ESBG responds to EBA consultation, comments on real estate, private equity, equity exposures
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BRUSSELS, 19 July 2018 – There is no need to publish draft guidelines for types of exposures to be associated with high risk under Article 128(3) of the Capital Requirements Regulation, according to ESBG. In its response submitted on 17 July to an European Banking Authority consultation on the subject, the association, which represents savings and retail banks in some 20 countries in Europe, commented that supervisors have not assigned work on the guidelines as a high priority after being given a mandate back in 2013 to do so.
On real estate, ESBG sees classification of all Acquisition, Development and Construction, or ADC exposures as speculative immovable property financing – without discriminating against different categories of credit quality of the property developer – lacking risk sensibility. It implies that credit institutions under the Standardised Approach for credit risk shall apply a 150% risk weight to these exposures regardless of the credit quality of the client, the mortgage guarantees provided or the level of reorganisation of the transaction. It deems necessary to mention the treatment given by the finalisation of Basel III to ADC lending, where these exposures will be risk-weighted at 150% unless certain criteria are meet. Thereby ADC exposures to residential real estate may be risk weighted at 100% if they meet certain criteria, such as pre-sale or pre-lease contracts amount to a significant portion of total contracts or substantial equity at risk.
Article 128 (3) of CRR provides a mandate to EBA to issue guidelines specifying which types of exposures other than exposures referred to in Article 128 (2) are associated with particularly high risk and under which circumstances.
EBA on its own initiative has decided, however, to include in the draft guidelines clarifications on the notion of certain exposures referred to in Article 128 (2), i.e. investments in venture capital firms and investments in private equity.