The European Banking Authority (EBA) has published its technical advice to the European Commission on the prudential filter for fair gains and losses arising from banks’ own credit risk related to derivative liabilities.
Article 33(1)(c) of the Capital Requirements Regulation (CRR) stipulates that institutions shall not include in any element of own funds, fair value gains and losses on derivative liabilities of the institution that result from changes in the own credit standing of the institution. Additionally, under Article 33(2) of the CRR, institutions shall not offset the fair value gains and losses arising from the institution’s own credit risk with those arising from its counterparty credit risk.
The EBA’s technical advice provides a qualitative analysis of the challenges in applying the current Article 33(1)(c) of the CRR and the alternative methods of treating fair value gains and losses arising from the own standing of an institution (including the Basel III approach). The final part of the technical advice includes an overall assessment of the current challenges and the appropriateness of the possible alternative approaches. It also provides the EBA’s considerations for addressing the prudential concerns.
The EBA’s analysis highlighted a number of issues concerning the application of Article 33(1)(c) of the CRR. In particular one of the main conceptual concerns regarding the recognition of own credit risk in own funds is the uncertainty of its realisation.
The Commission will prepare a report on this issue (under Article 502 of the CRR), taking account of the EBA’s work. The report is to be delivered to the European Parliament and the Council of the EU by 31 December 2014.