Single Rulebook Q&A

Question ID: 2017_3426
Legal act : Regulation (EU) No 575/2013 (CRR) as amended
Topic : Credit risk
Article: 159
Paragraph:
Subparagraph:
COM Delegated or Implementing Acts/RTS/ITS/GLs: Not applicable
Article/Paragraph : N/A
Type of submitter: Credit institution
Subject matter : Offset of Additional Value Adjustments (AVA) against Expected Loss (EL) under Article 159
Question:

Are AVAs arising from market risk for exposures to institutions (credit risk exposures) eligible for offset under Article 159 CRR?

Background on the question:

This question follows on from EBA Q&As 933, 950 and 1835. Article 159 CRR states that ‘Institutions shall subtract the expected loss amounts calculated in accordance with Article 158 (5), (6) and (10) from the general and specific credit risk adjustments and additional value adjustments in accordance with Articles 34 and 110 and other own funds reductions related to these exposures’.

The response provided to Q&A 933 states that AVAs deducted from own funds should be included in the offset of AVAs against EL. Q&A 950 advises that AVAs related to expected loss amounts calculated in accordance with Article 158(5), (6) and (10) can be taken into account if related to these exposures. We are not clear from the response in Q&A 1835 whether only AVAs related to credit risk exposures can be included.

Where an institution calculates AVA (arising from market risk) under Article 9 of Regulation (EU) No. 2016/101, but relates to IRB credit risk exposures (i.e. institutions), that are not in default, it is unclear whether these AVAs can be included in the offset of AVA against Expected Loss.

Date of submission: 27/07/2017
Published as Final Q&A: 18/01/2019
EBA answer:

Under Article 159 of Regulation (EU) No 575/2013 (CRR), “institutions shall subtract the expected loss amounts calculated in accordance with Article 158(5), (6) and (10) from the general and specific credit risk adjustments and additional value adjustments in accordance with Articles 34 and 110 and other own funds reductions related to these exposures”.

Hence, the Additional Value Adjustments (AVAs) to be included in the offset against expected losses (EL) are only those deducted from the own funds according to Article 34 CRR under the prudent valuation requirements of Article 105 CRR (Q&A 933), and referring to the credit risk exposures for which EL are calculated in accordance with Article 158(5), (6) and (10) CRR (Q&A 950). In other words, only AVAs associated to credit risk exposures due to counterparty default should be included within the offset in Article 159 CRR, as the offset under that Article is performed against expected loss amounts for credit risk.

Consequently, the AVAs to be included are limited to unearned credit spreads AVAs (Q&A 1835) and AVAs associated to credit risk exposures that are an element of unearned credit spreads in the sense of Article 12(2) of 2016/101. In particular, AVAs computed under Article 9 of Regulation (EU) No 2016/101, linked to market price uncertainty, are not in the scope of Article 159 CRR.

Status: Final Q&A
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