EBA launches consultation to amend technical standards on credit risk adjustments

The European Banking Authority (EBA) launched today a public consultation on amendments to its Regulatory Technical Standards (RTS) on credit risk adjustments in the context of the calculation of the Risk Weight (RW) of defaulted exposures under the Standardised Approach (SA). The proposed amendments follow up on the European Commission’s Action Plan to tackle non-performing loans in the aftermath of the COVID-19 pandemic, which indicated the need for a revision of the treatment of defaulted exposures under the SA. This update is necessary to ensure the prudential framework does not create disincentives to the sale of non-performing assets. The consultation runs until 24 September 2021.

The Commission’s Action Plan specifically asks the EBA to consider the appropriate regulatory treatment of 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, which ensures that the risk weight can remain 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. However, the EBA also recommends that the treatment set out in this RTS be included in the Commission’s considerations as part of the revised Capital Requirements Regulation (CRR3) proposal, which is expected at a later stage.

Consultation process

Comments on the consultation can be sent to the EBA by clicking on the “send your comments” button on the consultation page. Please note that the deadline for the submission of comments is 24 September 2021.

A public hearing will take place via conference call on 13 July 2021 from 11:00 to 12:00 CEST.

All contributions received will be published after the consultation closes, unless requested otherwise.

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.