Response to consultation on Regulatory technical standards on specialised lending exposures
a. How is the materiality of the SSCA and its usage for PF, IPRE, OF and CF exposures expected to evolve in the future (grow, reduce, stable)?
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b. What are the reasons behind this expected evolution and which role does the expected evolution of the IRB framework play, considering the amendments introduced under the CRR3 and the related Level 2 and Level 3 mandates as well as potential adjustments to the IRB framework that might result from the work on simplification?
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c. What were the main reasons underlying past decisions on the usage of the SSCA?
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d. From an industry perspective, are there any challenges or limitations you experience with the current Supervisory Slotting Criteria Approach—particularly in assessing and quantifying the risk of the exposure? Do the current assignment criteria provided in the Annexes capture all key risk dimensions effectively, or could it be enhanced by adjusting the current factors, sub factors, or sub-factor components? Please provide details, and examples where they apply, and explain the rationale for your feedback.
The draft Annexes already capture several important technology-related dimensions. Annex I assesses design and technology risk for PF, and Annex III refers to sensitivity to technological change, configuration, design and maintenance, resale value and refinancing risk for OF. The remaining gap is temporal: the criteria focus mainly on whether technology is proven and an asset is currently competitive, but do not expressly test whether the remaining economic life of a revenue-critical component is aligned with the amortisation profile and contractual maturity.
This is a distinct, complementary assessment. Technology maturity addresses execution and performance risk at origination. Life-cycle alignment addresses whether the asset can continue to generate the assumed cash flows and collateral value throughout the financing horizon. A technology-intensive installation may combine long-lived civil, power and cooling infrastructure with equipment that must be replaced before debt maturity. Current operating cash flow and DSCR may remain adequate even while an unfunded replacement obligation accumulates. If the timing, amount and responsible party are not identified, cash flow available for debt service, LLCR where applicable, debt yield, resale value and refinancing capacity may be overstated.
The risk transmits through more than one existing factor but should not be scored repeatedly. The underlying life-cycle conclusion should be made under asset characteristics; its consequences should then be reflected consistently in financial-strength cash-flow assumptions, integrated stress analysis, residual value and refinancing analysis. The same principle may be relevant to telecommunications infrastructure, advanced manufacturing equipment and other installations with material components whose economic life is shorter than the financing horizon.
For clarity, the assessment should be triggered where the failure, obsolescence or replacement of a shorter-lived component is reasonably capable of materially reducing project cash flows or contractual performance, materially impairing collateral or resale value, or requiring material capital expenditure before maturity. This principle-based trigger is preferable to a universal percentage or prescribed asset-life assumption, which could become outdated and would not be comparable across asset types.
Question 2. Do you have any comments on the proposed amendments to Article 1 or on the replacement of the references to ‘real estate’ by references to ‘income-producing real estate’?
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Question 3. Do you have any comment on paragraph 3 that was newly introduced to Article 3 regarding the consideration of UFCP?
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a. Do you have any comment on paragraph 6, on the consideration of ESG risks that is newly introduced to Article 3 of the RTS?
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b. Do you have any comment on the treatment of ESG- related factors or on the ESG-related clarifications for the assessment criteria provided in the annexes of the RTS? Do you have any concerns in terms of feasibility of the assessment considering ESG related factors and do you expect the consideration of ESG-related factors to lead to a better risk differentiation of the SSCA?
I support the draft approach of incorporating ESG aspects through the existing factors, sub-factors and additional-risk-driver mechanism where they are material. Technology obsolescence should not, however, be classified as an ESG risk by default. It becomes an environmental transition channel where changes in energy-efficiency requirements, environmental regulation, energy or water costs, or customer sustainability requirements shorten an asset's economic life or require additional capital expenditure. In other cases it remains a non-ESG technology risk.
