Can institutions use the excess of SA general credit risk adjustments over the 1.25% cap to reduce SA exposure value under own funds requirements, or reductions to SA original exposure value are just limited to specific credit risk adjustments? If so, where should the excess of general provisions, not considered as Tier 2 due to the 1.25% cap, be deducted (i.e. Retail class)?
It is possible to increase the value of the institution’s Tier 2 through provisions for general credit risk up until the cap of 1.25% of the risk weighted exposure amounts. In the current national report institutions are able to reduce the SA exposure value with the value of general provisions which exceeds the 1.25% cap. Although Regulation (EU) No 575/2013 (CRR) aims at harmonizing calculation of own funds and own funds requirements among all member states, it seems appropriate to consider the excess of general provisions as a mechanism to reduce the institution’s exposure value in the appropriate class.
Excess general credit risk adjustments cannot be used for reducing the exposure value under the standardised approach or otherwise recognised. Article 110 of Regulation (EU) 575/2013 (CRR) requires mandatorily that institutions applying the Standardised Approach shall treat general credit risk adjustments in accordance with Article 62(c) of CRR. Accordingly, Article 111(1) of the CRR limits recognition for the exposure value to those credit risk adjustments which form specific credit risk adjustments. For further details please refer to Regulation (EU) 183/2014 (RTS on Credit Risk Adjustments).
Update 26.03.2021: This Q&A has been reviewed in the light of the changes introduced to Regulation (EU) No 575/2013 (CRR) and continues to be relevant.