Should column 010 of CR SA (C 07.00), "Original Exposures Pre Conversion factors" be reported based on Secured/Unsecured part of the exposure?

Example: Residential mortgage exposure of € 229,607.16 with an underlying property value of € 200,000. The exposure would be split in RWs of 35% (up to 80% of the property value) and 75% (for the remaining part). However, there is an AAA rated government guaranteeing the full exposure. Hence, a substitution takes place and the risk weight of the government is applied (0%). For this specific case, the exposure should be reflected on C010:

• on the 35% and 75% rows before the outflow (the substitution): the RW row(s) of the exposure
• on the 0% row after the outflow: the RW row according to the CRM RW

We feel that there are no different guidelines for Immovable properties for reporting of c010 of C 07.00 i.e. "Original Exposure pre conversion factors”.

Regulation (EU) No 680/2014 (ITS on Supervisory Reporting), Annex II, Part II, chapter 3.2.5 states that in column 010 of template C 07.00 only the “Exposure value without taking into account value adjustments and provisions, conversion factors and the effect of credit risk mitigation techniques” shall be taken into account. It means that CRM techniques do not affect the amount included in column 010. However the presence of an immovable property is relevant for the exposure class allocation performed according to the decision tree in the ITS on Supervisory Reporting, Annex II paragraph 66.

According to Art. 124 (1) of Regulation (EU) No. 575/2013 (CRR), exposures secured by mortgages on immovable property are considered in the calculation of the risk weighted exposure amounts by splitting the exposure into

1. a part which is fully and completely secured (i.e. conditions of Art. 125 or 126 CRR are met), which is assigned to the exposure class ‘exposures secured by mortgages on immovable property’ according to Art. 112 (i) CRR
2. the part which consists of the remaining part of the fully secured exposure (i.e. conditions of Art. 125 or 126 CRR are not met), which may
   1. either be assigned to the exposure class according to Art. 112 (i) CRR based on the presence of the eligible immovable property collateral, attracting a risk weight of 100% according to Article 124 (1) CRR
   2. or to an exposure class other than Art. 112 (i) of CRR based on the nature of the debtor,

          (see also Q&A 2014_936)

and

3. the part of the exposure that exceeds the mortgage value of the immovable property which will always be assigned to an exposure class other than Art. 112 (i) of CRR.

Decisive for the reporting of exposures in column 010 of template C 07.00 of Annex I to the ITS on Supervisory Reporting is not only the risk weight, but also the exposure class.

In the proposed example the calculation of the risk weighted exposure amount of an exposure secured by mortgages on residential property follows approach b) ii. with regard to the fully, but not fully and completely secured part of the exposure by assigning it to the exposure class ‘Retail’ according to Article 112 (h) CRR.

Assuming that the conditions of Art. 125 CRR are met, the 80% of the market value of the property (80% x 200,000 = 160,000) is relevant according to article 125(2) lit d) CRR. So the total exposure of 229,607.16 € is split as follows for the purposes of reporting of c010 of template C 07.00:

1. 160,000.00 € are included in the exposure class “exposures secured by mortgages on immovable properties” according to Art. 112 (i) of CRR, the relevant risk weight for the reporting in column 010 of template C 07.00 is 35 %, implying that the exposure is assigned to {C 07.00, c010, r190, s010} for the purposes of the breakdown by risk weights of original exposures;
2. 69,607.16 € (= 40,000.00 € + 29,607.16 €) are included in the ‘Retail’ exposure class according to Art. 112 (h) of CRR, the relevant risk weight for the reporting in column 010 for this exposures class is 75%, i.e. the exposure is assigned to {C 07.00, c010, r220, s009} for the purposes of the breakdown by risk weights of original exposures.

Then, if eligible according to CRR, the AAA rated government guarantee will have an impact through Articles 235 and Art. 239 (3) of CRR, considering paragraphs 44 and 45 of Annex II of ITS on supervisory reporting. I.e. in the exposure classes ‘exposures secured by mortgages on immovable property’ and ‘Retail’ the respective parts of the guarantee are reported in column 050. Then the parts of the split exposure (as described under 1) and 2)) secured by the guarantee are substituted to the exposure class of the protection provider where the secured exposure is assigned to the risk weight 0% included from column 100 and reported explicitly from column 150 onwards.

The other cells in the sheets of C 07.00 shall be populated consistently.

Please note that, under approach b) i., 40,000.00 € (see above) would be reported in the exposure class ‘exposures secured by mortgages on immovable property’ with a risk weight of 100%, i.e. in {C 07.00, c010, r230, s010} in contrast to {C 07.00, c010, r220, s009} under approach b) ii.