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    EBA Proposes Standards to Determine Risk-Weight for Immovable Property

    April 29, 2021

    EBA proposed regulatory technical standards that specify how to identify the appropriate risk-weights and conditions when assessing minimum loss given default (LGD) values for exposures secured by immovable property. The regulatory standards are relevant for institutions applying both the standardized and the internal-ratings based approaches under the Capital Requirements Regulation or CRR. The consultation period for these standards ends on July 29, 2021 and the standards are expected to be finalized by October 31, 2021.

    Under CRR, the relevant authority, as designated by a member state, may set higher risk-weights, impose stricter criteria on risk-weights, or increase the minimum LGD values when the following two conditions are met:

    • Risk-weights do not adequately reflect the actual risks related to the exposures secured by mortgages on residential property or commercial immovable property, or that the minimum LGD values are not adequate
    • Identified inadequacy of these risk-weights or minimum LGD values could adversely affect the current or future financial stability in the member state

    These draft technical standards focus on the first condition. For institutions applying the standardized approach, these draft technical standards specify the types of factors that authorities should consider during the risk-weight assessment on the basis of the loss experience of exposures secured by immovable property and forward-looking immovable property market developments. The draft regulatory technical standards delineate the types of factors to be considered in the determination of the loss expectation. For institutions applying the internal ratings-based approach to retail exposures secured by residential or commercial immovable property, these draft technical standards provide conditions to be considered when assessing the appropriateness of minimum LGD values. For both assessments, proper coordination and cooperation between the competent and the designated authority are key to strengthening the identification of risks and to avoid overlaps, double-counting of risk, and duplicative actions by authorities.

    In addition to the adequate consideration of the loss experience and the differences between assessing risk-weights under the standardized approach or minimum LGD values under the internal ratings-based approach, the draft technical standards focus on other key elements for the appropriateness assessments, which include:

    • Existence of national specificities related to the real estate market and its financing, such as public and private guarantee schemes, tax deductibility, recourse regimes, or social safety nets
    • Assessment at the level of parts of the territory or at the level of specific property segments, if deemed relevant
    • Data problems concerning relevant indicators, such as availability, quality, granularity, or harmonization

     

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    Comment Due Date: July 29, 2021

    Keywords: Europe, EU, Banking, CRR, Basel, Risk Weight, Loss Given Default, Regulatory Technical Standards, Standardized Approach, IRB Approach, Credit Risk, Regulatory Capital, EBA

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