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January 17, 2019

EBA published the final guidelines on the specification of types of exposures to be associated with high risk under the Capital Requirements Regulation (CRR). The guidelines are intended to facilitate a higher degree of comparability in terms of the current practices in identifying high-risk exposures. EBA also aims to facilitate the transition to the upcoming regulatory revisions, noting that the forthcoming implementation of the revised Basel standards will only apply as of 2022. The consultation on these guidelines was conducted from April to July 2018. The guidelines should be implemented by July 01, 2019.

The guidelines consist of two sections:

  • The first section clarifies the notions of investments in venture capital firms and private equity, which EBA has taken the initiative to provide for the purpose of these guidelines only. This step was triggered by the lack of guidance available to the public on these notions and because definitions are deemed necessary to ensure harmonization on the types of exposures that are considered as investments in venture capital firms and private equity.
  • The second section specifies the types of exposures listed under Article 128 (3) of CRR, which should be considered as high risk and provides stakeholders with a clear identification scheme to follow in their process of identification of exposures associated with high risk. This guidance will encourage institutions to single out and specify the individual exposures that carry a high risk of loss—as items of particularly high risk and, therefore, structurally different from common exposures of the same original asset class.

EBA recognizes that the revised standardized approach for credit risk, which was agreed on by BCBS as part of its Basel III finalization in December 2017, no longer includes provisions on higher risk exposures as the Basel II standard currently does. Nevertheless, EBA considers it beneficial to issue these guidelines to ensure detection of high risk within banks before the transposition of Basel III into the EU legislative framework as well as to ensure a harmonized and consistent application of Article 128(2) and (3) of CRR until any revision of these provisions has to be applied by institutions, noting that BCBS only requires the framework to apply from 2022 onward.

 

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Effective Date: July 01, 2019

Keywords: Europe, EU, Banking, CRR, High-risk Exposures, Basel III, Credit Risk, EBA

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