Where the channel is environmental, the institution should connect the same underlying assumptions to the legal and regulatory environment, integrated stress analysis and forecast capital expenditure, and document the linkage under Article 3(6). Data-centre energy-performance metrics available under the Union reporting and rating framework may provide relevant evidence where applicable, but the RTS should not prescribe a universal PUE or similar credit cut-off. The prudential question is the financial transmission mechanism and its materiality to the exposure, not the metric in isolation. The same environmental driver should not be penalised again under the life-cycle compon
c. Specifically for the newly specified sub-factor component on the CPI: Do you think the cut-off values for the CPI allow for a reasonable risk differentiation? If not, please provide cut-off values that would be meaningful for your specialised lending portfolios.
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d. With specific regard to CF, given the current low uptake of the CF criteria: Do you support the specification of the additional sub-factors for CF, or do you believe that the low uptake of SSCA for CF portfolios indicates the need for simpler criteria? What aspect(s) would be crucial to include in such simpler criteria?
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Question 5. Documentation: Do you have any comments on the clarifications for the documentation of overrides and validation results that were introduced to Article 6 of the RTS, also in view of the supervisory best practices outlined in the Supervisory Handbook on IRB Validation (EBA/REP/2023/29)?
I support the proposed documentation of overrides and validation results, in particular the focus on cash-flow projections. For technology-intensive PF and OF, validation should include challenger analysis of the assumptions that determine whether life-cycle risk has been captured. This should cover the remaining economic life of material components; the timing and amount of maintenance, replacement and refresh capital expenditure; the legal allocation and enforceability of sponsor, operator, tenant or vendor support; and the consistency of those assumptions across DSCR, any applicable LLCR, stress analysis, residual value and refinancing capacity.
Validation should compare forecast and realised expenditure and operating performance where data are available, and should document limitations where they are not. It should test whether an override or conservative assumption has been applied consistently, rather than impose fixed useful-life schedules for a technology class. This is consistent with the draft Article 6 emphasis on validation of the cash-flow projections and with the Supervisory Handbook's use of challenger analysis for the SSCA.
a. would these challenges remain under the proposal to remove the floor for the factor weights and the proposed amendments to the Annexes?
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b. please specify in detail, which amendments (removal of caps, removal of the linear aggregation, structural changes or other) would, in your assessment, most effectively enhance risk sensitivity under the SSCA?
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a. on the newly introduced sentence to Article 3(1) of the RTS to clarify the attribution of categories to sub-factors or sub-factor components,
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b. to the introduction of descriptions for each factor, or
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c. to the implementation of category 4 as residual category, as well as to the quantitative threshold introduced for the assessment of the DSCR as criterion for category 4, in particular on the need of providing further clarifications on the treatment of missing information and its documentation?
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a. Do you have any comments on the specification of the new sub-factors and the amendments introduced to the sub-factors and sub-factor components? Do you expect an improvement in risk differentiation by the specification of new sub-factors and sub-factor components, and do you expect material model changes introduced by newly specified sub-factors or sub-factor components (related to ESG aspects or other)? Specifically for CF, given the current low usage of the CF criteria: Do you support the specification of additional sub-factors for CF or would it be more commensurate to maintain the current criteria?
The proposed amendments should improve clarity and risk differentiation. I recommend specifying a new sub-factor component, 'alignment of the remaining economic life of material components with debt tenor', under Annex I (PF), sub-factor 'design and technology risk'. An analogous component should be added under Annex III (OF), within the asset-characteristics sub-factor 'configuration, size, design and maintenance compared to other assets on the same market'. This would complement, not replace, the existing assessment of proven technology, market competitiveness and resale value.
Suggested core wording is: "For assets containing material technology-dependent components, institutions shall assess whether the remaining economic life of those components is aligned with the amortisation profile and contractual maturity. The assessment shall consider the timing, amount and funding source of economically necessary maintenance, replacement or refresh capital expenditure; the contractual allocation and enforceability of those obligations; and the effect on cash flows, asset value, market liquidity and refinancing capacity."
