On 17 April 2018, the European Banking Authority (EBA) issued a consultation paper on guidelines concerning the types of exposures to be associated with high risk under Article 128(3) of the Capital Requirements Regulation (CRR).

The draft guidelines consist of two sections. The first section aims at clarifying the notion of investments in venture capital firms and private equity as referred to in Article 128(2) CRR. The second section specifies which other types of exposures should be considered as high risk and under which circumstances by way of application of Article 128(3) CRR. The second section has been drafted with the intention that institutions should specify those individual exposures as items of particular high risk which carry a high risk of loss due to being structurally different from common exposures of the same asset class.

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. However, the EBA feels that it is beneficial to issue the guidelines in order to ensure detection of high risk within banks before transposition of Basel III in the EU legislative framework and 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.

The deadline for responding to the consultation paper is 17 July 2018.