Question ID:
2016_3072
Legal Act:
Regulation (EU) No 575/2013 (CRR) as amended
Topic:
Supervisory reporting - COREP (incl. IP Losses)
Article:
99
COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations:
Regulation (EU) No 680/2014 - ITS on supervisory reporting of institutions (as amended)
Article/Paragraph:
Annexes I and II, template C 07.00
Disclose name of institution / entity:
No
Type of submitter:
Competent authority
Subject Matter:
Leased assets residual value under standardised method
Question:

With regards to the risk-weighted exposure on residual value of leased assets, CRR article 134 (7) states that it shall be computed as follows: “1/t * 100 % * residual value”, where t is the greater between 1 and the nearest integer corresponding to the remaining maturity of the lease.
The institution's understanding of the aforementioned CRR reference is that the Initial Exposure shall correspond to the residual value of the leased assets and that the EAD value shall be applied a 1/t discounted factor.
According to the institution, the treatment does not seem to fit the Corep logics nor its structure since it raised the same blocking errors as those referred to in item 1) [submitter probably refers to Q 3064 and v0010_h, v0306_m, v0307_m, v0308_m, v0312_m].
In order to bypass the blocking errors, we have made the decision to align the EAD values with their respective Initial Exposure amounts.

Background on the question:

Original question from the institution: With regards to the risk-weighted exposure on residual value of leased assets, CRR article 134 7) states that it shall be computed as follows: “1/t * 100 % * residual value”, where t is the greater between 1 and the nearest integer corresponding to the remaining maturity of the lease. Our understanding of the aforementioned CRR reference is that the Initial Exposure shall correspond to the residual value of the leased assets and that the EAD value shall be applied a 1/t discounted factor. Once again, the treatment does not seem to fit the Corep logics nor its structure since it raised the same blocking errors as those referred to in item 1). In order to bypass the blocking errors, we have made the decision to align the EAD values with their respective Initial Exposure amounts. Amounts involved are significant (EUR4bn). Also, processing the solution implies operational risk and is definitely time consuming. Getting your input on this topic would be very beneficial to our production process in the long run. ”

Date of submission:
22/12/2016
Published as Final Q&A:
04/10/2019
EBA Answer:

The prudential treatment of leases is defined in article 134(7) of Regulation (EU) No 575/2013 (CRR). It states that the leases’ exposure is composed of (i) minimum lease payments and (ii) residual value.

With regard to the residual amount Q&A 2014_1241 clarifies that, for the purposes of the calculation of risk weighted exposure amount with the formula “1/t * 100% * residual value” included in the above mentioned article, the residual value shall be the “undiscounted estimated residual value at the end of the lease term which is reassessed periodically to ensure continued appropriateness”.

Furthermore, according to the currently applicable instructions on template C 07.00 of Annex I of Regulation (EU) No 680/2014 (ITS on Supervisory Reporting), column 010 refers to Art. 111 CRR and therefore here the accounting value is relevant to populate this column, and columns 040, 110, 150 as well which refer to the exposure value and not the risk weighted exposure amount (of the residual value of the leasing asset) which is subject to Art. 134 (7) sentence 5 and calculated according to the formula “1/t * 100% * residual value”.

In the light of that, the following figures shall be included in template C 07.00 in order to ensure consistency with both accounting framework / COREP instructions and the EBA Q&A 2014_1241:

1.      Column 010 “ORIGINAL EXPOSURE PRE CONVERSION FACTORS” – the accounting value of payments and residual value before value adjustments and provisions. Under IFRS 16, it implies that payments and residual value are discounted figures;

2.      Column 040 “Exposure net of value adjustments and provisions” – the accounting value of payments and residual value. The value in column 010 minus the value in column 030. Both the figures are discounted;

3.      Column 110 “NET EXPOSURE AFTER CRM SUBSTITUTION EFFECTS PRE CONVERSION FACTORS” – the accounting value of payments. The accounting value (discounted value) of the residual value is included only if the unfunded credit protection provided for in article 134(7) CRR does not apply, otherwise the residual value is reduced for the guarantee value (that is included in columns 050 and 090 of C 07.00 and treated consequently as an exposure to the guarantor).

4.      Column 150 “FULLY ADJUSTED EXPOSURE VALUE (E*)” – includes the same figure of column 110 because the CRM technique provided for in article 223 of CRR does not apply to leases;

5.      Column 200 “Exposure value” – includes the value that results from the calculation stated in v0308_m, that is, the residual value should be undiscounted.  

This should include the same figure of column 150 because the CCF equals 100%.

6.      Column 215/220 “Risk weighted exposure amount pre/after SME supporting factor” - only here will be a change in the treatment of the residual value. According to Art. 134 (7) sentence 5 the risk weighted exposure amount of the residual value will be calculated according to the formula: 1/t * 100% * residual value. EBA Q&A 2014_1241 clarifies that, only for the purposes of the calculation of the formula “1/t * 100% * residual value” included in the above mentioned article, the residual value shall be the “undiscounted estimated residual value at the end of the lease term which is reassessed periodically to ensure continued appropriateness”.

It is only for the calculation of the risk-weighted exposure amounts (column 215) that the undiscounted figure of residual value should be considered, in the formula (1/t * 100% * Residual Value). 

Status:
Final Q&A