In the scenario below, if the repayment of a retail depends on the client's business (and not the performance of the property), could a loan secured by immovable commercial property have a higher RW than a similar loan which is unsecured?
This query relates to the review of risk weights secured and unsecured lending under the standardised approach. The question is best posed by providing a scenario: A bank lends money to a client that meets the requirements to be classed as Retail under the standardised approach.
(A) If the loan is provided for working capital purposes and is unsecured then under article 123 CRR the loan receives a risk weight of 75%
(B) If the loan is provided for workings capital purposes and is secured by a commercial property (i.e. the risk of the borrower DOES NOT depend on the performance of the property) the loan would be classed under Article 126 CRR which carries a risk weight of 50%.
Under article 124(2) CRR competent authorities can set a higher risk weighting than those set out in article 126(2) CRR. The local competent authority has indeed availed of this option and has set a risk weight higher than 75%.
This has led to a situation whereby unsecured lending to a client gets a 75% risk weight but if the client provides collateral in the form of a commercial property the loan gets a risk weight higher than 75%.
For both loans the ability to pay the loan back comes from the client's business (and not the performance of the property) however the former is surely riskier lending yet gets a lower risk weighting.
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