April 30, 2015
Comments on the Basel Committee on Banking Supervision’s Consultative
Document “Guidance on Accounting for Expected Credit Losses”
Japanese Bankers Association
We, the Japanese Bankers Association (“JBA”), would like to express ourgratitude for this opportunity to comment on the consultative document
Guidance on accounting for expected credit losses issued by the BaselCommittee on Banking Supervision (the “BCBS”) on February 2, 2015.
We respectfully expect that the following comments will contribute toyour further discussion.
<General Comments>
The Consultative Document proposes supervisory requirements onsound credit risk practices associated with the implementation and ongoing
application of expected credit loss (ECL) accounting models. We understandthe overall objective but consider that there are some areas that should bereviewed from practical reasons. Additionally, discussions currently being
made by the BCBS for the review of various regulations should also beconsidered.
First of all, the main section of this guidance should explicitly specify thatthe principle of materiality in the accounting framework may be applied tothe extent that it facilitates a high-quality implementation of ECL models.
In this guidance, the BCBS expects that a bank will consider all
information that is reasonably available and is known to affect theassessment and measurement of credit risk. On the other hand, paragraph
12 “allows less complex banks to adopt approaches commensurate with thesize, nature and complexity of their lending exposures”. The BCBS isrequested to add descriptions that would also allow internationally active
banks and those banks more sophisticated in the lending business to takedifferent approaches depending on the materiality of loan assets. For
example, the simplification, such as use of practical expedients, should be1permitted for immaterial assets.
Further, even if banks use simplifications for immaterial assets in termsof disclosure, it would not disrupt the users’ decision-making.
The second issue relates to the difference in the treatment of wholesale
and retail lending. Generally, credit risk management approaches andavailable information differs between wholesale and retail lending. This
guidance therefore should clarify that the treatment for these two does notnecessarily need to be the same under ECL accounting practices.
Our comments on specific issues other than the above are describedhereinafter.
<Specific Comments: Main Section of the Consultative Document>
1. Principle 3 (Paragraphs 46 and 48)
Paragraph 46 requires that whenever changes in credit risk affect only
some exposures within a group, those exposures must be segmented out ofthe group. And paragraph 48 requires that exposures must be re-segmented
whenever relevant new information is received or a bank’s expectations ofcredit risk have changed. However, re-segmentation of exposures is notalways the best approach in such cases. Therefore, the guidance should be
amended to allow banks to re-segment exposures only when they consider it
as appropriate.
<Specific Comments: Appendix>
1. A Significant Increase in Credit Risk (Paragraph A29)
Where banks assign highly-granular credit ratings, a one-notch
downgrade would not be indicative of a significant increase in credit risk inmany cases. This paragraph however mentions that “it is possible that asignificant increase in credit risk could occur before lending exposuresexperience even a one-notch downgrade,” implicitly indicating that banks
should assess a one-notch downgrade as a significant increase in credit risk.
Given this, the BCBS is requested to amend this description because it could
suggest a case that contradicts actual practices.

22. Associated Costs for Investments in New Systems and Processes(Paragraph A49)
We agree that banks should endeavour to develop systems and processes
needed to achieve a high-quality, robust and consistent implementation ofthe approach. However, in order to clarify the objective and to give someconsideration to cost effectiveness, it is requested that this paragraph will beamended to require banks to spend appropriate costs needed to achieve ahigh-quality implementation by taking into account the principles ofproportionality, materiality and other factors according to the size andnature of banks’ businesses.
Seemingly, paragraph A49 might be construed as a requirement for allbanks to bear significant costs. It should therefore be amended to better
clarify the objective, i.e. “a high-quality implementation commensurate withthe size and nature of their businesses.” Further, banks as well as firms inother industries should be allowed to take into account cost effectiveness inaccordance with the principle of materiality. For example, for those productswith low quantitative materiality, the use of simplified approaches should bepermitted relative to core products for banks.
3. “Low Credit Risk” Exemption (Paragraph A58)
It is requested that the third sentence of paragraph A58 (i.e. “Whenconsidering the boundary between low-credit-risk and higher-risk
exposures…but it may not use one with a higher PD.”) be eliminated, or theparagraph be amended to clarify that it is an expectation limited to the casewhere the external grade rating class is used as a threshold for “low creditrisk”.
It is understood that this third sentence itself assumes the case where theexternal grade rating class is used as a threshold for “low credit risk”.
However, since other parts of this paragraph refer to adjustments between
internal and external benchmarks, the sentence may be applied by analogy
to the case where the internal rating class is used as a threshold. In such acase, the level of PD for internal ratings regarded by banks as “investmentgrade” is not always equivalent to that provided by external parties (whichmay also differ across rating agencies, regions or periods) and thus there
would be a case where it may not be appropriate to evaluate “low credit risk”
only by comparing PDs. Given that the fourth sentence of paragraph A58
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states that banks shall reconsider the appropriateness of the level of PDs
where an internal rating class is used for a threshold, it is consideredreasonable to eliminate the third sentence, or to amend whole paragraph
A58 in order to clarify that it is an expectation limited to the case where an
external rating class is used as a threshold.
4. Use of “More-than-30-days-past-due Rebuttable Presumption” (ParagraphA60)
It is our understanding that this paragraph intends to indicate thatbanks should not rely easily and solely on the more-than-30-days-past-due
rebuttable presumption as a practical expedient. But where themore-than-30-days-past-due rebuttable presumption is relied on, it isrequested that banks would not be required without reasonable limit todemonstrate that any forward-looking information that is consideredpotentially relevant does not have a substantive relationship with increases
in credit risk. Therefore, the description of this paragraph should be
amended accordingly or the second sentence of the paragraph (i.e. “In thisperspective, the Committee has a strong expectation that…”) should be
eliminated.
This request is intended to prevent undue burden for banks in cases
where the more-than-30-days-past-due rebuttable presumption needs to berelied on in practice for some exposures because of the constraints of
information availability or from other reasons.
Further, it is next to impracticable to demonstrate that all
forward-looking information has no substantive relationship with the level ofcredit losses, and therefore, such a description may be construed as
substantive prohibition of the reliance on past-due information. On the other
hand, we fully understand by paragraph A59 the BCBS’s intention to restrict
the reliance on past-due information used for the practical expedient. Given
this, the BCBS is requested to also consider eliminating the second sentencefrom this paragraph.

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