On 13 December 2021, the European Banking Authority (EBA) issued a final report on draft Regulatory Technical Standards (RTS) amending the RTS on credit risk adjustments in the context of the calculation of the risk weight (RW) of defaulted exposures under the Standardised Approach (SA) of credit risk. The proposed amendments follow up on the European Commission’s Action Plan to tackle Non-Performing Loans (NPLs) in the aftermath of the COVID-19 pandemic.
Section 2.5 of the Commission Action Plan asks the EBA to consider the appropriate prudential treatment of the RW for defaulted exposures following the sale of a non-performing asset (NPL assets). In particular, it is noted that a 100% RW – compared to the normal RW of 150% – can be applied when provisions cover more than 20% of an exposure; however ‘only provisions/write-downs (so-called ‘credit risk adjustments’) made by the institution itself can be accounted for, not write-downs accounted for in the transaction price of the exposure’.
The proposed amendments allow for the recognition of such write-downs accounted for in the transaction price of the exposure, which are retained by the seller, in the credit risk adjustments recognised for the determination of the RW of defaulted exposures applied by the buyer under the SA. This is achieved by introducing an amount (that could be seen as a ‘discount’) that would have to be added to the amount of specific credit risk adjustments used to determine the appropriate RW under Article 127(1) of the Capital Requirements Regulation (CRR). As a consequence, the amount used to determine the RW under Article 127(1) of the CRR is designed in such a way that the purchase of an asset with a discount equal to the amount of specific credit risk adjustments that were assigned to the exposure by the seller does not change its RW.
The EBA has taken the step of implementing the change via an RTS amendment. However, it is also recommended that the treatment set out in these RTS is included directly in the level 1 text, which is the case in the amending CRR Commission proposal published of 27 October 2021.
The final draft RTS will be submitted to the Commission for endorsement before being published in the Official Journal of the European Union (OJ). The technical standards will apply 20 days after their publication in the OJ.