On 17 January 2019, the European Banking Authority (EBA) published its final report on the guidelines on specification of types of exposures to be associated with high risk under Article 128(3) of the Capital Requirements Regulation (CRR).

Article 128(3) CRR provides a mandate to the EBA to draft guidelines that specify which types of exposures, other than those mentioned in Article 128(2) CRR, are to be associated with particularly high risk and the circumstances under which this should happen. As a result of an exposure being identified as an ‘item of particularly high risk’, such exposure receives a risk weight of 150%.

The guidelines consist of two sections:

  • section 1 aims to clarify the notions of investments in venture capital firms and private equity as referred to in Article 128(2) CRR; and
  • section 2 specifies the types of exposures other than those listed in Article 128(2) CRR that should be considered as high risk (and under which circumstances) by way of application of Article 128(3) CRR. This section has been drafted by the EBA with the intention that institutions should specify those individual exposures as items of particularly high risk that carry a high risk of loss due to being structurally different from common exposures of the same original asset class. The guidelines apply from 1 July 2019.

The EBA recognises that the revised standardised approach for credit risk agreed by the Basel Committee on Banking Supervision as part of its Basel III finalisation in December 2017 no longer includes provisions on ‘higher risk exposures’ as the Basel II standard currently does. Nevertheless, the EBA considers it beneficial to issue these guidelines in order to ensure detection of high risk within banks before the transposition of Basel III into the EU legislative framework, as well as a harmonised and consistent application of Article 128(2) and (3) of the CRR until any revision of these provisions has to be applied by institutions, noting that the Basel Committee only requires the framework to apply from 2022 onwards.

The guidelines apply from 1 July 2019.