Question ID
2014_1214
Legal act
Regulation (EU) No 575/2013 (CRR)
Topic
Credit risk
Article
124, 126
COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations
Not applicable
Article/Paragraph
N/A
Type of submitter
Individual
Subject matter
Recognition of real estate as commercial property
Question

1. What kind of assets are to be included in the “Residential” and “Commercial” categories within “Mortgage Loans” for the purposes of supervisory reporting? For instance where should institutions assign garages, plots of land, storage rooms and rustic property etc. which are used as collateral? Are there more specific criteria to be used in assigning these assets? 2. Can we recognize as Commercial Real Estate the following types of property: Land for development, factories, plots of land for commercial purposes, slotted houses, schools and quarries etc.?

Background on the question

Exposures fully secured by mortgages on immovable property shall be assigned according to Article 124(1) of Regulation (EU) No 575/2013 (CRR), a risk weight of 100% unless the property is classified as residential or commercial real estate. Article 126(1) of the CRR allows for exposures fully and completely secured by mortgages on commercial property to receive a 50% risk weight where the conditions in Article 126(2) are met unless otherwise decided by the competent authorities in accordance with Article 124(2). In Article 4 (75) of the CRR there is a definition of residential property but no definition of commercial property. In the CRR, as in the ITS on Supervisory Reporting, two definitions are provided which do not clarify the issue raised above: “Residential property” is described as a “residence which is occupied by the owner or the lessee of the residence, including the right to inhabit an apartment in housing cooperatives located in Sweden”. “Commercial property”: “Offices or other commercial premises”.

Submission date
Final publishing date
Final answer
  1. Where an institution accepts collateral that does not qualify for recognition for the risk weights according to Articles 125 or 126 of Regulation (EU) No 575/2013 (CRR) and assigns the collateralised exposure to an exposure class other than "exposures secured by mortgages on immovable property" according to Article 112(i), this needs to be reported for the other exposure class to which the exposure is assigned.

Regarding reporting in the category "Mortgage loans [Loans collateralized by immovable property]" as specified by Annex V, Part 2 point 41(h) of Regulation (EU) 680/2014 (ITS on Supervisory Reporting), please note that this does not relate to reporting of capital requirements but to a breakdown of assets in the balance sheet. According to the reporting instructions, this does not require eligibility of the property for the risk weights according to Articles 125 or 126 of the CRR, but explicitly includes all "loans formally secured by immovable property collateral independently of their loan/collateral ratio".

  1. For the purposes of the CRR, "commercial immovable property" encompasses any immovable property that is not a "residential property" within the meaning of Article 4(1)(75) of the CRR.

This means that exposures secured by mortgages on immovable property (Article 124) should be restricted to exposures secured by residential or "offices or other commercial premises" properties. In determining whether an exposure meets the description of "offices or other commercial premises" for the purposes of Article 126(1) of the CRR, consideration should be given to the dominant purpose of the property in question, which should be linked to an economic activity.

However, this does not mean that all commercial immovable property is necessarily recognised for the risk weights for exposures or any part of an exposure fully and completely secured by mortgages on commercial immovable property according to Article 126 of the CRR. Recognition of "commercial immovable property" for the risk weights applicable to exposures or any part of an exposure fully and completely secured by mortgages under Article 126 of the CRR is restricted by the conditions set out in Articles 126(1) and (2).   

See also Q&A 2013 94.

Status
Final Q&A
Answer prepared by
Answer prepared by the EBA.
Note to Q&A

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.

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