Question ID
2015_1992
Legal act
Regulation (EU) No 575/2013 (CRR)
Topic
Credit risk
Article
164
Paragraph
5
COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations
Not applicable
Article/Paragraph
not applicable
Name of institution / submitter
Finanstilsynet
Country of incorporation / residence
Denmark
Type of submitter
Competent authority
Subject matter
Change of minimum values of exposure weighted average LGD for exposures secured by property in their territory
Question

Does Article 164(5) of Regulation (EU) No 575/2013 (CRR) allow competent authorities to set higher minimum values of exposure weighted average LGD for exposures in one or more parts of its territory on the basis of Financial stability considerations? (In the same way as it is possible under Article 124(2) CRR)

Background on the question

According to Article 124(2) CRR, competent authorities shall assess at least annually whether the risk-weight of 35 % for exposures secured by mortgages on residential property and the risk weight of 50 % for exposures secured on commercial immovable property located in their territory are adequate. Where the assessment demonstrates that the risk weights do not reflect the actual risks related to one or more property segments of such exposures, fully secured by mortgages on residential property or on commercial immovable property located in one or more parts of its territory, the competent authorities shall set, for those property segments of exposures, a higher risk weight corresponding to the actual risks.

Submission date
Final answer

Article 164(5) of Regulation (EU) No 575/2013 (CRR) does allow competent authorities to set higher minimum values for exposure weighted average LGD for exposures secured by immovable property in their territory. Although this provision does not explicitly mention that those higher minimum values may be set (on the basis of financial stability considerations) in relation to one or more property segments of exposures located in one or more parts of a competent authority 19s territory, the wording does not preclude the setting of more than one higher minimum value per territory.

The fact that in relation to credit institutions using the standardised approach, subparagraph (5) of Article 124(2) CRR explicitly allows setting higher risk weights for one or more property segments of exposures located in one or more parts of its territory while Article 164 CRR does not entail such an explicit mention in relation to higher minimum values for exposure weighted average LGD, is not an indication that competent authorities may only set one higher value for their entire territory. In particular, recital 12 of CRR sets out in general that: "With regard to the peculiarity of immovable property markets, which are characterised by economic developments and jurisdictional differences that are specific to Member States, regions or local areas, competent authorities should be allowed to set higher risks weights or to apply stricter criteria based on default experience and expected market developments to exposures secured by mortgages on immovable property in specific areas".

It follows from the above that competent authorities. when setting higher minimum values of exposure weighted average Loss Given Default (LGD) in respect of exposures secured by immovable property in their territory in accordance with Article 164(5) of CRR, may differentiate the minimum LGD values for one or more property segments of exposures located in one or more parts of its territory on the basis of financial stability considerations and provided the provisions of that article are met.

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

Update 26.03.2021: This Q&A has been archived in light of the change(s) in Articles 124(2) and 164 (6) of Regulation (EU) No 575/2013 (CRR).