List of Q&As

Treatment of exposures under FX-clause in Large Exposure reporting

One of our fully consolidated foreign banks in Croatia raises the question of how exposures with FX-clause should be treated in consolidated Large Exposure reporting.

Legal act: Regulation (EU) No 575/2013 as amended by Regulation (EU) 2019/876 (CRR2)

COM Delegated or Implementing Acts/RTS/ITS/GLs: Not applicable

ID: 2020_5283| Topic: Large exposures| Date of submission: 29/05/2020

EBA validation rule v5315_m

EBA validation rule v5315_m is formulated as follows: sum({F 18.00.b, c130, (r100, r194)}) <= sum({F 20.04, r170, c031, (sNNN)}) Question: Should datapoint {F 18.00.b, r005, c130} be included in validation rule v5315_m?

Legal act: Regulation (EU) No 575/2013 as amended by Regulation (EU) 2019/876 (CRR2)

COM Delegated or Implementing Acts/RTS/ITS/GLs: Regulation (EU) No 680/2014 - ITS on supervisory reporting of institutions (as amended)

ID: 2020_5460| Topic: Supervisory reporting - FINREP (incl. FB&NPE)| Date of submission: 21/08/2020

Classification of Trade Finance guarantees for the good payment of purchased goods or services under Annex I of Regulation 575/2013 (CRR)

How should trade finance guarantees for the good payment of purchased goods or services be classified according to Annex I CRR

Legal act: Regulation (EU) No 575/2013 as amended by Regulation (EU) 2019/876 (CRR2)

COM Delegated or Implementing Acts/RTS/ITS/GLs: Not applicable

ID: 2020_5327| Topic: Credit risk| Date of submission: 23/06/2020

Private equity treatment in sufficiently diversified portfolios

As per article 152(4)(a) of the CRR (as amended by CRR II), Institutions that apply the look-through approach in respect to exposures assigned to the equity exposure class referred to in point (e) of Article 147(2) (i.e. equity exposures), shall apply the simple risk-weight approach set out in Article 155(2). The simple risk-weight approach set out in Article 155(2) of the CRR has not been amended by the CRR II and provides for a 190% risk-weight for private equity exposures in sufficiently diversified portfolios. Regarding the methods for assessing the diversification criteria the following approaches are, in abstract, possible: A. the equity exposures in the CIU are treated as held directly on the balance sheet of the Institution. Hence, the diversification criteria is assessed at the level of the Institution’s portfolio (i.e. taking all underlying exposures of multiple CIUs into account); or B. the diversification criteria is assessed at the level of the portfolio of investee companies within each CIU (i.e. at the level of the CIU). Question 1: What is the approach that should be followed when assessing the diversification criteria? Approach A or approach B above? Question 2: What are the parameters that should be used to assessed if a portfolio is sufficiently diversified? Should Institutions resort to the Herfindahl-Hirschman Index, or is there any other acceptable measures that could be used to assess diversification? Is there any recommended threshold for considering a portfolio sufficiently diversified, in case the Herfindahl-Hirschman Index is used?

Legal act: Regulation (EU) No 575/2013 as amended by Regulation (EU) 2019/876 (CRR2)

COM Delegated or Implementing Acts/RTS/ITS/GLs: Not applicable

ID: 2020_5381| Topic: Credit risk| Date of submission: 21/07/2020

Appropriate reference point for article 199 paragraph 3 and 4 loss rates

What is the appropriate reference point for credit institutions for 199 paragraph 3 and 4 loss rates. 199 paragraph 3 and 4 discuss Member State market situation. Nevertheless supervisory disclosure on related amount is done by ECB or national competent authorities based on their supervision responsibilities, 650/2014 is relevant ITS .

Legal act: Regulation (EU) No 575/2013 as amended by Regulation (EU) 2019/876 (CRR2)

COM Delegated or Implementing Acts/RTS/ITS/GLs: Not applicable

ID: 2020_5472| Topic: Credit risk| Date of submission: 01/09/2020

Why the Capital Ratio includes Tangible assets

For calculation of the Total Capital Ration the credit risk exposure should in include all the on-balance sheet items on the asset side, including tangible assets. - Why tangible assets are considered under credit risk (not operational risk) and with the risk weight of 100%? That said the more company has fixed tangible assets (furniture, equipment etc.) the higher is the credit risk exposure? - If tangible assets are considered as an amount that has to be replaced (in case of the operational risk event) why it is then the amount includes the depreciation of the fixed tangible asset?

