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    EBA Proposes to Amend Technical Standards on Credit Risk Adjustments

    June 24, 2021

    EBA launched a consultation on amendments to the regulatory technical standards (Delegated Regulation 183/2014) on credit risk adjustments in the context of the calculation of the risk-weight of defaulted exposures under the standardized approach. The proposed amendments follow up on the EC Action Plan to tackle non-performing loans (NPLs) in the aftermath of the COVID-19 pandemic, which indicated the need to revise the treatment of defaulted exposures under the standardized approach. The consultation runs until September 24, 2021.

    As part of the Action Plan, EC requested EBA to consider the appropriate prudential treatment of the risk-weight for defaulted exposures, following the sale of a non-performing asset. It is noted that a 100% risk-weight—compared to the normal risk-weight of 150%—can be applied when provisions cover for more than 20% of an exposure. However only provisions/write-downs (credit risk adjustments) made by the institution can be accounted for, but not the write-downs accounted for in the transaction price of the exposure. The proposed amendments allow for the recognition of such write-downs accounted for in the transaction price of the exposure, which are retained by the seller, in the credit risk adjustments recognized for the determination of the risk-weight of defaulted exposures applied by the buyer under the standardized approach. This is done via the introduction of an amount (that could be seen as a “discount”) that would have to be added to the amount of specific credit risk adjustment used to determine appropriate risk-weight under Article 127(1) of the Capital Requirements Regulation (CRR or Regulation 575/2013). As a consequence, the amount used to determine the risk-weight under Article 127(1) of the CRR is designed in such a way that the purchase of an asset with a discount equal to the amount of specific credit risk adjustments that were assigned to the exposure by the seller does not change its risk-weight. However, the discount is defined in a dynamic way, to consider any future revaluations of the exposure.

    One of the proposed amendments to the existing technical standards on credit risk adjustments introduces a change to the recognition of total credit risk adjustments, which ensures that the risk- weight can remain the same in both cases. The price discount stemming from the sale will be recognized as a credit risk adjustment for determining the risk-weight. By implementing this change through an amendment to the technical standards, EBA aims to clarify the regulatory treatment of sold NPL assets. However, EBA also recommends that the treatment set out in the technical standards be included in the EC considerations as part of the revised Capital Requirements Regulation (CRR3) proposal, which is expected at a later stage. After the consultation period, the final draft regulatory technical standards will be subsequently submitted to EC for endorsement before being published in the Official Journal of the European Union.

     

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    Comment Due Date: September 24, 2021

    Keywords: Europe, EU, Banking, Credit Risk Adjustments, Credit Risk, Standardized Approach, NPLs, CRR, Basel, CRR3, Regulatory Technical Standards, Regulatory Capital, Investment Firms, EBA

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