An illustrative calibration consistent with the four SSCA categories would be: Category 1, no material mismatch, or replacement is fully funded through robust reserves or enforceable support and remains covered under downside cash-flow analysis; Category 2, a mismatch exists but the plan, funding and contractual allocation are credible and sensitivity is limited; Category 3, a material mismatch exists and mitigation is incomplete or contingent, with material sensitivity of cash flow, residual value or refinancing; Category 4, no other category applies. These criteria should inform the relevant sub-factor component and should not automatically cap the final exposure category.
The assessment should be recorded once under asset characteristics and transmitted consistently into the relevant financial-strength, stress, valuation and refinancing inputs. This avoids double counting. Where the Annexes do not yet capture this recurring risk driver, the Article 3(3) mechanism for an additional risk driver at the level of a type of specialised lending exposure provides a route, but express Annex wording would improve harmonisation.
b. Specifically for the clarifications to the DSCR for the sub-factor ‘financial ratios’, do you have any concerns about reducing the financial ratios to consider just to the DSCR? Are there other products than operational leases, where the DSCR does not allow unbiased risk assessment?
I support the DSCR-led approach. The proposed definition already deducts capital expenditure, so the issue is not an omission from the formula but whether the cash-flow projection has identified all economically necessary expenditure over the relevant horizon. A standard DSCR may be biased if a revenue-critical component must be replaced before maturity but the forecast includes only routine maintenance.
For this purpose, routine maintenance capital expenditure should mean expenditure required to sustain current operating capacity; replacement or refresh capital expenditure should mean expenditure required before debt maturity to preserve contractual performance, regulatory compliance, competitiveness or residual value; and discretionary expansion expenditure should be distinguished from both. Sponsor, operator, tenant or vendor support should reduce projected expenditure only where it is legally enforceable and financially credible.
Where material replacement or refresh expenditure is not fully captured, the institution should adjust the cash-flow inputs used in the existing DSCR so that the ratio reflects repayment capacity, rather than create a parallel regulatory ratio. The adjusted assumptions should also be used in the integrated stress analysis, any applicable LLCR and the debt yield at contractual maturity. A material difference between the unadjusted projection and the life-cycle-consistent projection should trigger documented review and validation.
c. Specifically for the sub-factors that refer to the loan-to-value, could you please provide insights in inhowfar the determination of the loan-to-value used is aligned with the exposures-to-value according to Article 124(6) CRR?
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d. For the newly specified sub-factor market price volatility, how could the different levels of volatility (low/ moderate/ high) be further specified? For IPRE and OF, is the short-term volatility of market prices a risk driver that is frequently considered in practice as additional information when assessing the assignment criteria? Do you support the specification of a new sub-factor or sub-factor component to capture short-term volatility of market prices for IPRE or OF and if so, why?
I would not support a standalone short-term market-price-volatility sub-factor for IPRE or OF at this stage unless evidence demonstrates that it adds risk differentiation beyond the existing market-liquidity, resale-value and stress criteria. Short-term price volatility and structural technological obsolescence are distinct. An asset may show limited observed volatility until a new generation, standard, performance threshold or demand shift causes a step change in value. Conversely, temporary market volatility need not imply deterioration in long-term economic value.
If the EBA nevertheless introduces such a component, low, moderate and high levels should be calibrated relative to the asset type and the lender's expected recovery horizon, using evidence on the magnitude and speed of repricing, secondary-market depth, buyer concentration and valuation uncertainty. Universal numerical thresholds would not be comparable across heterogeneous IPRE and OF markets. Structural obsolescence should be addressed through a separate forward-looking residual-value stress or a cross-reference to the life-cycle component, not proxied by short-term volatility.
For an exposure containing layered assets, institutions should analyse long-lived base infrastructure and shorter-lived equipment separately when developing cash-flow and valuation inputs. The outcome should still be aggregated into one exposure-level SSCA assignment under the existing methodology; separate component-level regulatory risk weights are not necessary.