementing. As an example, it is difficult to determine if the Facility Rating bands will coincide with the LGD ratings that are being developed. Should there be discrepancies, the proposal could become overly complex to implement.
The clear beneficiaries of this proposal would be ABL operations and other lending structures that are well secured and controlled. What is not clear from the proposal is how banks would be expected to reserve or hold capital against loans classified as Remote Risk of Loss.
There is also a need for additional clarity around guarantees. In the case of US Government or GSE s, the benefit is on the Facility Rating, while it appears that for other unconditional corporate guarantees, the Borrower Rating is impacted. The concept of highly liquid personal guarantees is not addressed.
Moving the rating system toward an Expected Loss methodology is appropriate and consistent with ALLL approaches and Basel II. However, if such a change is made, it has to be done so that it does not add another calculation and justification burden outside of Basel II processes.
Answers to specific interagency questions
Optimal implementation date - At least 1 year from announcement
|Last Updated 06/30/2005||Regs@fdic.gov|