Should the credit risk exposures and counterparty credit risk exposures for the same customer be classified as retail exposures if the criteria from Article 123 points (a) to (c) of Regulation (EU) No 575/2013 (CRR) are met and they are classified neither as exposures in default nor as exposures secured by mortgages on immovable property? Are there any restrictions in assigning derivative instrument to the retail exposures class and to use one of the preferential risk weights
of 75% except criteria from Article 123?
According to Article 274 of CRR exposure value is the sum of current replacement cost and potential future credit exposure and all of those exposures shall be assigned to one of the 16 (in Standardised Approach) exposure classes in order to calculate the own funds requirements. The only restriction according to the Article 123 of CRR is not to classify securities to the retail exposure class. e.g. Exposure A - credit exposure Gross exposure value = 700 000 EUR, credit risk adjustments = 5 000 EUR, net exposure value = 695 000 EUR Exposure B - derivative instrument Current replacement cost = 5 000 EUR, potential future credit exposure = 50 000 EUR exposure value = 55 000 EUR
Article 123 of Regulation (EU) No 575/2013 (CRR) sets out criteria which must be adhered to in order for an exposure to be eligible for the retail exposures class. All three criteria in points (a) to (c) of Article 123 are applicable and must be satisfied. Whereas securities are explicitly excluded from eligibility for the retail exposure class, all other exposures to be covered by Article 123 shall satisfy all the aforementioned criteria in order to be assigned a risk weight of 75% or 35% should the additional criteria specified in Article 123 be met, provided the CRR does not require or allow for the exposure to be assigned to a different exposure class.
The assignment of a derivative instrument to the retail exposure class, having met the criteria set out in Article 123(a) to (c) of the CRR, is without prejudice to requirements set out under consumer protection and related legislation.
Update 26.03.2021: This Q&A has been updated in the light of the changes introduced to Regulation (EU) No 575/2013 (CRR).