Question ID:
2016_2691
Legal Act:
Regulation (EU) No 575/2013 (CRR)
Topic:
Credit risk
Article:
159, 166
Paragraph:
1
COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations:
Not applicable
Article/Paragraph:
Not applicable
Disclose name of institution / entity:
Yes
Name of institution / submitter:
Center for Company Law and Corporate Governance
Country of incorporation / residence:
Romania
Type of submitter:
Other
Subject Matter:
Computation of discount for purchased assets
Question:

How does the treatment described in the last subparagraph of Article 166(1) CRR interact with that of Article 159 CRR? How does the definition of discount/premium apply in prudential treatment of exposures?

Background on the question:

Under the IRB, the exposure value of on-balance sheet exposures shall be the accounting value measured without taking into account any credit risk adjustments made. This rule also applies to assets purchased at a price different than the amount owed.

Article 166(1) further states that: “For purchased assets, the difference between the amount owed and the accounting value remaining after specific credit risk adjustments have been applied that has been recorded on the balance-sheet of the institutions when purchasing the asset is denoted discount if the amount owed is larger, and premium if it is smaller.”

To determine the value of the discount/premium when an institution purchases an asset, an institution could consider:

- (i) “the difference between the amount owed and the accounting value remaining after specific credit risk adjustments have been applied”; or

- (ii) “the accounting value remaining after specific credit risk adjustments have been applied”.

We are aware that each interpretation leads to a different impact for the purpose of Article 159 – which states that “Discounts on balance sheet exposures purchased when in default in accordance with Article 166(1) shall be treated in the same manner as specific credit risk adjustments” - if the purchased assets are in default.

In order to resolve the dilemma, we had also taken into consideration the provisions of Annex VII, Part 3, point 1 of Directive 2006/48 /EC where it is stated that “the exposure value of on-balance sheet exposures shall be measured gross of value adjustments. This rule also applies to assets purchased at a price different than the amount owed. For purchased assets, the difference between the amount owed and the net value recorded on the balance-sheet of credit institutions is denoted discount if the amount owed is larger, and premium if it is smaller”.

From an economic point of view, we believe the first approach - under (i) - shall gain pre-eminence.

Date of submission:
30/03/2016
Published as Final Q&A:
21/07/2017
Final Answer:

Article 166(1) CRR stipulates that “the exposure value of on-balance sheet exposures shall be the accounting value measured without taking into account any credit risk adjustment made”, unless noted otherwise.

Article 24(1) CRR stipulates that “the valuation of assets and off-balance sheet items shall be effected in accordance with the applicable accounting framework”, as defined in point (77) of Article 4 (1) CRR). In this sense, the CRR provisions take what is recorded on the balance sheet of an institution in accordance with applicable accounting rules as a starting point for prudential purposes.

Consequently, for the calculation of the exposure value under the IRB approach, credit risk adjustments shall be disregarded. In order to do so, where the accounting value recorded in the balance sheet of the institution is net of such adjustments, the latter will have to be added back for the calculation of the exposure value.

According to the first subparagraph of Article 166(1) CRR, the same rule also applies to “assets purchased at a price different than the amount owed” meaning that in this case, too, the exposure value for prudential purposes shall be the gross accounting value that is, measured without taking into account any credit risk adjustments or discounts as set out in Article 166 (1). In practice this means that where credit risk adjustments or discounts referred under this provision have reduced the accounting value, they have to be added back (or subtracted in the case of premiums) to obtain the exposure value.

In this sense, Article 166(1) ensures that under the IRB approach the exposure values for exposures are calculated in the same way, irrespective of the applicable accounting framework, and also whether the exposure was originated by the institution or purchased subsequently.

Article 159 CRR provides that the expected loss amounts shall be subtracted “from the general and specific credit risk adjustments and additional value adjustments in accordance with Articles 34 and 110 CRR and other own funds reductions related to these exposures”, and that in doing so discounts on balance sheet exposures purchased when in default shall be treated “in the same manner as specific credit risk adjustments”.

However, neither Article 166(1) nor Article 159 CRR provide for a general assimilation of discounts on purchased exposures to specific credit risk adjustments.

Please see also Q&A 101 and Q&A 354.

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

Update 26.03.2021: This Q&A has been reviewed in the light of the changes introduced to Regulation (EU) No 575/2013 (CRR) and continues to be relevant.

Image CAPTCHA