The European Banking Authority (EBA) published today its final draft Regulatory Technical Standards (RTS) specifying how institutions should take into account and treat several factors when assigning risk weights to specialised lending exposures. The purpose of these RTS is to harmonise the assignment of risk weights to specialised lending exposures for institutions that apply the so called ‘supervisory slotting criteria' approach. These final draft RTS will be part of the Single Rulebook aimed at enhancing regulatory harmonisation in the banking sector in Europe.
Specialised lending is a type of exposure towards an entity specifically created to finance or operate physical assets, where the primary source of income and repayment of the obligation lies directly with the assets being financed.
These final draft RTS define four classes of specialised lending: project finance, real estate, object finance, and commodities finance and for each of these four classes, a set of assessment criteria is specified by means of a list of factors that institutions shall take into account. These factors are further detailed in sub-factors and some of those in sub-factor components. Institutions shall apply the approach set out in these draft RTS to combine the assignments of the factors to the categories in order to determine the final category and the risk weight to be attributed to the specialised lending exposure. This approach requires institutions to calculate the weighted average of the assignments of the factors to the categories, where institutions should determine the weights they assign to each factor, under certain strict conditions. The approach followed in these RTS is in line with the current Basel framework, which uses the so-called ‘supervisory slotting criteria' approach under which specialised lending exposures are classified into categories depending on the underlying credit risk. These RTS have also taken into account the recent Basel proposals on constraints on the use of internal model approaches.
These final draft RTS have been developed on the basis of Article 153 (9) of Regulation (EU) No. 575/2013 (Capital Requirements Regulation – CRR), which mandates the EBA to specify how institutions shall take into account certain factors when assigning risk weights to specialised lending exposures.