Question ID
2022_6496
Legal act
Regulation (EU) No 575/2013 (CRR)
Topic
Model validation
Article
151
Paragraph
1
COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations
Not applicable
Article/Paragraph
n/a
Type of submitter
Credit institution
Subject matter
Interaction between (i) CET1 deduction for minimum coverage on NPE and (ii) REA calculated under IRB-Advanced
Question

In accordance with CRR art. 36(1)m and 47c the amount of insufficient coverage for non-performing exposures is to be deducted from CET1.

Simultaneously the CRR requires institutions to calculate risk weighted exposure amounts (REA). This may result in a situation whereby for a given exposure the underlying risk is double-counted, once through available funds (deduction of CET1) and once through required funds (REA). Such double-counting is not intended, as also recognized in art. 67 of the ‘EBA REPORT ON STATUTORY PRUDENTIAL BACKSTOPS’.

W.r.t. exposures under the IRB-Advanced approach the ‘EBA REPORT ON STATUTORY PRUDENTIAL BACKSTOPS’ further states in art. 69 that ‘In this respect Article 151(1) CRR clarifies that no own fund requirements should be imposed on parts of exposures that have already been deducted from CET1 while parts of exposures that have not yet been deducted from capital should still be risk-weighted to address any unexpected losses.’

While based on CRR art. 151(1) it appears clear that in theory only the exposure remaining after partial CET1 deduction (due to CRR art. 47c) is still to be risk weighted, clarification is sought on how exactly the risk weight on parts of a non-performing exposure is to be calculated in practice under the IRB-Advanced approach.

Assume an exposure of 1000, under IRB-Advanced. Both the provision and the ELBE are equal to 300 (30%), while the LGD is equal to 500 (50%). In accordance with Art. 153(1) and 154(1) the REA is then calculated as 1000 * max(0, 12.5 * (LGD – ELBE)) or a REA of 2500. Now assume a minimum coverage expectation in line with art. 47c of 70%, i.e. 700. The resulting insufficient coverage thus equals 400, which is deducted from CET1. Remaining exposure to be risk weighted is 600.

How to calculate the REA on this 600 given that ELBE and LGD were modelled based on an original exposure of 1000? Is our understanding correct that the REA on the remaining exposure is intended to be zero as provisions and CET1 deduction combined already exceed the (downturn) LGD? I.e. REA is only required for the 

Background on the question

REGULATION (EU) 2019/630 introduced new minimum coverage requirements on non-performing exposures (also known as 'NPL backstops' or 'calendar provisioning') whereby shortfalls versus the requirements are to be deducted from CET1. It is unclear how this would interact with the calculation of REA under IRB-Advanced (unlike for Standardized where REA is calculated on a net exposure bases or for IRB-Foundation where REA is zero for defaulted exposures). While art 151(1) allows not to risk weight the part of the exposure dedcuted from CET1, guidance is sought on how exactly the risk weight is to be determined on the remaining part and hence how to avoid double-counting between CET1 deduction and REA.idance is sought on how exactly the risk weight is to be determined on the remaining part and hence how to avoid double-counting between CET1 deduction and REA.

Submission date
Rejected publishing date
Rationale for rejection

This question has been rejected because the question is not sufficiently clear, or has not sufficiently identified a provision of a legal framework covered by this tool that creates uncertainty and for which an explanation is merited in terms or practical implementation or application.

Status
Rejected question