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Unnecessary: CRR high-risk exposures EBA guidelines

Unnecessary: CRR high-risk exposures EBA guidelines

​​​​ESBG responds to EBA consultation, comments on real estate, private equity, equity exposures

 

>> See full response


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.


​Other areas ESBG includes in the response are:


  • Defining “high risk” private equity: ESBG opines that the current specification of what is to be considered as high risk with respect to private equity in the sense of Art. 128(c) CRR should be defined clearly in order to avoid misunderstanding or room for interpretation. The current definition leaves in fact room for interpretation whether any exposures related to investments, such as indirect in private equities, are to be considered as high risk in the sense of this article.
  • ​Specialised lending: Regarding the consideration of certain specialised lending as high risk exposure in the draft guidelines (paragraph 5 (b)) and given that the finalisation of Basel III provides an specific treatment for specialised lending, ESBG question the logic behind implementing rules, and specially charges, that are already known as being modified/amended.  From its perspective, this will unnecessarily surcharge entities and generate unjustified capital volatility.

  • Equity exposures: According to paragraph 7 of the draft guidelines, “All equity exposures should be considered whether to be classified as high risk if the risk weight for any debt exposure to the same issuer is 150% or where any debt of such issuer would receive a 150% risk weight if these debt obligations were exposures of the institution”. In ESBG’s opinion, the treatment proposed is highly prejudicial for these equity exposures, particularly for ADC listed companies since all ADC lending has been ask by the supervisor to be considered as high-risk exposure. Due to this, ESBG calls for its removal.


Background on rationale for EBA guidelines

  • ​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.


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European Supervisory Authorities (EBA-ESMA); Basel III; Capital Requirements Directive and Regulation