Single Rulebook Q&A

Question ID: 2018_3995
Legal act : Regulation (EU) No 575/2013 as amended by Regulation (EU) 2019/876 – CRR2
Topic : Accounting and auditing
Article: 473a
Paragraph: 7
Subparagraph: b
COM Delegated or Implementing Acts/RTS/ITS/GLs: Delegated Regulation (EU) 2015/62 - DR with regard to the leverage ratio
Article/Paragraph : 429, paragraph 5
Type of submitter: Individual
Subject matter : IFRS 9 Transitional arrangements – Calculation of the total exposure measure of the leverage ratio
Question:

According to Article 473a(7)(b) of CRR, is it correct to adjust the specific credit risk adjustments by applying a scaling factor for the only exposures subject to the standardised credit risk approach for the purpose of the calculation of the total exposure measure of the transitional leverage ratio?

Background on the question:
In accordance with Article 473a(7) of Regulation (EU) No 575/2013 (CRR) introduced by Regulation (EU) 2017/2395 amending the CRR, the institution that decides to apply IFRS 9 transitional arrangements shall recalculate all requirements laid down in CRR and in Directive 2013/36/EU without taking into account the effects that the expected credit loss provisions that it included in its Common Equity Tier 1 capital have on those items. With specific reference to the calculation of the exposure value of assets in accordance with Article 111(1), Article 473a(7)(b) of CRR requires institutions using the standardised approach to measure capital requirements for credit risk, to adjust the specific credit risk adjustments by which the exposure value shall be reduced by applying a scaling factor. In addition, Article 473a(7)(c) requires institutions using the IRB approach to adjust the IRB excess of provisions over expected losses which is eligible as Tier 2 capital in order to taking into account any shortfall existing as at 31 December 2017.
 
It follows that the specific credit risk adjustments should be adjusted by applying a scaling factor for the only exposures subject to the standardised approach while no adjustment is required for exposures subject to the IRB approach for which the total amount of IFRS 9 provisions is considered during the transitional period.
 
On the basis of the above, the different treatment of accounting provisions between the SA and IRB credit risk approaches in the transitional period seems to be applicable to the total exposure measure for the calculation of the leverage ratio applying IFRS 9 transitional arrangements. Regarding the latter, for the purpose of the calculation of the exposure value of assets, Article 429(5)(a) of Commission Delegated Regulation (EU) No 2015/62, irrespective of the credit risk approach used by institutions, refers to Article 111(1) which states that the exposure value is the accounting value remaining after specific credit risk adjustments. Therefore, the specific credit risk adjustment by which the exposure value included in the total exposure measure of the leverage ratio is reduced, should be adjusted for the only assets subject to the standardised credit risk approach.
Date of submission: 13/06/2018
Published as Final Q&A: 15/02/2019
EBA answer:
Article 473a(7) of Regulation (EU) No 575/2013 (“CRR”) refers to institutions having to recalculate all requirements laid down in this Regulation and in Directive 2013/36/EU that use some specific items, by not taking into account the effects that the expected credit loss provisions that it included in its Common Equity Tier 1 capital have on those items. In particular, sub-paragraph (b) of Article 473a(7) indicates as one of these items the exposure value as determined in accordance with Article 111(1) of the same Regulation, whereby the specific credit risk adjustments by which the exposure value shall be reduced needs to be recalculated.
 
The methodology for determining the exposure value of assets to be considered in the calculation of the leverage ratio is defined in Article 429 paragraph 5 of the CRR (as amended by Commission Delegated Regulation (EU) 2015/62). This Article specifies in sub-paragraph 5(a) that “institutions shall determine the exposure value of assets in accordance with the following principles: the exposure value of assets […] means exposure values in accordance with the first sentence of Article 111(1); […]”. The first sentence of Article 111(1) establishes that “the exposure value of an asset item shall be its accounting value remaining after specific credit risk adjustments, […]”.
 
Taking into account the abovementioned requirements, the recalculation of the leverage ratio is not limited to exposures subject to the standardised credit risk approach. Hence, institutions applying IFRS 9 transitional arrangements, as established in Article 473a, need to perform the recalculation of the leverage ratio exposure measure by applying the same scaling factor, as defined in Article 473a(7)(b) of Regulation (EU) No 575/2013, regardless of whether for the calculation of the risk-based ratio the standardised or IRB approach is used.
Status: Final Q&A
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