Legal act: Regulation (EU) No 575/2013 as amended by Regulation (EU) 2019/876 (CRR2)

COM Delegated or Implementing Acts/RTS/ITS/GLs: Not applicable

ID: 2020_5467| Topic: Credit risk| Date of submission: 26/08/2020

Guidance on the use of Automated Valuations in Loan Origination & Monitoring

Good afternoon, I am inquiring about the recent updated guidance that was issued regarding loan origination and monitoring, specifically the guidance and recommendation of the use of AVM's within the origination and monitoring process. Rightmove are a longstanding provider of AVM services in the UK and a number of our customers have raised concerns regarding the recent guidance as to whether it impacts their ability to use AVM's within their processes. Specifically guidelines 206, 208, 209 & 210 do provide slightly conflicting guidance and we were looking for some further intepretation if possible. We have reached out to the PRA but they have advised they are unable to provide any specific interpretation regarding this latest update. Many thanks Ed Burgess Account Manager RIghtmove Data Services

Legal act: Other

COM Delegated or Implementing Acts/RTS/ITS/GLs: Not applicable

ID: 2020_5451| Topic: Not applicable| Date of submission: 17/08/2020

Calculation of the Maturity Factor under the Standardised Approach for counterparty credit risk.

In case of an institution using the IRB Approach with own estimates of LGD, with reference to the calculation of the maturity factor as per Article 279c(1) CRR of a transaction whose exercise/last fixing date is significantly (more than one week) before its maturity, is it possible to derive the maturity factor from the exercise/last fixing date of the transaction instead of its remaining maturity?

Legal act: Regulation (EU) No 575/2013 as amended by Regulation (EU) 2019/876 (CRR2)

COM Delegated or Implementing Acts/RTS/ITS/GLs: Not applicable

ID: 2020_5440| Topic: Credit risk| Date of submission: 11/08/2020

Collateral Type

Can a Bank grant a loan to an individual and use as collateral (extending a par value to it, and 100% LtV) a bond or money market instrument (ex.CD) that the Bank had issued? And if affirmative, can the Risk Weight for that position be 0%?

Legal act: Regulation (EU) No 575/2013 as amended by Regulation (EU) 2019/876 (CRR2)

COM Delegated or Implementing Acts/RTS/ITS/GLs: Not applicable

ID: 2020_5396| Topic: Credit risk| Date of submission: 30/07/2020

Definition of deposits

Is the definition of a 'deposit', referred to in LCR DA, in line with the ECB BSI Regulation?

Legal act: Regulation (EU) No 575/2013 as amended by Regulation (EU) 2019/876 (CRR2)

COM Delegated or Implementing Acts/RTS/ITS/GLs: Delegated Regulation (EU) 2015/61 - DR with regard to liquidity coverage requirement

ID: 2020_5388| Topic: Liquidity risk| Date of submission: 24/07/2020

Calculation of the Maturity Factor under the Standardised Approach for counterparty credit risk

In case of an institution using the IRB Approach with own estimates of LGD, with reference to the calculation of the maturity factor as per Article 279c(1) CRR of a transaction whose exercise/last fixing date is significantly (more than one week) before its maturity, is it possible to derive the maturity factor from the exercise/last fixing date of the transaction instead of its remaining maturity?

Legal act: Regulation (EU) No 575/2013 as amended by Regulation (EU) 2019/876 (CRR2)

COM Delegated or Implementing Acts/RTS/ITS/GLs: Not applicable

ID: 2020_5372| Topic: Credit risk| Date of submission: 20/07/2020

Examining concepts of "same funding" and "corresponding liability"

