EBA Publishes Final Guidelines on Exposures Associated with High Risk Under CRR

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On January 17, the European Banking Authority (“EBA“) published its final report (EBA/GL/2019/01) on guidelines on the specification of types of exposures to be associated with high risk under the Capital Requirements Regulation (575/2013) (“CRR“).

The guidelines (which apply from July 1, 2019):

  • Specify which other types of exposures should be considered as high risk and under which circumstances by way of application of Article 128(3) of the CRR. This part of the guidelines, provided under the mandate in Article 128(3), has been drafted with the intention that institutions should specify those individual exposures as items of particularly high risk that carry a high risk of loss due to being structurally different from common exposures of the same original asset class.
  • Clarify the notion of investments in venture capital firms and private equity as referred to in Article 128(2) of the CRR. This is an own initiative clarification of the EBA and is not within the CRR mandate for the guidelines.

The EBA notes that the revised standardized approach for credit risk agreed by the Basel Committee on Banking Supervision (“BCBS“) as part of its Basel III finalization in December 2017 no longer includes provisions on “higher risk exposures” as the Basel II standard currently does. The revised standards are due to apply from 2022 onwards. The EBA considers that, in the meantime, it is beneficial to issue these guidelines to ensure detection of high risk within banks before the transposition of the revised standards into the EU legislative framework. The guidelines will also help to ensure a harmonized and consistent application of Articles 128(2) and (3) until any revision of the provisions has to be applied by institutions under Basel III.

The EBA consulted on a draft version of the guidelines in April 2018. The final report includes a summary of responses to the consultation and the EBA’s feedback. The EBA amended the guidelines where necessary to take account of the responses it received. Key issues raised on the draft guidelines on which the EBA has commented include those relating to the timing of the guidance, the definition and the prudential treatment of speculative immovable property financing, the inclusion of the notion of private equity and venture capital, the scope of the guidelines and the introduction of the notification mechanism.