13 December 2021
The European Banking Authority (EBA) published today its final report on the draft Regulatory Technical Standards (RTS) amending its RTS on credit risk adjustments in the context of the calculation of the Risk Weight (RW) of defaulted exposures under the Standardised Approach (SA) of credit risk. The proposed amendments follow up on the European Commission’s Action Plan to tackle Non-Performing Loans (NPL) in the aftermath of the COVID-19 pandemic, which indicated the need for a revision of the treatment of purchased defaulted exposures under the SA. This revision is necessary to ensure that the prudential framework does not create disincentives to the sale of non-performing assets by banks.
The Commission’s Action Plan specifically asks the EBA to reconsider the appropriate regulatory treatment of the RW for purchased defaulted assets, as laid out in the Capital Requirements Regulation (CRR), which have been sold at a discount, i.e. NPL sales. Under the current regulatory framework, the capital charge for a defaulted exposure may – under certain circumstances - increase after its sale from a risk weight of 100% on the seller’s balance sheet to a risk weight of 150% on the balance sheet of the credit institution buying the assets.
The proposed amendment to the existing RTS on credit risk adjustments introduces a change to the recognition of total credit risk adjustments to ensure that the risk weight remains the same in both cases. In particular, the price discount stemming from the sale will be recognised as a credit risk adjustment for the purposes of determining the risk weight.
By implementing this change through an RTS amendment, the EBA aims at clarifying the regulatory treatment of sold NPL assets. The EBA also recommends that the treatment set out in this RTS be directly reflected in the level 1 text, in line with European Commission CRR3 proposal.
Legal basis and background
Article 110(4)(e) of Regulation (EU) No 575/2013 mandates the EBA to specify the amounts that need to be included in the calculation of credit risk adjustments for the determination of default under Article 178 of Regulation (EU) No 575/2013.
In light of the COVID-19 pandemic, it is desirable to remove any impediment to the creation of secondary markets for defaulted exposures. In this context, a misalignment between the risk weight applied to defaulted assets and the potential for unexpected losses in relation to the level of already expected losses could create undue obstacles for credit institutions to move their non-performing loans off their balance sheets.
It is, therefore, necessary to ensure that the specific credit risk adjustments recognised for Article 127(1) of Regulation (EU) No 575/2013 incorporate any discount in a transaction price that the buyer has not recognised by increasing CET1 capital.
DOCUMENTS
Final draft RTS amending RTS on the calculation of specific credit risk adjustments
LINKS
Regulatory Technical Standards on the calculation of credit risk adjustments