On 17 May 2024, the European Banking Authority (EBA) issued a consultation paper containing draft guidelines on acquisition, development and construction (ADC) exposures to residential property.

Article 126a of the Capital Requirements Regulation (CRR) introduces under the standardised approach for credit risk a new category of exposures called ADC exposures within the class of exposures secured by mortgages on immovable property. These exposures are associated with heightened risk and may attract a risk-weight of 150%. Institutions may, however, apply a risk weight of 100% to ADC exposures to residential property when, besides engaging in sound originating and monitoring standards, certain conditions reducing the credit risk of the exposure are met. These conditions are listed in Article 126a(2) of the CRR, which refer to a significant proportion of total contracts must be pre-sale and pre-lease contracts with substantial cash deposit or sale and lease contracts (or where the financing is ensured in an equivalent manner) and/or an appropriate amount of obligor-contributed equity to the residential property value upon completion.

The draft guidelines in the EBA’s consultation paper specify the terms under Article 126a of the CRR related to the credit risk reducing conditions that must be met to apply the 100% risk weight for ADC exposures to residential property. The guidelines also take into account the specificities of institutions’ lending to public housing or not-for profit entities across the EU that are regulated by national law and that exist to serve social purposes and to offer tenants long-term housing.

The deadline for comments on the consultation paper is 19 August 2024.

A public hearing will take place via conference call on 20 June 2024 from 9.30 to 11.00 CEST.