Single Rulebook Q&A

Question ID: 2018_3753
Legal act : Regulation (EU) No 575/2013 (CRR) as amended
Topic : Credit risk
Article: 119
Paragraph: 2
Subparagraph:
COM Delegated or Implementing Acts/RTS/ITS/GLs: Regulation (EU) No 680/2014 - ITS on supervisory reporting of institutions (as amended)
Article/Paragraph : 119 / 2
Type of submitter: Credit institution
Subject matter : Risk weighted assets calculation under Article 119(2) of the CRR
Question:

What would be the applicable risk weight according to Article 119 (2) of Regulation (EU) No 575/2013 (CRR), to an exposure in the scope of Article 114(6)(a) CRR? 

Background on the question:

According to Article 119 (2) of Regulation (EU) No 575/2013 (CRR) "Exposures to institutions of a residual maturity of three months or less denominated and funded in the national currency of the borrower shall be assigned a risk weight that is one category less favourable than the preferential risk weight, as described in Article 114(4) to (7), assigned to exposures to the central government in which the institution is incorporated".

It is however unclear how this is applied in combination with Article 114(6)(a) CRR, which, for the exposures indicated in Article 495(2), states that in 2018 the risk weight applied to the exposure values shall be 20 % of the risk weight assigned to these exposures in accordance with paragraph (2).

In particular, it is not clear

  1. whether the exposures indicated in Article 495(2) are those to the central governments or central banks of Member States, denominated and funded in the domestic currency of any Member State or only those denominated and funded in the domestic currency of a member, other than the domestic currency; 
  2. whether an exposure to institutions of a residual maturity of three months or less denominated and funded in the national currency of the borrower, in addition to being denominated and funded in the domestic currency of a Member State should be assigned according to Article 119(2) CRR a risk weight that is one category less favourable than the preferential risk weight, as described in Article 114(6)(a);
  3. how to calculate the applicable risk weight, considering that Article 114(6)(a) states that the RW shall be 20 % of the risk weight assigned to the same exposures in accordance with Article 114(2) CRR (which refers to exposures to central governments and central banks for which a credit assessment by a nominated ECAI)

For example, would such an exposure, in case according to Table of Article 114 it was assigned to credit quality step 6 be applied a risk weight of 30% (e.g. 20% *150%)? And in case it was an exposure  corresponding to credit quality step 3, would it be ultimately risk weighted at 10% (e.g. 20% *50%)?

Date of submission: 08/03/2018
Published as Final Q&A: 01/03/2019
EBA answer:

Article 114(6) CRR is not applicable for the purpose of Article 119(2) CRR.

Three cases can be distinguished:

1. exposures to an institution, which are denominated and funded in the same currency, which is the domestic currency of the institution;

2. exposures to an institution, which are denominated and funded in the same currency, which is not the domestic currency of the institution;

3. exposures to an institution, which are denominated and funded in different currencies.

Only the first case is relevant for Article 119(2) CRR because it is about exposures “denominated and funded in the same currency, which is the national currency of the borrower”. This implies that the only relevant risk weight is the one for exposures denominated and funded in the domestic currency of the central government of the country where the borrower institution is incorporated. This risk weight is specified by Article 114(4) CRR where the country is a Member State, whereas the risk weights for third countries are fully specified by Article 114(7) CRR.

Status: Final Q&A
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