Question ID
2024_7079
Legal act
Regulation (EU) No 575/2013 (CRR)
Topic
Credit risk
Article
194
Paragraph
4
COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations
EBA/GL/2016/09 - Guidelines on corrections to modified duration for debt instruments under Article 340(3) CRR
Article/Paragraph
194
Type of submitter
Individual
Subject matter
Interpretation of ‘ The degree of correlation between the value of the assets relied upon for protection and the credit quality of the obligor shall not be too high.’
Question

In Article 194,

Quote

Institutions may recognise funded credit protection in the calculation of the effect of credit risk mitigation only where the lending institution has the right to liquidate or retain, in a timely manner, the assets from which the protection derives in the event of the default, insolvency or bankruptcy — or other credit event set out in the transaction documentation — of the obligor and, where applicable, of the custodian holding the collateral. The degree of correlation between the value of the assets relied upon for protection and the credit quality of the obligor shall not be too high.

Unquote

My question is about the aforementioned correlation. If a obligor’s major asset is a very valuable mine asset, and the mine asset is collateralized by a bank as security for a loan, is it eligible for the bank to consider the value of the mine asset for calculating the ‘risk-weighted asset’? The value of the mine asset is valued by independent & renowned evalution agency and it meets with all other regulatory requirements for eligible collateral.

Background on the question

I’ve read through relevant Articles containing the keyword ‘correlation’ and searched in Q&A. However, the definition & interpretation in Article 194 is vague and could be misinterpreted by policy owner in a bank. For instance, the mine asset I mentioned in Question was interpreted as ‘ineligible’ in calculating ‘risk-weighted asset’ in a case I have encountered, as the policy owner deems the obligor owns the mine asset and the mine asset is the major asset under the obligor, and so the performance of the two is highly-correlated. 

Submission date
Rejected publishing date
Rationale for rejection

This question has been rejected because it is considered that EBA guidance or clarification is not needed with regard to the issue that it raises. For example, this can be the case where it is considered that the existing regulatory framework is sufficiently clear and unambiguous, or where different practices may be possible but it is not currently necessary to harmonise these further through the Q&A process.

The Single Rule Book Q&A tool has been established to provide explanations and non-binding interpretations on questions relating to the practical application or implementation of the provisions of legislative acts referred to in Article 1(2) of the EBA’s founding Regulation, as well as associated delegated and implementing acts, and guidelines and recommendations, adopted under these legislative acts.

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Status
Rejected question