Case 1: Provisions according to Article 37 of the Bank Accounting Directive (86/635/EEC): Under this Directive, loans and debt securities may be shown at a value lower than that which would result from the application of the at-cost and the regular provisioning requirements, where that is required by the prudence dictated by the particular risks associated with banking. Nevertheless, the difference between the two values must not be more than 4 % of the total amount of the assets.

In case such provisions qualify as general credit risk adjustments according to Article 1(2) of Commission Delegated Regulation (EU) 183/2014 (RTS on Credit Risk Adjustments), they neither qualify as specific credit risk adjustments according to point (i) nor for any of points (ii), (iv),(v) and (vi) of Article 47c(1)(b) CRR2. However, as any credit risk adjustments must have reduced CET1 capital according to Article 1(1) RTS on credit risk adjustments, they could potentially be covered by point (iii) of Article 47c(1)(b) CRR2 – other own funds reductions.

In any case, where general credit risk adjustments are assigned to the treatment under the standardised approach according to Article 110 CRR, “other own funds reductions” could only be applied to the amount of such general credit risk adjustments that exceeds the cap of 1.25% risk-weighted exposures amounts of SA exposures, below which general credit risk adjustments are included in Tier 2 capital. As far as general credit risk adjustments are included in Tier 2 items in accordance with Article 62(c) CRR(2), they are thus not recognised as other own funds reduction according to Article 47c(1)(b)(iii) CRR2, because the own funds reduction from reducing CET1 capital is neutralised by inclusion in Tier 2 items.

One could indeed question whether general credit risk adjustments were even meant to be covered under item (iii) as Article 47c(1)(b) CRR2 only recognises items related to the same non-performing exposure, in contrast to point (b) of the criteria for general credit risk adjustments in Article 1(2) RTS on Credit Risk Adjustments requiring that they reflect credit risk losses for a group of exposures for which the institution has currently no evidence that a loss event has occurred, thus this might just exclude non-performing exposures.

On the other hand, one could argue that specific credit risk adjustments are directly offset against the deduction requirement for non-performing exposures, whereas general credit risk adjustments are not directly offset, but only offset up to their own funds reduction (when exceeding the 1.25% risk-weighted SA exposure amounts ceiling).

General credit risk adjustments treated in accordance with Article 62(c) CRR(2) but not included in Tier 2 items due to exceeding the ceiling would thus be recognised as other own funds reduction according to Article 47c(1)(b)(iii) CRR2, because of the own funds reduction from reducing CET1 capital.

However, the problem comes when allocating general credit risk adjustments to the exposures in a portfolio – especially those provisions under Article 37 of the Bank Accounting Directive – against the deduction requirement for non-performing exposures. General credit risk adjustments are built to cover future risks not yet covered by specific credit risk adjustments (because point (a) of Article 1(2) RTS on Credit Risk Adjustments requires they are freely and fully available, as regards to timing and amount, to meet credit risk losses that have not yet materialised), whereas the deduction requirement applies to non-performing exposures, thus floors the valuation of losses from defaults that happened long ago. For that reason, general credit risk adjustments for a group of exposures should be allocated

- first to performing exposures,

- then to non-performing exposures in the period before the factor in paragraph 2(a) or 3(a) of Article 47c CRR2 becomes applicable,

- finally to non-performing exposures for which one of the factors in paragraph 2 or 3 of Article 47c CRR2 is applicable.

Offsetting the own funds reduction would thus occur mainly when the bank establishes a provision for a portfolio that is wholly subject to the deduction requirement for non-performing exposures.

Case 2: Positive amounts resulting from the calculation for IRB expected loss amounts that are included in Tier 2 items in accordance with Article 62(d) CRR(2): not recognised as other own funds reduction according to Article 47c(1)(b)(iii) CRR2 and also not according to Article 47c(1)(b)(i) CRR2 where arising from specific credit risk adjustment, because own funds reduction from reducing CET1 capital is neutralised by inclusion in Tier 2 items.

Case 3: Positive amounts resulting from the calculation for IRB expected loss amounts that are not included in Tier 2 items due to exceeding the cap at 0.6% risk-weighted exposures amounts of IRB exposures according to Article 62(d) CRR(2): recognised, because of arising from specific credit risk adjustments and/or other own funds reductions recognised by Article 47c(1)(b)(i) and (iii) CRR2. The amount attributable to each non-performing IRB exposure is determined by multiplying the recognised amount by the contribution of the expected loss amount for the non-performing exposure to total expected loss amounts for defaulted or non- defaulted exposures, as applicable, because the same rationale applies as for the EL-shortfall deductions according to Article 47c(1)(b)(iv) CRR2.

For avoiding double recognition (i) as specific credit risk adjustment and again (ii) as other own funds reduction arising from positive amounts exceeding the cap for inclusion in Tier 2 items, amounts of specific credit risk adjustments assigned to non-performing IRB exposures must not be recognised according to Article 47c(1)(b)(i) CRR2 if already recognised as other own funds reduction according to Article 47c(1)(b)(iii) CRR2 due to exceeding the cap for inclusion in Tier 2 items. This implies that the total amount of specific credit risk adjustments for non-performing IRB exposures recognised according to Article 47c(1)(b)(i) CRR2 cannot exceed total expected loss amounts for IRB exposures  less any other amounts included in the calculation according to Article 159 CRR, thus can be even zero if these other amounts already exceed total expected loss amounts for IRB exposures. For the total amount of those specific credit risk adjustments that can be recognised according to Article 47c(1)(b)(i) CRR2, the amount attributable to each non-performing IRB exposure  is determined by multiplying the recognised amount by the contribution of the expected loss amount for the non-performing exposure to total expected loss amounts for defaulted or non- defaulted exposures, as applicable, because the same rationale applies as for the EL-shortfall deductions according to Article 47c(1)(b)(iv) CRR2.