On 13 May 2024, the European Banking Authority (EBA) published a Consultation Paper on draft regulatory technical standards (RTS) on equivalent mechanisms for unfinished property under Article 124(12) of the Capital Requirements Regulation (CRR).

Article 124 of CRR sets out the requirements for the assignment of risk weights for exposures secured by mortgages on immovable property, i.e., both for residential and commercial property lending. Article 124(3)(a)(iii) CRR extends the possibilities to be eligible to the preferential risk weight treatment for retail immovable property under Article 125(1) CRR for exposures which are still under construction, where any of the following conditions are met:

  • The immovable property does not have more than four residential housing units and will be the primary residence of the obligor and the lending to the natural person is not indirectly financing ADC exposures.
  • A central government, regional government or local authority or a public sector entity involved, exposures to which are treated in accordance with Articles 115(2) and 116(4), respectively, has the legal powers and ability to ensure that the property under construction will be finished within a reasonable time frame and is required to or has committed in a legally binding manner to do so where the construction would otherwise not be finished within a reasonable time frame; alternatively, there is an equivalent legal mechanism to ensure that the property under construction is completed within a reasonable timeframe.

The EBA is mandated under Article 124(12) CRR to specify what constitutes an equivalent legal mechanism to ensure that the property under construction is completed within a reasonable timeframe.

The Consultation Paper clarifies that an equivalent legal mechanism requires the existence of a counter guarantee provided by a central government or assimilated entities, on an entity which should have the legal powers and ability to ensure that the property under construction will be finished within a reasonable timeframe, and should be required to or have committed in a legally binding manner to do so where the construction would otherwise not be finished within a reasonable timeframe.

The draft RTS aim to provide a harmonised framework at the EU level for the prudential treatment of residential real estate exposures under construction, ensuring comparability of own funds requirements and ultimately achieving a level playing field across the EU.  

The deadline for comments on the Consultation Paper is 13 August 2024.