Single Rulebook Q&A

Question ID: 2018_4148
Legal act : Regulation (EU) No 575/2013 as amended by Regulation (EU) 2019/876 – CRR2
Topic : Liquidity risk
Article: 416
Paragraph:
Subparagraph:
COM Delegated or Implementing Acts/RTS/ITS/GLs: Delegated Regulation (EU) 2015/61 - DR with regard to liquidity coverage requirement
Article/Paragraph : 10(1)(c)(ii) and 10(1)(d)
Type of submitter: Credit institution
Subject matter : Treatment of government bonds of a third country as Level 1 assets when the credit quality step 1 is assigned according to article 114(7) of Regulation (EU) 575/2013
Question:

Are the provisions of Article 114(7) of Regulation (EU) 575/2013 (use of the lower RW applied by a third country on exposures to the central government in case of equivalent supervisory and regulatory arrangements) applicable also to the LCR framework?

Background on the question:

To be eligible as Level 1 assets, the Delegated Regulation (EU) 2015/61 Article 10(1)(c)(ii) requires government debt issued by a third country to be assigned a credit assessment at least credit quality step 1 in accordance with  Article 114(2) of Regulation (EU) 575/2013. If this is not the case the next paragraph (Article 10(1)(d)) allows recognition as level 1 up to the amount of stressed net liquidity outflows incurred in the same currency in which the asset is denominated.

In the credit risk framework however, Article 114(7) of Regulation EU 575/2013 allows institutions to use the risk weight applied by the local regulator to government exposures in its own country/currency wherever this is lower than the rating would imply and whenever it is an equivalent third country (reference to Regulation 2014/908/EU as amended by Regulation 2016/2358). As a consequence these exposures can be given a 0% RW according to Article 114(7) and be credit quality step 1, although according to Article 114(2) they should have been assigned a higher RW and consequently a lower credit quality step.

Date of submission: 19/07/2018
Published as Final Q&A: 18/01/2019
EBA answer:

Assets representing claims on or guaranteed by the central government of a third country have to be assigned a credit assessment of at least credit quality step 1 in accordance with  Article 114(2) of Regulation (EU) 575/2013 (“CRR”) to qualify as Level 1 assets according to Article 10(1)(c)(ii) of Delegated Regulation (EU) 2015/61.

Article 114(7) allows institutions to use lower risk weights assigned by a third country than those indicated in the table of Article 114(2), for exposures to the central government and the central bank of this third country which has equivalent supervisory regime. Nevertheless, this article does not allow to conclude that as a consequence, when an exposition is assigned a 0% risk weight, the credit quality step for this exposition is 1. Consequently, the provisions of Article 114(7) of the CRR are not applicable to the LCR framework.

Assets representing claims on or guaranteed by the central government of a third country that are not assigned a credit assessment of credit quality step 1 in accordance with Article 114(2) of the CRR may be recognized as Level 1 according to Article 10(1)(d) of Delegated Regulation (EU) 2015/61 up to the amount of the credit institution's stressed net liquidity outflows incurred in the same currency in which the assets is denominated.

Status: Final Q&A
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