On 24 June 2021, the European Banking Authority (EBA) issued a consultation regarding amendments to the 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. The update is designed to ensure that the EU prudential framework does not create disincentives to the sale of non-performing assets.
Article 110(4)(e) of the Capital Requirements Regulation (CRR) 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 the CRR. In light of the COVID-19 pandemic, the Commission wants to remove any impediment to the creation of secondary markets for defaulted exposures. In this context, a misalignment between the RW 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. Therefore the amendments to the RTS are designed to ensure that the specific credit risk adjustments recognised for Article 127(1) of the CRR incorporate any discount in a transaction price that the buyer has not recognised by increasing common equity tier 1 capital.
The deadline for comments on the consultation is 24 September 2021.
The final draft RTS will be subsequently submitted to the Commission for endorsement before being published in the Official Journal of the European Union.