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EBA FINAL Draft Regulatory Technical Standards Summary

Core Content

The EBA FINAL draft Regulatory Technical Standards (RTS) on the calculation of specific and general credit risk adjustments under Article 110(4) of the Capital Requirements Regulation (CRR) (Regulation (EU) No 575/2013) aim to specify how credit risk adjustments should be calculated for the purpose of determining own funds requirements for credit risk. These standards apply to various aspects of credit risk management, including exposure values under the Standardised Approach and IRB Approach, the treatment of expected loss amounts, and the determination of default.

The RTS are designed to ensure that credit risk adjustments reflect losses exclusively related to credit risk, and that these adjustments reduce the institution's Common Equity Tier 1 (CET1) capital. The standards also clarify that only amounts affecting CET1 are considered for inclusion in the calculation of credit risk adjustments.

Main Views and Key Information

1. Scope and Purpose

• The RTS apply to the calculation of:
  • Exposure values under the Standardised Approach (Article 111) and IRB Approach (Articles 166–168).
  • Treatment of expected loss amounts under Article 159.
  • Determination of default under Article 178.
• All provisions are focused on own funds requirements for credit risk, and the calculation is limited to credit risk adjustments that reduce CET1.

2. Classification of Credit Risk Adjustments

• Credit risk adjustments are classified as General Credit Risk Adjustments (GCRAs) or Specific Credit Risk Adjustments (SCRAs).
• GCRAs are for losses that:
  • Are freely and fully available to meet future credit risk losses.
  • Reflect losses for a group of exposures without evidence of a loss event.
• SCRAs are for losses that:
  • Are related to a specific exposure or group of exposures.
  • Are not eligible for Tier 2 capital under the Standardised Approach.
  • Are deducted from CET1 and reflect credit risk impairments or deterioration in credit quality.

3. Application of the Criteria

• The RTS provide criteria for mapping these adjustments to the applicable accounting framework.
• Proportional assignment is required for SCRA amounts that relate to a group of exposures. These amounts are assigned proportionally to the risk-weighted exposure amounts.
• Exposure values used in the calculation should be determined without considering SCRA.

4. Special Considerations

• Interim losses are immediately deducted from CET1 and do not require adjustment for SCRA unless they affect exposure values or Tier 2 before CET1.
• For determination of default, only SCRA made individually for a single exposure or obligor are considered, not those for groups of exposures.
• Documentation is required to show how institutions apply the criteria in their accounting frameworks.

5. Alignment with Basel III

• The RTS align with Basel III standards, particularly:
  • Paragraph 58: Tier 2 capital should provide loss absorption on a gone-concern basis.
  • Paragraph 60: Provisions for future, unidentified losses are freely available and qualify for Tier 2.
• The restrictive nature of the criteria for GCRAs means that most losses are classified as SCRA.

6. Regulatory Context

• The Omnibus Directive amended the CRD IV, leading to the CRR/CRD IV framework.
• The EBA was mandated to develop draft RTS under Article 110(4) of the CRR.
• The European Commission has adopted this Regulation as a delegated regulation, making it binding and directly applicable in all EU Member States.

Key Provisions

• Article 1: Defines the identification criteria for GCRAs and SCRA.
• Article 2: Specifies the proportional assignment of SCRA to exposures within a group.
• Article 3: Outlines the calculation of SCRA for exposure values.
• Article 4: Details the calculation of SCRA for expected loss amounts.
• Article 5: States that no GCRAs are required for the determination of default.
• Article 6: Requires documentation of the identification and calculation process.
• Article 7: Specifies the entry into force and applicability of the Regulation.

Accompanying Documents

• Cost-Benefit Analysis / Impact Assessment: Provides an overview of the problem justification, objectives, and benefits of the proposed RTS.
• Views of the Banking Stakeholder Group (BSG): Includes feedback from stakeholders on the public consultation and the BSG opinion.
• Feedback on Public Consultation and BSG Opinion: Summarises public input and stakeholder views on the draft RTS.

Conclusion

The EBA RTS aim to ensure consistency and clarity in the calculation of credit risk adjustments across the EU. They are aligned with Basel III and the CRR/CRD IV framework, focusing on own funds requirements and capital reduction due to credit risk. The standards also address accounting frameworks, proportional allocation, and documentation requirements, ensuring that institutions can accurately reflect credit risk in their capital calculations.