Single Rulebook Q&A

Question ID: 2017_3517
Legal act : Regulation (EU) No 575/2013 as amended by Regulation (EU) 2019/876 – CRR2
Topic : Credit risk
Article: 115(2), 116(4), 143(3), 147(3), 150(1)
Paragraph:
Subparagraph:
COM Delegated or Implementing Acts/RTS/ITS/GLs: Not applicable
Article/Paragraph : Not applicable
Type of submitter: Credit institution
Subject matter : Exposures to regional governments, local authorities or public sector entities which are treated as exposures to central governments under Articles 115 and 116 CRR
Question:

Please clarify how Article 115(2) CRR shall be applied in case regional governments and local authorities are treated under the SA by application of Article 150 CRR and central governments are treated under the IRB Approach. 

Background on the question:

Please find below three different situations for the analysis:

Case 1: Consider an exposure to a regional government or local authority which has not been yet published in the EBA list. The institution measures the risks to exposures to regional governments or local authorities according to the Standardised Approach. No authorization has been granted to use the IRB Approach for those exposures. On the contrary, the exposures to central governments are risk weighted according to the IRB Approach under this scenario, what happens when this exposure that originally was not in the EBA list is included in the list? According to the CRR it must be treated as an exposure to a central government, in this case should it be treated under the IRB Approach given that exposures to central governments are risk weighted under IRB?

Case 2: Consider an exposure to a regional government or local authority which has not been yet published in the EBA list. The institution measures the risks to exposures to regional governments or local authorities according to the IRB Approach. On the contrary, the exposures to central governments are risk weighted according to the Standardised Approach, there’s no authorization to use IRB Approach for exposures to central governments Under this scenario, what happens when this exposure that originally was not in the EBA list is included in the list? According to the CRR it must be treated as an exposure to a central government, in this case should it be treated under the Standardised Approach given that exposures to central governments must be risk weighted under the Standardised Approach? Or on the contrary should it be risk weighted according to the “original” IRB Approach as an exposure to the regional government or local authority as no permission has been granted for the use of IRB for central government exposures?

Case 3: Consider an exposure to a regional government or local authority which has not been yet published in the EBA list. The institution measures the risks to exposures to regional governments or local authorities according to the IRB Approach. The exposures to central governments are risk weighted also according to the IRB Approach. Under this scenario, what happens when an exposure that originally was not in the EBA list is included in the list? According to the CRR it must be treated as exposures to a central government, in this case should it be risk weighted under the IRB Approach applicable to exposures to central governments or should it be risk weighted according to the “original” IRB Approach applicable to regional government or local authority exposures?

Date of submission: 07/09/2017
Published as Final Q&A: 01/03/2019
EBA answer:

Exposures to regional governments or local authorities shall be treated as exposures to the central government where relevant conditions in Article 115(2) and (4) of Regulation (EU) No 575/2013 (CRR) are met. Entities that meet the conditions of article 115(2) are to be included in the list published by the EBA.

Exposures to public-sector entities may be treated as exposures to the relevant central government, central bank, regional government or local authority where the conditions set by Article 116(4) CRR are met and as clarified in Q&A 2484.

Institutions permitted to use the IRB Approach for one or more exposure classes may apply the Standardised Approach for those exposures, which meet the requirements set out in Article 150 CRR, subject to permission by competent authorities. The permission to use the Standardised Approach may relate to all exposures within a given exposure class or to a subset of exposures within a given exposure class depending on the conditions under which the permanent partial use in Article 150(1) of CRR has been permitted. Otherwise, each exposure shall be assigned to a relevant IRB exposures class according to Article 147 CRR.

Consequently, if an institution has the permission to use the IRB Approach for the “exposures to central government and central banks” and for “exposures to institutions” (and no permission to use the Standardised Approach according to Article 150 CRR for any of these exposures), an exposure to a regional government or local authority shall be assigned to the exposure class “exposures to central governments and central banks” in accordance to Article 147(3)(a) CRR if it fulfils the criteria of Article 115(2) CRR.

Exposures to the regional governments or local authorities included in the list published by the EBA of entities that meet the conditions of Article 115(2) and 116(4) CRR, can be assigned to “exposures to central governments and central banks” in accordance with Article 147(3)(a) CRR. If however an exposure to such an obligor does not fulfil the criteria of Article 115(2) or (4) CRR it shall be assigned to “exposures to institutions” according to Article 147(2)(b), pursuant to 147(4)(a) CRR.

The range of application of the rating systems used by the institution for the purpose of the IRB Approach should reflect a relevant type of exposures as defined in point (2) of Article 142(1) CRR, which may include exposures from different exposure classes. A given type of exposures, being a group of homogeneously managed exposures, may or may not fully coincide with the exposure class as specified in Article 147(2) CRR and may, in particular, may be a subset of an exposure class.

Any changes in the treatment of exposures to regional governments, local authorities or public sector entities should be in line with the approved range of application of the rating systems in accordance with Article 143 CRR and with the scope of the approved use of the Standardised Approach in accordance with Article 150 CRR. Where an institution has exposures to regional governments or local authorities that meet the relevant conditions set out in Article 115(2), it shall proceed as follows:

  • Where the institution has an approved rating system, which includes in its range of application exposures to regional governments or local authorities treated as central governments, the exposures to such entities shall be rated with this rating system.
  • If this is not the case, where the institution has a permission granted in accordance with Article 150 CRR to apply the Standardised Approach to exposures to regional governments or local authorities treated as exposures to central governments and central banks granted in accordance with Article 150 CRR, the exposures to such obligors shall be treated under the Standardised Approach.
  • The institution, which does not have a permission to use the Standardised Approach for such exposures in accordance with Article 150 CRR or a rating system, which includes in its range of application exposures to regional governments or local authorities treated as central governments and central banks, shall treat such exposures according to the Standardised Approach until it has received the permission from the competent authority for an appropriate rating system or for a change to the range of application of an existing rating system in accordance with Article 143(2) or (3) CRR. If the institution does not intend to build or extend a rating system to exposures to regional governments or local authorities treated as exposures to central governments and central banks, it shall request a permission from its competent authority to use the Standardised Approach in accordance with Article 150 CRR.
Status: Final Q&A
Permanent link: link