Do the Article 193 ‘Principles for recognising the effect of credit risk mitigation techniques’ and Article 194 ‘Principles governing the eligibility of credit risk mitigation techniques’ apply to immovable property collateral under the Standardised approach?
Article 193 specifies the principles that should apply in order for the effect of credit risk mitigation techniques to be recognised. Similarly, Article 194 defines the principles that govern the eligibility of credit risk mitigation techniques.
However, Article 194(3) states “Institutions may recognise funded credit protection in the calculation of the effect of credit risk mitigation only where the assets relied upon for protection […] are included in the list of eligible assets set out in Articles 197 to 200, as applicable”.
Article 197 in turn is titled “Eligibility of collateral under all approaches and methods”, but it does not include immovable property collateral. On the other hand, immovable property collateral is included in Article 199 but this Article is titled ‘Additional eligibility for collateral under the IRB Approach’.
It has come to our attention that the wording of the above articles and their titles has led different market participants to interpret them in different ways with i) some concluding that CRR does not consider immovable property collateral to be a funded credit risk mitigation technique under the Standardised approach and therefore the principles in articles 193 and 194 do not apply to immovable property collateral under the Standardised approach and ii) other market participants ensuring their immovable property collateral satisfies the principles in Articles 193 and 194 under both the Standardised and IRB approaches.
Immovable property collateral is not eligible under the credit risk mitigation framework set in Chapter 4 of Part Three of Regulation (EU) No 575/2013 (CRR) where the institution applies the standardised approach for credit risk. This type of collateral is not included in the lists provided by Articles 197 and 198 CRR of collateral available under all approaches. Article 199(1)(a) CRR permits recognition of immovable properties collateral exclusively for exposures to which the IRB approach applies.
As clarified in paragraph 28 of the EBA Report on the Credit Risk Mitigation Framework, where an exposure under the standardised approach is secured by mortgage on immovable properties, this can exclusively be recognised according to Articles 124, 125 or 126 CRR, as applicable. In particular, the conditions to apply the preferential treatments provided for by Article 125 or 126 CRR mainly refer to the requirements set out in Article 208 and the valuation rules set out in Article 229(1) CRR. Consequently Articles 193 and 194 CRR are not applicable for this purpose.