Article 114(7) CRR provides: “When the competent authorities of a third country which apply supervisory and regulatory arrangements at least equivalent to those applied in the Union assign a risk weight which is lower than that indicated in paragraphs 1 and 2 to exposures to their central government and central bank denominated and funded in the domestic currency, institutions may risk weight such exposures in the same manner…” In our view, the “denomination… in the domestic currency” element is quite clear and allows institutions to risk rate domestic sovereign debt of third-country central government or central bank issuers in accordance with the risk weighting which is assigned by the relevant competent authority in those jurisdictions (provided that there has been a finding of equivalence in respect of the relevant jurisdiction), on the basis that sovereign debt denominated in the currency of the sovereign carries inherently less credit risk than sovereign debt denominated in a currency other than that of the relevant sovereign. However, the section of the requirement which calls for the exposure to be “funded in the domestic currency” is somewhat less clear. The Basel Committee (in its document Calculation of RWA for credit risk – Standardised approach: individual exposures) and the EBA (in its response to question 2017_3262) both suggest that this means that the institution must have a “corresponding liability” denominated in the relevant currency. Our question therefore relates to what this “corresponding liability” needs to be; in particular whether it means that “corresponding liability” must mean that the bank in question has a direct funding line (through direct borrowings in the domestic currency, deposits in domestic currency or the issuance of capital instruments in the domestic currency) or whether the funding can be indirect (i.e. where the bank, whose main funding is in another currency (e.g. EUR or USD), engages in a USD-JPY swap, in order to be in a position to fund, for example, the purchase of a Japanese-government debt instrument denominated in JPY). The bank would then have a liability to redeliver JPY under the forward leg of the swap, albeit from an accounting perspective, the FX swap will be accounted for on a net mark-to-market basis. Our question, therefore, is whether the liability under the forward leg of the swap would be a “corresponding liability” for the purposes of Article 114(7) and EBA Q&A 2017_3262?

Legal act: Regulation (EU) No 575/2013 as amended by Regulation (EU) 2019/876 (CRR2)

COM Delegated or Implementing Acts/RTS/ITS/GLs: Not applicable

ID: 2020_5352| Topic: Credit risk| Date of submission: 03/07/2020

Application of the CRR2 Large Exposure exemptions to technical failures

Do you agree that delays in managing large exposure that happen due to technical failures are an “other activity” and should therefore be not included in exposures as per Art. 390 para 6 (c) of the Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 ?

Legal act: Regulation (EU) No 575/2013 as amended by Regulation (EU) 2019/876 (CRR2)

COM Delegated or Implementing Acts/RTS/ITS/GLs: Not applicable

ID: 2020_5351| Topic: Large exposures| Date of submission: 03/07/2020

Interpreting the status of money in transit when calculating exposure value in the context of Article 390 of the Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 (herein ‘CRR’)

Do you agree that by irrevocably submitting a payment transaction, the obligation to mitigate exposure should be seen as discharged and the money in transit should no longer be calculated in the specific exposure relationship?

Legal act: Regulation (EU) No 575/2013 as amended by Regulation (EU) 2019/876 (CRR2)

COM Delegated or Implementing Acts/RTS/ITS/GLs: Not applicable

ID: 2020_5343| Topic: Large exposures| Date of submission: 30/06/2020

Changes to IRB approach

Should the removal at consolidated level of a regulatory floor, imposed by the competent authority of a non-ECB supervised country and not required by the European regulation, be considered an IRB change that requires the parent institution competent authority’s approval or the notification to the said authority before its implementation?

Legal act: Regulation (EU) No 575/2013 as amended by Regulation (EU) 2019/876 (CRR2)

COM Delegated or Implementing Acts/RTS/ITS/GLs: Regulation (EU) No 529/2014 - RTS on materiality of extensions and changes in the advanced approaches (IRB and AMA)

