Question ID
2017_3227
Legal act
Regulation (EU) No 575/2013 (CRR)
Topic
Credit risk
Article
500
COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations
Not applicable
Article/Paragraph
N/A
Type of submitter
Consultancy firm
Subject matter
Application of IRB floor
Question

How should the IRB floor requirement, stemming from Article 500 CRR (transitory Basel I floor), be applied in case of an IRB institution that uses standardised method (after regulator’s approval) as an alternative to Basel I floor in the situation when 80 % of the total minimum amount of own funds calculated under standardised method (SA) is higher than the own funds calculated under IRB approach?

Is the institution in such circumstances obliged to recognise an additional capital (own fund) requirement, resulting from the difference between the floor value based on STA and the actual own funds calculated under IRB capital requirements, directly in its capital adequacy ratio (the positive difference between 80% of STA RWA and IRB RWA to be added to denominator of capital adequacy ratio calculation)?

Or rather the IRB bank is only obliged to ensure that it holds own funds at the level which is more or equal to the 80% of the total minimum amount of own funds as required under Basel I (or STA under Basel II, after regulator’s approval), i.e. the level of own funds is sufficient for covering the IRB floor requirement of Art. 500 CRR?

Background on the question

According to Article 500 CRR, an IRB institution should hold own funds which are at all times more than or equal to the higher of:

a) the level required by Article 92,

b) 80 % of the total minimum amount of own funds that the institution would be required to hold under Article 4 of Directive 93/6/EEC as that Directive and Directive 2000/12/EC of the European Parliament and of the Council of 20 March 2000 relating to the taking up and pursuit of the business of credit institutions stood prior to 1 January 2007.

This amount may be replaced by a requirement to hold own funds which are at all times more than or equal to 80 % of the own funds that the institution would be required to hold under Article 92 calculating risk-weighted exposure amounts in accordance with the standardised method.

Although the wording of Article 500 clearly says that this requirement should be fulfilled by holding the appropriate level of own funds, based on information received in the context of our cooperation with some local banks, some IRB banks would be expected to recognise an additional capital requirement resulting from the IRB floor and include it in the denominator of the capital adequacy ratio. This approach seems to contradict Article 500 CRR and the market and supervisory practices in other EU. It also seems to depart from the existing Q&A 1011 provided by EBA in this area.

The IRB floor requirements according to Article 500,in our view, should be based on the comparison of own funds and 80% RWA under Basel I or STA approach. IRB floor should not work through changing of the manner the capital adequacy ratio is calculated by adding difference between 80% of RWA calculated under STA and IRB RWA to its denominator, and such position is in line with the single rulebook principles as expressed by CRR.

We understand that under Single Rule Book approach expressed i.a. by maximum harmonisation logic that governs CRR, Article 500 is directly applicable (as the rest of CRR) and this article does not contain any national option for local competent authorities or supervisors to reinterpret the literal meaning of the provisions of Article 500 and apply any extra layer of gold plating in the interpretation of Article 500 CRR.

This Q&A is connected to and followed by a similar question (Q&A 3228) regarding presentation of IRB floor in COREP templates.

Submission date
Final answer

According to Article 500 (1) (b) of Regulation (EU) No 575/2013 (CRR) institutions shall hold own funds which are at all times more than or equal to 80% of the total minimum amount of own funds that would be required to be held under the previous EU Directives (which transposed Basel I) as they stood prior to 1 January 2007.

In accordance with Article 500 (2), CRR, this amount may, subject to approval of the competent authorities, be replaced by a requirement to hold own funds which are at all times more than or equal to 80% of the own funds that would be required under Article 92 CRR where the risk-weighted exposure amounts are calculated using the Standardised Approaches for credit risk and operational risk (or the Basic Indicator Approach for the latter) rather than the IRB approach or the Advanced Measurement Approach. The application of Article 500 (2) is subject to the respect of the conditions of Article 500 (3) CRR.

As stated in Q&A 744, the requirements of Article 500 (1) (a) CRR (own funds requirement according to Article 92 CRR) and 500 (1) (b) CRR (Basel I floor) require separate calculations and shall both be met. As both requirements are separate, the difference of the Basel I floor as determined under Articles 500(1)(b) where the necessary condition are met, under Article 500(2), and the requirement under 500(1)(a) should not be reflected in the denominator of the capital ratio of Article 92 CRR (i.e. the risk-weighted exposures amounts calculated using the IRB approach and/or the Advanced Measurement Approach).

Status
Archive
Answer prepared by
Answer prepared by the EBA.
Note to Q&A

Update 16.09.2021: This Q&A has been archived in light of the change(s) in Article 500 to Regulation (EU) No 575/2013 (CRR), applicable from 28.06.2021.