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    EC Regulation Amends Standards for Calculating Credit Risk Adjustments

    June 21, 2022

    The European Commission (EC) published the Delegated Regulation 2022/954, which amends regulatory technical standards on specification of the calculation of specific and general credit risk adjustments. This Regulation shall enter into force on the twentieth day following that of its publication in the Official Journal of the European Union—that is, July 11, 2022.

    The Regulation 2022/954 amends Regulation 183/2014 with respect to calculating the specific credit risk adjustments for purposes of assigning the risk-weights, referred to in Article 127(1) of the Capital Requirements Regulation or CRR (575/2013), to the unsecured part of a defaulted exposure. When calculating specific credit risk adjustments for such purposes, institutions shall include any positive difference between the amount owed by the obligor on that exposure and the sum of the following:

    • Additional own funds reduction if that exposure was written-off fully
    • Any already existing own funds reductions related to that exposure

    The Regulation 2022/954 highlights that it is necessary to ensure that the specific credit risk adjustments recognized for the purposes of Article 127(1) of CRR incorporate any discount in a transaction price of a defaulted exposure that the purchasing institution has not recognized by increasing common equity tier (CET 1) capital. In case of a revaluation of the defaulted exposure occurring after its purchase, the discount should no longer incorporate the part of the revaluation amount of the defaulted exposure that has been recognized as increasing the institution’s CET 1 capital. This needs to be done to avoid any undue double recognition of the potential decrease in the level of expected loss by the purchasing institution after the purchase on both CET 1 capital of that institution and for the purposes of determining the risk-weight in accordance with Article 127(1) of CRR. Therefore, Regulation 183/2014 has been amended accordingly.

     

    Related Link: Regulation 2022/954

     

    Keywords: Europe, EU, Banking, Credit Risk, CRR, Basel, Regulatory Technical Standards, Regulatory Capital, Risk-Weighted Assets, Defaulted Exposures, EC

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