The EACB welcomes the opportunity to comment on the EBA Guidelines on proportionate retail diversification methods under Article 123(1) of the CRR3. We agree on the importance to define proportionate retail diversification methods for the application of a preferential risk wight of 75% and implement the discretion embedded in the Basel III reforms to determine appropriate methodologies, beyond the 0.2% aggregate portfolio threshold.
However, the diversification test as currently delineated in the draft Guidelines appears burdensome, not in line with the principle of proportionality and ineffective, considering the limited benefits in terms of financial stability and the large expected impact on regulatory capital. While we can understand that quantitative criteria may allow to more easily compare different banking portfolios, the current framework based on qualitative and quantitative criteria implemented at national level has shown to be effective and fit for purpose. It also represents the appropriate compromise to account for specificities of financial institutions, without generating additional inappropriate costs.
The diversification test proposed in the draft Guidelines will introduce an avoidable competitive disadvantage for small banks and their ability to finance the real economy because of a general reduction of the working capital, also for the SMEs loans. For example, a bank that only has a retail portfolio of EUR 100 million would be able to grant retail loans of up to EUR 200.000 granularly. This leads to strong distortions of competition to small banks and, thus, contrasting the level playing field concept and the principle of proportionality.
In our view, higher thresholds or greater flexibility (e.g., maintaining a qualitative criteria and gradual exemptions for very small banks with a balance sheet total lower or equal EUR 2.5 bn) should be devised, ensuring that institutions of all sizes can maintain a diversified portfolio without compromising their business model. Currently, a single exposure exceeding 0.2% could have a disproportionate impact in terms of capital requirements for smaller portfolios. It is important to underline that the proposed calibration in the Basel framework does not take into consideration small banks and, therefore, the threshold established cannot be considered satisfactory or proportionate.