EBA欧洲银行-Public-hearing-CP-on-conditions-for-CAs-to-raise-risk-weights-and-LGD-floors-for-mortgage-exposures_16页_1mb

EBA Consultation Paper on Higher Risk Weights and Minimum LGD Values

Core Content

This Consultation Paper (CP) by the European Banking Authority (EBA) outlines the conditions that competent authorities should consider when determining higher risk weights or higher minimum Loss Given Default (LGD) values for exposures secured by immovable property, under Articles 124(4)(b) and 164(6) of the Capital Requirements Regulation (CRR). The aim is to ensure consistency between capital requirements and the level of risk, particularly in relation to financial stability considerations.

The EBA is tasked with specifying these conditions in a single Regulatory Technical Standard (RTS), which will be submitted to the European Commission in the first half of 2016. The CP was published on 6 July 2015 and the consultation period ended on 6 October 2015.

Main Views and Key Information

1. Standardized Approach (SA) - Higher Risk Weights

• Base Risk Weights:
  • 35% for exposures fully and completely secured by residential property
  • 50% for exposures fully and completely secured by commercial immovable property
• Maximum Increase:
  Risk weights can be increased up to 150% if certain conditions are met.
• Appropriateness Assessment:
  Competent authorities must assess the appropriateness of the risk weights based on both backward-looking (observed LGD) and forward-looking (expected LGD) elements.
• Financial Stability Considerations:
  These include the potential impact on financial stability, such as the risk of systemic effects, pro-cyclical effects, and the resilience of the financial system.
• Other Conditions:
  Competent authorities should ensure that the increase in risk weights is justified and corresponds to the loss expectation. They must also assess the potential pro-cyclical effects.

2. Internal Ratings Based (IRB) Approach - Higher LGD Floors

• Base LGD Floors:
  • 10% for retail exposures secured by residential property
  • 15% for retail exposures secured by commercial immovable property
• Maximum Increase:
  LGD floors can be increased up to 150% if certain conditions are met.
• Appropriateness Assessment:
  Competent authorities must assess the appropriateness of the minimum LGD values based on both backward-looking (observed LGD) and forward-looking (expected LGD) elements.
• Financial Stability Considerations:
  Similar to the SA, these are taken into account to prevent material impacts on financial stability.
• Other Conditions:
  Competent authorities must ensure that the increase in LGD floors corresponds to the LGD expectation and provide an explanation for the increase.

3. Conditions for Setting Higher Risk Weights or LGD Floors

• Joint Assessment:
  Competent authorities must jointly assess both the loss experience and the loss expectations.
• Adjustments:
  Adjustments can be made to the loss experience based on forward-looking immovable property market developments.
• Indicative Benchmarks:
  The EBA proposes indicative benchmarks for the assessment of the appropriateness of the risk weights, which vary based on the type of property and the level of loss expectation.
• Property Segments:
  When setting higher risk weights for one or more property segments, competent authorities must define the segment clearly and ensure it is a homogeneous group of significant size.

4. Consultation Questions

The CP includes eight consultation questions, addressing:

1. Agreement with the three main categories of conditions.
2. Agreement with the conditions for loss experience and loss expectations, and adjustments.
3. Agreement with the indicative benchmarks and their appropriateness.
4. Agreement with the definition of "financial stability considerations."
5. Agreement with other conditions for higher risk weights.
6. Agreement with the conditions for exposure weighted average LGD and LGD expectations, and the lack of indicative benchmarks for LGD.
7. Agreement with other conditions for higher minimum LGD values.
8. Suggestions for the Impact Assessment.

Conclusion

The EBA seeks to ensure that competent authorities apply consistent criteria when setting higher risk weights or LGD floors, with a focus on financial stability and market developments. The CP provides a structured approach for assessing both backward-looking and forward-looking elements, along with indicative benchmarks for different property segments, and invites feedback on these proposals.