ID: 2020_5330| Topic: Credit risk| Date of submission: 26/06/2020

Risk weighted exposure amounts for defaulted exposures

According to CRR articles 153(1)(ii) and 154(1)(ii), for defaulted exposures the risk weight (RW) shall be RW= max {0;12,5 · (LGD - ELBE)}. Where LGD is the LGD-estimate and ELBE is the sum of the institution’s best estimate of expected loss long as the given current economic circumstances and exposure status and its estimate of the increase of loss rate caused by possible additional unexpected losses during the recovery period, in accordance with article 181(1)(h). When the capital requirement is 8 per cent, the formula ensures that the total capital charge (expected loss + unexpected loss) is indifferent to an ELBE lower than the LGD. Any reduction in EL due to a low ELBE will have its counterpart in av RW according to the formula above. However, if calculated with a capital requirement well in excess of 8 per cent, the calculation may yield perverse results. When the capital requirement is in excess of 8 per cent, the capital charge resulting from the risk weight formula will be greater than the reduction in EL. The total capital charge will increase with decreasing ELBE. In other words, in cases where all available information implies that losses on a defaulted exposure will be significantly lower than the LGD-estimate, the total capital charge will be significantly higher than in cases where losses are likely will be around the values implied by the LGD-model. The more positive information you have, the higher the total capital charge. In some cases, the most positive ones, the capital charge may actually be in excess of the EAD! The table below illustrates an actual case (example A) and a hypothetical case where the outlook for recoveries are significantly lower (example B). Example A – positive outcome - best estimate of expected loss is significantly lower than LGD Example B – neutral/negative outcome - best estimate of expected loss is equal to LGD Exposure at default (EAD) 180.000.000 Regulatory LGD 144.210.640 Expected loss = ELBE 32.800.000 RWA= ((LGD – ELBE) * 1250%) 1.392.633.000 Capital charge (15,4% of RWA) 214.465.482 Total capital charge (Capital charge + Expected loss) 247.265.482 Total capital charge in per cent of EAD 137 % Example B – neutral/negative outcome - best estimate of expected loss is equal to LGD Exposure at default (EAD) 180.000.000 Regulatory LGD 144.210.640 Expected loss = ELBE 144.210.640 RWA= ((LGD – ELBE) * 1250%) 0 Capital charge (15,4% of RWA) 0 Total capital charge (Capital charge + Expected loss) 144.210.640 Total capital charge in per cent of EAD 80 % Logic would imply that the capital requirement in example A should be calculated with an 8 per cent capital requirement, in which case the total capital charge would be indifferent to an ELBE lower than LGD. Using an 8 per cent capital requirement would result in the same total capital charge in per cent of EAD in example A and B. Is it a correct understanding that the capital charge for defaulted assets should calculated using a capital requirement of 8 per cent? If not, it seems clearly unreasonable that the total capital charge can exceed EAD, particularly when this can only happen in instances where the expected loss best estimate is significantly lower than LGD. In these instances, should not the total capital charge be capped at 100% of EAD?

Legal act: Regulation (EU) No 575/2013 as amended by Regulation (EU) 2019/876 (CRR2)

COM Delegated or Implementing Acts/RTS/ITS/GLs: Not applicable

ID: 2020_5329| Topic: Credit risk| Date of submission: 24/06/2020

Use of Depositary Receipts for Credit Risk mitigation

We would like a clarification: is the EBA response in relation to when only 1 direction is open? Or does it relate even to where conversion programmes exit without any restrictions?

Legal act: Regulation (EU) No 575/2013 as amended by Regulation (EU) 2019/876 (CRR2)

COM Delegated or Implementing Acts/RTS/ITS/GLs: Not applicable

ID: 2020_5284| Topic: Market risk| Date of submission: 31/05/2020

netting between local shares and DRs while estimating specific and general equity risks

Is it correct that there is no restriction on the netting between local shares and DRs while estimating specific and general equity risks?

Legal act: Regulation (EU) No 575/2013 as amended by Regulation (EU) 2019/876 (CRR2)

COM Delegated or Implementing Acts/RTS/ITS/GLs: Not applicable

ID: 2020_5282| Topic: Market risk| Date of submission: 27/05/2020

Past due days, ECl (Stage 1 and Stage 2)

Dear Sir/Madam, While defining low risk exposure (Stage 1) and a significant increase in credit risk (Stage 2), we use IFRS 9 (2016/2067) and EBA/GL/2017/06 instructions, which means strict number of days: For "Stage 1" -> 30 days and "Stage 2" ->31 days to 90 days. These rules are consistently applied throughout the internal model. Our question is: Could we use, instead of fixed number of days (30,60,90), calendar days depending of the month in which the ECL is calculated? For example: If the reporting month is April, than "Stage 1" border would be 30 days. If the reporting month is May, than "Stage 1" border would be 31 days and consistently apply it through entire model and internal risk policies.

Legal act: Directive 2013/36/EU as amended by Directive (EU) 2019/878 (CRD5)

COM Delegated or Implementing Acts/RTS/ITS/GLs: EBA/GL/2017/06 - Guidelines on credit institutions' credit risk management practices and accounting for expected credit losses

ID: 2020_5271| Topic: Credit risk| Date of submission: 21/05/2020

Exposure value of derivatives - deduction of variation margin

Can banks deduct from the Leverage Ratio exposure the cash balance increase triggered by variation margin inflows?

Legal act: Regulation (EU) No 575/2013 as amended by Regulation (EU) 2019/876 (CRR2)

COM Delegated or Implementing Acts/RTS/ITS/GLs: Delegated Regulation (EU) 2015/62 - DR with regard to the leverage ratio

ID: 2020_5222| Topic: Leverage ratio| Date of submission: 28/04/2020