Is Article 194(3)(b) relevant for accepting or rejecting commercial immovable property to reduce the value of an exposure secured by commercial immovable property according to the Article 402(2) when an institution uses the standardised approach for calculating credit risk capital requirements?
The Article 402(2) of the Regulation states: "For the calculation of exposure values for the purposes of Article 395, an institution may reduce the value of an exposure or any part of an exposure fully secured by immovable property in accordance with Article 126(1) by the pledged amount of the market or mortgage lending value of the immovable property concerned but not more than 50% of the market or 60% of the mortgage lending value in those Member States that have laid down rigorous criteria for the assessment of the mortgage lending value in statutory or regulatory provisions, if all of the following conditions are met:
(a) the competent authorities of the Member States have not set a higher risk weight than 50% for exposures or parts of exposures secured by commercial immovable property in accordance with Article 124(2);
(b) the exposure is fully secured by:
(i) mortgages on offices or other commercial premises; or
(ii) offices or other commercial premises and the exposures related to immovable property leasing transactions;
(c) the requirements in Article 126(2)(a), Article 208 and Article 229(1) are met;
(d) the commercial immovable property is fully constructed. ..."
The question arises whether institutions, using SA for credit risk capital requirements, can use commercial immovable properties for reducing exposures because the situation with commercial immovable properties on market does not match the conditions set in Article 194(3)(b) even though commercial immovable property matches all conditions set in Article 402(2) .
Article 194(3)(a) states: "(a) they are included in the list of eligible assets set out in Articles 197 to 200, as applicable;" and Article 199 : " ... Additional eligibility for collateral under the IRB Approach 1. In addition to the collateral referred to in Articles 197 and 198, institutions that calculate risk-weighted exposure amounts and expected loss amounts under the IRB Approach may also use the following forms of collateral: (a) immovable property collateral in accordance with paragraphs 2, 3 and 4; ..."
Against that background we consider that Article 194(3)(b) is not relevant for using commercial immovable properties to reduce the value of an exposure where an institution uses SA approach when all criteria in Article 402(2) are matched.
Article 399(2) of Regulation (EU) 575/2013 (CRR) states that the eligibility requirements and other requirements set out in Part Three, Title II, Chapter IV on credit risk mitigation which includes Article 194(3), apply where the recognition of funded or unfunded credit protection is permitted under Article 400 to 403 CRR. The eligibility requirement of Article 194(3)(b) CRR therefore has to be complied with whenever an institution makes use of Article 402 CRR.
It should be highlighted that as regards Article 194(3)(a) CRR, applying this condition in this context would not permit the use of collateral in the form of immovable property by institutions using the standardised approach for credit risk mitigation purposes. At the same time, Article 402 CRR does explicitly allow institutions to reduce their exposure value if it is fully secured by immovable property in accordance with Article 125(1) and 126(1) CRR, which applies only to institutions using the standardised approach. Applying Article 194(3)(a) CRR would therefore mean that Article 402 CRR would never have any effect. However given the specific provisions of Article 402 it is considered that, although Article 399(2) CRR refers to all the eligibility requirements and other requirements set out in Part Three, Title II, Chapter IV, the requirement in Article 194(3)(a) CRR does not apply for the purposes of Article 402 CRR.
It should, however, be highlighted that Article 399(3) CRR exempts exposures secured by immovable properties in accordance with Article 402 CRR from the prohibition to use credit risk mitigation techniques which are available only to institutions using one of the IRB approaches.
Update 16.09.2021: This Q&A has been updated in light of the change(s) – applying from 28.06.2021 – introduced to Regulation (EU) No 575/2013 (CRR).