Is capital requirement deduction (SME factor) applicable for specialised lending exposures if conditions determined in Article 501(2) of Regulation No 575/2013 (CRR) are met?

The recovery and future growth of the Union economy depends largely on the availability of capital and funding to SMEs established in the Union, therefore the growth of SME lending is desirable. The original aim of the special SME factor is to support SME lending by decreasing the capital requirement of credit institutions through the application of a supporting factor equal to 0,7619. (Preamble 44) Bearing in mind this original goal, it is a question for us, whether credit institutions are entitled to apply the SME factor for specialised lending exposures also (as a subclass of corporate exposures based on Article 147(8) of Regulation No 575/2013 (CRR)), if the conditions laid down in Article 501(2) CRR are met. Even if formally, specialised lending exposures may comply with the conditions regarding categorisation, annual turnover and total exposure, these exposures are not comparable with SME exposures due to their different risk characteristics and profile. In our opinion the conditions currently set in Article 501 CRR for the application of the SME factor are not strict enough to exclude these higher risk specialized lending exposures, e.g. commercial real estate financing, etc. We believe that the favourable treatment of specialised lending exposures (i.e. the application of the SME factor) is not in line with the regulator’s original aim; therefore it would be more prudent, if the application of the SME factor was not allowed for specialised lending exposures. It is also a question for us what the appropriate treatment of specialized lending exposures with regard to the application of the SME factor would be, if a bank under the standard method did not identify a separate sub-segment for specialized lending exposures. We think that the application of the SME factor for specialized lending exposures should be treated the same way (i.e. should not be allowed), no matter if the exposure is in the books of an IRB bank or a standard approach bank.

Article 501(2) of Regulation No 575/2013 (CRR) states that the supporting factor is applicable to exposures classified either in the retail or in the corporates or secured by mortgages on immovable properties. The same Article specifies that the exposures should be to SMEs defined in accordance with the Commission Recommendation 2003/361/EC of 6 March 2003, which states that an enterprise is considered to be any entity engaged in an economic activity, irrespective of its legal form. This includes, in particular, self-employed persons and family businesses engaged in craft or other activities, and partnerships or associations regularly engaged in an economic activity.

Article 147(8) CRR identifies specialized lending as a sub-class of the corporate exposures which possess the following characteristics:

(a) the exposure is to an entity which was created specifically to finance or operate physical assets or is an economically comparable exposure;

(b) the contractual arrangements give the lender a substantial degree of control over the assets and the income that they generate;

(c) the primary source of repayment of the obligation is the income generated by the assets being financed, rather than the independent capacity of a broader commercial enterprise.

Accordingly, where exposures meet the conditions listed in Article 147(8) CRR and at the same time the conditions listed in Article 501(1) and (2) of Regulation (EU) No. 575/2013 (CRR) banks can apply the supporting factor for the calculation of capital requirements.

The same approach shall be applied in the standardized approach subject to meeting the relevant criteria set out in Part Three, Chapter 2 for the Standardized approach.

Please see also Q&A 2013_27.

Update 16.09.2021: This Q&A has been updated in the light of the changes – applying from 28.06.2021 – introduced to Regulation (EU) No 575/2013 (CRR).